A likely reduction in tax receipts due to slower nominal gross domestic product (GDP) growth than anticipated and lower goods and services tax (GST) rates, besides pay panel-induced additional expenditure, has imparted a sense of uncertainty to the Centre’s fiscal outlook in 2017-18, chief economic adviser Arvind Subramanian said.
The downside risks beyond those expected at the time of the Budget on February 1 also include reduced spectrum receipts on account of the structural jolt to the viability of incumbent firms, he said in the second part of Economic Survey 2016-17.
At the time of the Budget, real GDP growth was assumed between 6.75% and 7.5%, and nominal GDP at 11.75%, factoring in buoyant exports and consumption boost after demonetisation. However, a set of new factors have emerged since then as real exchange rate appreciated making exports revival challenging, adverse impact on demand due to reduction in developmental spending by states to accommodate farm loan waivers and the transitional challenges from implementing the GST, generating a deflationary bias. Finance ministry economists have predicted real GDP growth will be towards the lower trajectory of the range this year.
The Budget this year has assumed indirect tax revenue growth to be 11.3%, nearly half of the 21.4% growth in the previous year, as there are no significant measures for additional resource mobilisation. The 7th Pay Commission made it difficult to compress revenue expenditure significantly, as the Centre has to provide additional Rs 30,000 crore this year for implementation of allowances. The Reserve Bank of India on Friday paid a dividend of Rs 30,659 crore, nearly half of what was assumed in the Budget, putting further pressure on Centre’s finances.
However, the economists said, there is also upside potential to revenues both from the compliance benefits of the GST and the compliance possibilities opened up by demonetisation. Accordingly, the magnitude and pace of final fiscal consolidation relative to the commitments made may need to be assessed going forward, they added. The Budget has targeted a fiscal deficit of 3.2% of GDP (from 3.5% in 2016-17) which represented a steady rather than sharp fiscal consolidation path recommended by the FRBM Review Committee, prudently balancing the requirements of a cyclically weakening economy and the imperative of maintaining credibility. The Centre’s finances went through considerable degree of consolidation in the last three years, aided by buoyant tax revenues that largely sprang from additional revenue measures and subsidy reduction related to reduced petroleum prices. The quality of spending improved with a gradual tilt towards capital expenditure.
Public investment — approximated by investment by Centre, states plus CPSEs — improved on the back of accelerated efforts by CPSEs in 2016-17. However, while states’ capex is likely to remain steady as a percentage of GDP, the same is likely to decline marginally for the Centre and its PSUs in 2017-18.