The revised fiscal deficit target of 3.3% does not stand the test of credibility as it is based on a rather optimistic assumption that GDP will grow by 11.5%.
The Union Budget 2018-19 has made a significant departure from the “fiscal glide path”. The target fiscal deficit of 3.2% has been abandoned, and the 3% target for FY 2018-19 has been pushed out to FY 2020-21.
The realised fiscal deficit, as per the budget documents, is 3.5%. However, the actual fiscal deficit number is surely higher, given that a part of the proceeds of disinvestment are from other public sector companies. For example, even before rising to present the budget today, finance minister Arun Jaitley managed to raise Rs 37,000 crore in a transaction with ONGC, which bought shares of HPCL, taking on the debt the government would have had to take.
Depending on how much of the Rs 1 lakh crore budgeted for disinvestment receipts is going to be from other PSUs, that amount should rightfully be counted as a part of the fiscal deficit. So the fiscal deficit for 2017-18 is actually more than 3.5%; just adding the Rs 37,000 crore of the ONGC-HPCL transaction, for example, takes the fiscal deficit number to 3.76%.
A departure from earlier targets
The fiscal deficit target for next year is 3.3%. This is based on an assumed growth rate of 11.5% of the gross domestic product (GDP) in current terms. First of all, the target is a major departure from the earlier target as per the original “fiscal glide path”, which was 3% for 2018-19. Second, the revised target of 3.3% itself does not stand the test of credibility. It is based on a rather optimistic assumption of GDP growing by 11.5% in nominal terms; while in 2017-18 the projected achievement is 9.5% in nominal terms. There is every likelihood that this may not actually be achieved which will impact the tax revenue targets.
Some of the tax revenue targets for next year – on the same lines – are quite aggressive. For example, the targeted growth of personal income tax is almost 20% (19.88%). It appears this is based on the higher buoyancy seen in the last two years, described in some detail by the finance minister in his budget speech. To assume this buoyancy will continue in the coming year, given that the government’s claim is that it was demonetisation that caused it in the first place, is a leap of faith which is unlikely to be borne out.
On GST, there is a target of Rs 7,43,900 crore. This is over 25% higher than the annualised collection of the GST for 2017-18 which works out to Rs 592,841 crore (444,631 X 12/9). Both these tax growth targets could slip in 2018-19, leading to a slip up again in the fiscal deficit target.
The finance minister has announced a large number of expenditure initiatives, which may again cause serious pressures on the expenditure budget particularly in an election year, hence again threatening the achievement of the fiscal deficit target. Finally, the targeted receipts from disinvestment of Rs 80,000 crore – if they were to be genuine, and not similar to the ONGC-HPCL transaction – may prove to be difficult to achieve on the back of a high achievement of Rs 100,000 crore projected for this current fiscal year.
One of the key promises made by the finance minister in his 2015-16 budget speech was to rationalise tax incentives/exemptions with a view to reduce the revenue foregone. The government’s statement, presented along with the budget documents such as ‘Revenue Impact of Tax Incentives under the Central Tax System’, shows that large amounts are still being lost to revenues foregone to tax incentives – almost Rs 165,000 crore for direct taxes for 2017-18, and Rs 145,000 crore for indirect taxes for 2016-17 (not available for 2017-18). The finance minister has not been able to deliver on that promise made four years ago; that would have provided a good amount of tax revenues which could have helped achieve the fiscal deficit target.
The key problematic issues in the Indian macroeconomic scenario remain: the sharp decline in the investment to GDP ratio, which has fallen from about 37% in 2007 to just about 27% now; the stagnation in agricultural growth in which there is almost zero growth in the gross added value (GVA) in the last two years; the continuing lack of dynamism in the manufacturing sector and in exports.
All of these have an impact on GDP growth. It is unclear whether the budget on its own has or even can do much to favourably impact these factors resulting in achievement of the projected growth rate of 11.5% of nominal GDP.
Also read: Budget 2018-2019 As It Happened
On the taxation front, the challenges are also clear. The overly-complex Goods and Services Tax (GST) needs simplification, the corporate income tax (CIT) structure needs to be reformed to be able to face growing international tax competition following the US tax reform, and personal income taxation needs to address the growing inequality in India. This budget does not address these fundamental issues. There is no announcement on a reform roadmap on the GST. CIT reforms appear half-hearted, and while providing relief to small and medium-sized enterprises (SMEs), do not address the international tax competition issues. The overall structure of personal income tax (PIT) remains as it was.
Rajul Awasthi was an OSD to Finance Minister between 2004-08. Views are personal.