Column: OROP, pay panel no real problem for FM

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Updated: Dec 25, 2015 1:10 AM

In FY17, govt revenues could increase by 0.8% of GDP, helping meet wage burden and contain fiscal deficit.

It is conventional wisdom now that the finance minister cannot meet the pay commission and one-rank-one-pension (OROP) expenditure obligations as well as continue the higher infrastructure spending while sticking to the fiscal consolidation commitment. In the mid-year economic analysis, the chief economic advisor even suggested that, given the continued sluggishness in private investments, the magnitude of fiscal consolidation for next fiscal year (i.e. FY17) needs to be reassessed. But a higher wage bill, continued infrastructure spending and fiscal consolidation need not be an ‘impossible trinity’ if the government steps up asset sales in the next year.

The net (i.e., post income-tax) pay commission and OROP obligations are estimated to be approximately Rs 60,000 crore (0.5% of GDP). In addition, as a recent report in The Financial Express suggests, the government may have to bear a part of the obligations of Indian Railways, which would could cost 0.1% of GDP. But the government will receive a windfall from lower commodity prices. Modest hikes in minimum support prices for foodgrains and lower crude prices mean that the subsidy bill will be lower next year by around 0.1% of GDP (i.e., subsidies will stay constant in rupee terms in FY17). As such, the net increase in government’s expenditure will be only 0.4% of GDP in FY17. Under this scenario, increase in public investment will be in line with nominal GDP growth (10-11%).


On the revenue side, the two recent hikes in excise duty on petrol and diesel excise duty will generate additional tax revenues worth 0.14% of GDP. As the government prepares to transition to the goods-and-service tax (GST), the service tax rates would have to be increased in order to bring them closer to the revenue neutral GST rate suggested by the Subramanian committee. If media reports are to be believed the government is indeed planning to increase the service tax rate from current 14.5% (including the Swachh Bharat cess) to 16.5%. In FY17, services taxes, according to my estimates, can generate additional revenues worth 0.3% of GDP. The Subramanian committee has also recommended a pruning of goods exempted from central excise duty in preparation for a transition to the GST. A recent report in the Business Standard suggests that goods eligible for excise exemptions will be pruned to from the current 300 around 90, which will also generate additional revenues.

The mid-year review estimates that the buoyancy of direct and indirect taxes (the latter after stripping out tax hikes) was 1.5x and 1.7x, respectively, in the first half of fiscal FY16. So conservatively assuming that, despite an acceleration in GDP growth rate, tax buoyancy declines next year, the government can increase tax revenues by around 0.65% of GDP. But after devolution to the states, the tax revenue left with the central government would be around 0.4% of GDP.

Despite budgeting for it, the government will not generate any revenues from strategic divestment in FY16. But, if the government gets its act together, revenues from asset sales can sharply increase next year. The government can sell a part of the SUUTI holdings and dispose off its residual shareholding in Hindustan Zinc and Balco to generate revenues. Stable market conditions would also allow the government to step up disinvestments. Spectrum auctions have been delayed because of a lack of agreement on floor price and delay in spectrum harmonization. But, if the recent statements of Trai chairman are to be believed, these issues will be resolved soon, opening the door for spectrum auctions in FY17. As such, with a concerted effort, it should be possible for the government to generate an additional revenue of R60,000-65,000 crore (i.e, 0.4% of GDP) from asset sales in FY17.

To sum-up, in the next fiscal year, the government can increase revenues by 0.8% of GDP, allowing it to both meet the higher expenditure obligations of 0.4% of GDP and reduce the fiscal deficit by 0.4% of GDP.

In the near term, India’s attractiveness to foreign investors is largely premised on reforms and macroeconomic stability. As the winter session demonstrated, prospects of meaningful structural reforms next year are weak. Arguably, the need for fiscal stimulus will be lower next year because the economy will experience a gradual recovery and headwinds from poor monsoons as well as weak exports will dissipate. But, if the government risks macroeconomic stability by abandoning its commitment to fiscal consolidation, the ‘India story’ will weaken considerably and India may no longer be insulated if emerging markets experience another round of turmoil in 2016.

The author is a Masters’ student at Johns Hopkins University

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