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Budget 2018: Poll bugle drowns fiscal prudence

Faced with a tricky balancing act to maintain fiscal prudence while meeting aspirations of the masses ahead of the 2019 polls, finance minister Arun Jaitleychose to give the fiscal deficit target a miss again and settled for a medium-term consolidation process.

The Centre’s fiscal deficit will breach the target by as much as 30 basis points at 3.5% in FY18, partly due to the GST mop-up for only 11 months, lower dividend payment by RBI and deferment of spectrum auction. It intends to trim it to 3.3% next fiscal (against an earlier target of 3%), suggesting a slower pace of reduction than witnessed in the past two years.

Also, while a 14.6% rise in revenue seems achievable next fiscal, given the budgetted nominal GDP growth of 11.5%, the 10.1% increase in expenditure ahead of the elections runs the risk of exceeding the target, yet again. In the current fiscal, against the 9.5% rise in the Centre’s revenue receipts, expenditure jumped 12.3%.

The Centre has also retreated from a decision last year to improve the share of the more-productive capital spending in overall expenditure. In fact, instead of the targetted 25% rise, the government is actually forced to reduce capital spending by Rs 36,356 crore in 2017-18 from the budgetted level to Rs 2,73,445 crore to prevent fiscal deterioration from worsening further. Even for the next fiscal, revenue expenditure is targetted to rise over 10%, higher than the 9.9% increase (from the reduced revised estimate for 2017-18) in capital spending.

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The fiscal slippage, coupled with worsening expenditure quality, is bound to be noticed by the RBI, and given the surge in retail inflation in recent months, the central bank could turn more hawkish.

However, to reassure the markets of the government’s commitment to fiscal discipline and macro-economic stability, Jaitley accepted recommendations of the NK Singh-led FRBM panel to prune the Centre’s debt burden to 40% of GDP by 2022-23 (against 49.4% in 2016-17), with fiscal deficit target as the key operational parametre. This means the daunting challenge of a steady cut in fiscal deficit to prune the debt levels is being passed on to the next government.

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The Centre pins hopes on a 16.6% jump in net tax collection next year against 15.3% this fiscal to fund expenditure. Strung by a drop in non-tax revenue mop-up in 2017-18, the government has raised the target for the next fiscal by less than Rs 10,000 crore.