Given that Prime Minister Narendra Modi has made it clear that the fiscal deficit target for FY15 of 4.1% of GDP will be met, the goal for FY16 Budget is fixed in terms of broad fiscal policy.
Even though the finance ministry is pushing for an increase in public expenditure for raising growth in the next fiscal, it will have to balance it through higher tax collection and savings with the help of direct benefits transfer and sensible allocation of resources.
In the backdrop of the fiscal deficit touching 99% of the full-year projection in the April-November period itself as compared to 94% in the same period last year, the government is set for a larger expenditure compression in FY15 than in FY14. Clearly, in FY16 too, if the roadmap fixed for the fiscal deficit is to be followed, finance minister Arun Jaitley is in for a tightrope walk.
Y axis represents % of GDP
As per the FRBM goals, the fiscal deficit target has to be progressively reduced to 3.6% and 3%, respectively, in FY16 and FY17.
“This implies limited fiscal space over the medium-term period. The process of fiscal rectitude which has so far been largely on the expenditure side will have to be matched by greater resource mobilisation in the coming years,” the finance ministry has said in its medium-term fiscal policy statement in the FY15 Budget.
The choice for the finance minister, therefore, is limited. He will have to find out innovative ways to generate additional revenue if public investment has to be increased.