Non Tax Revenues Rescue the FRBM Ship

Union Minister for Finance Arun Jaitley and  MoS for Finance Jayant Sinha during their Post-Budget Press Conference, in New Delhi on Monday. Credit: PTI Photo by Kamal Singh

Union Minister for Finance Arun Jaitley and MoS for Finance Jayant Sinha during their Post-Budget Press Conference, in New Delhi on Monday. Credit: PTI Photo by Kamal Singh

From the rock shoals of Scylla and the whirlpool of Charybdis: ergo, stick with Fiscal Responsibility and Budget Management (FRBM), and do not stick with it.

Last year’s Union Budget expected to collect Rs 221,733 crore from non tax revenues – about the same as the revised estimate (RE) and a modest 12% more than the accounts figures which had turned out lower than the RE. However, 2015-16 gave Arun Jaitley a big bonus: Much higher non tax revenue collections than he may have expected – as much as Rs. 36,843 crore more than the budget estimate (BE) and Rs 60,719 crore over last year’s actuals, a growth of 31%. Had this bonus not come, the finance minister would have been struggling with maintaining his deficit targets even for the current year.

Based on this year’s success, the Jaitley has budgeted for a further increase of Rs 64,345 crore in non tax revenues in 2016-17. Barring this bonanza, he would have been hard-pressed to find the “third way” around the twin dangers. By avoiding anything major on the tax side, he has reduced the downside risks from the budget and that is a wise thing.

Of course, he also did several other things: First, capital expenditures in 2015-16 (RE) were lower than BE by Rs 12,000 crore; second, that makes next year’s increase (Rs 18,000 crore) in capital expenditure plus net lending at 8% over RE, a bit more plausible with the investment story; third, a small savings was found in plan revenue expenditure (Rs 5,000 crore) in 2015-16.

But most important was what had to be done in next year’s budget: Namely, finding space for Seventh Pay Commission payouts for 2016-17 and three months of 2015-16; aside from the unknown costs of one-rank, one-pension (which may not be paid out in a single year if there are arrears). That is at about Rs 92,000 crore. The higher excise duty collection on automotive fuel is a one-off and the big increases will not be available next year. Tax growth, given the state of economy, cannot be expected to rise by very much, and the 11.7% growth in gross tax revenues taken seems to be fair. Finally, he had to accommodate the higher spending on rural India – Pradhan Mantri Gram Sadak Yojana roads and micro-irrigation. The plan revenue expenditure which captures most of the latter increased by Rs. 68,624 crore over the RE for 2015-16.

Add the two items – Seventh Pay Commission and plan revenue expenditure – and one gets a total of Rs 161,000 crore. Add the increase of Rs 50,000 crore on account of interest and the total to be funded is over Rs 210,000 crore. On the tax side, the increase in 2016-17 over RE 2015-16 is Rs 107,000 crore. That is quite a large gap and trying to fill it by disinvestment proceeds would not be possible. That is where the increase in non tax revenues projected to be Rs 64,345 crore more than the RE of 2015-16 has been so critical. The balance Rs 30,000 crore had to be found elsewhere, including what appears to be a little less than Rs 92,000 crore provisioning for pay commission awards. But these are not very large amounts and can be adjusted in more ways than one. Current year data up to end-January 2016 suggests tax collections may result in actuals that are slightly higher than RE. Some space may thus exist to make an ad hoc payment on pay commission awards before 31 March and reduce the pressure on next year.

The more important thing is what is the plan on subsidies? The BE for 2016-17 keeps principal subsidies at the same level as in 2015-16. Given the likelihood of oil prices recovering slowly through 2016-17 this does not make much sense, unless a reduction of leakages by going the direct benefit transfer route and/or making increases in costs a pass-through, are envisaged. We will have to wait and see.

Saumitra Chaudhuri was a member of the Planning Commission