In the run-up to the Union Budget, the primary concern for most observers was the state of the fiscal health. Union Finance Minister Arun Jaitley did little to allay the apprehensions as he announced a slippage of 30 basis points (bps) in the fiscal deficit for FY18. Worse, the fiscal deficit for the next year has been targeted at 3.3 per cent, which is quite a distance from Mr Jaitley’s initial promise in 2014 to achieve the 3 per cent mark in three years. He has now postponed getting to 3 per cent to 2020-21. Fiscal consolidation is important from the point of view of the credibility of policy-making. The latest slippage is all the more worrying because fiscal prudence had been one of the main achievements of this government. It had inherited a fiscal deficit of 4.4 per cent of GDP in FY14 and steadily brought it down to 3.5 per cent in the first three years of his tenure. But what happened since then has damaged the government’s enviable record. To be sure, it was relatively easy to reduce the overall fiscal deficit in the initial years primarily due to a sharp fall in oil prices and limited pass-through to the consumers as well as rapid economic growth. The situation got considerably more difficult as growth faltered in FY17 and the first half of FY18 and oil prices started rising.
As things stand, it is expected that the interest rates regime will harden further, hampering growth. Yet, what makes this current slide of the fiscal deficit peculiar is the massive improvement in the tax to GDP ratio. It is expected to be 12.1 per cent in the coming financial year and that is a huge improvement over the 10.1 per cent level in the last year of the previous regime. Mr Jaitley argued that tax buoyancy had gone up sharply ever since the government introduced anti-tax evasion steps — income tax buoyancy has gone up to 1.95 and 2.11 in FY 17 and FY18, respectively, as against 1.1 in the seven years preceding these two years. In fact, the fiscal slippage in this Budget has happened despite tax revenues growing by 28 bps more than budgeted. The problem is what was gained from tax revenues was lost on account of non-tax revenues — a fall of 30 bps from the Budget estimates for FY18. In fact, despite this fall in the revised estimates for the current year, non-tax revenues are budgeted to contribute an even smaller proportion in FY19. It’s high time we accorded non-tax revenues the priority they deserve. A structured, long-term plan will not only outline the course of action but also help provide predictability to the earnings from non-tax revenues. One way of doing this is to frame a proper asset monetisation plan as the government is among the largest owners of property and immovable assets in the world. This acquires urgency as there is little room for further contraction in expenditure, with the election cycle starting soon. But one thing is certain: The government just cannot afford to slip on its divestment and non-tax revenue targets and needs to keep a close watch on expenditure to achieve this year’s fiscal deficit target of 3.3 per cent.
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