FM can raise spending and meet deficit target.
Going by current trends, FY16’s fiscal deficit is likely to miss the targetted 3.9% since nominal GDP is going to grow at around 8.2% versus the projected 11.5% and, thanks to a big slippage in direct tax revenues, the R14.49 lakh crore target is not going to be met. At R4.83 lakh crore till November, the deficit was at 87% of the budgeted R5.6 lakh crore.
While the government has gained enormously from the collapse in crude oil prices which allowed it to impose new cesses and boost excise duty collections, the shortfall in the mop-up through divestments and strategic sales budgeted at R69,500 crore will be fairly large; so far the government has raised just around R12,700 crore. In such a situation, with private investment not forthcoming, the government has no option but to raise capital spending which means it can’t stick to the promised path of fiscal rectitude.
One option is to keep to the primary deficit targets while increasing only capital expenditure—that will signal the government’s commitment to fiscal discipline. It helps that credit rating agencies like Moody’s have indicated a small slip in the deficit is unlikely to change their rating stance. It has to, of course, be kept in mind that the likely increase in government expenditure can’t possibly make up for the fall in private investment—so even if the fiscal deficit target is given a miss, growth will be slow.
FY17, in any case, is going to be tougher than FY16 since, even if oil prices go all the way down to $20 a barrel, the fall will not be as large as in FY16—so the scope to raise excise collections will be limited. Also, the Pay Commission will cost an extra R1 lakh crore. What will help keep the breach in the fiscal deficit to a minimum while increasing public capital expenditure is the value of shares the government holds in SUUTI.
For reasons that are not clear, this has not been sold for several years now—even at today’s depressed prices, the SUUTI shares of Axis Bank, L&T and ITC are worth R48,000 crore; there is also the residual shareholding in Hindustan Zinc and Balco. Apart from this, if the government was to implement the recommendations of the Shanta Kumar committee and keep the strategic buffer stock of foodgrains at around 10 million tonnes—and give people cash transfers instead of physical grain in the PDS—it could earn anywhere around R80,000 crore.
Reducing the need for high stocks with FCI would also put an end to the practice of high MSPs and, with no special gain to be got by growing wheat and rice, farmers would switch to other crops, in keeping with market demand-and-supply.
That is, apart from saving money, the move would help push the much-needed reform in the agriculture sector, which by the government’s own admission, is top priority.