Fiscal deficit target: Jaitley on a sticky wicket | Business Line–02.01.2018

With the fiscal deficit exceeding the full-year target in November itself Finance Minister Arun Jaitley has very little room for manoeuvre

Will he press the NK Singh Panel’s GST escape clause button to justify the fiscal slippage?

If you thought that Finance Minister Arun Jaitley is squarely on the back foot as regards reining in fiscal deficit at 3.2 per cent of GDP for 2017-18 is concerned, then think again.

The announcement of additional borrowing of ₹50,000 crore last week and sluggish GST revenues notwithstanding, he can comfortably accept fiscal deviation by as much as 0.5 percentage points, say officials in the know adding that this can be done without ruffling the feathers of foreign investors.

Asked how, the official said, it can be done if the government were to accept the recommendations of the NK Singh-headed Committee that reviewed India’s fiscal discipline rules.

The Fiscal Responsibility and Budget Management Committee, set up in May 2016 to review the Centre’s fiscal roadmap, had submitted its four-volume report. Some of its recommendations were also included in the Union Budget 2017-18, but Jaitley had said that the report would be examined in detail.

The Committee had allowed deviation in fiscal deficit targets of not more than 0.5 percentage points to deal with unforeseen events such as war, calamities of national proportion, collapse of agricultural activity, far reaching structural reforms and sharp decline in real output growth of at least 3 percentage points.

GST factor

The implementation of GST is clearly being seen as a far reaching structural reform that could afford a fiscal slippage.

“What should be desirable level is yet to be decided. Union Budget projected 3.2 per cent and the expectation was that next year it will be 3 per cent. Now we have to see what will be the fiscal approach that the government will adopt. As this year’s numbers have been breached due to major structural reform – GST,” an official said.

It is a fact that revenue receipts under GST still remains uncertain, the official told BusinessLine, adding that while working out the next level of fiscal deficit the government will have to keep in mind the current uncertainty of GST and necessity to maintain certain level of capital expenditure.

According to the latest data released by the Controller General of Accounts, the government has breached its fiscal deficit target for the current financial year till November end.

The fiscal deficit as at the end of April to November 2017 for the current financial year stood at 112 per cent against 85.8 per cent during the corresponding period of the previous financial year.

The difference between government revenue and expenditure stood at ₹6.12 lakh crore.

The government was expecting the difference to be at ₹5.46 lakh crore during the period under consideration.

This was mainly because of higher fiscal gap due to the lower than expected revenue collections at the back of higher government expenditure during the current financial year.

Interest rate factor

Why fiscal deficit is important? It is important because it determines the borrowing size. And if borrowing is more there will be higher pressure on interest rates. Higher interest rate will crowd out private sector.

Also if borrowing is higher the debt accumulated will also be higher, the official said. Pointing towards the current interest outgo which is almost 23 per cent of the entire Budget, the official said “we do not want a situation where your interest outgo will become 30-40 or 50 per cent. And it goes this high you are left be nothing to incur expenditures, pay salaries and give pension, to fund social sector schemes and meet defence capital as well internal security requirements.”

(This article was published on January 1, 2018)

via Fiscal deficit target: Jaitley on a sticky wicket | Business Line

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