Budget 2018: Arun Jaitley deviates from fiscal consolidation road map

At 3.3 per cent of GDP, FY19 target up from 3 per cent earlier

Finance Minister Arun Jaitley has chosen to deviate from the path of fiscal consolidation by budgeting the fiscal deficit target for 2018-19 at 3.3 per cent of the gross domestic product (GDP) as against the target of 3 per cent set earlier under the fiscal consolidation road map. This will be the second straight deviation from the glided path of fiscal consolidation. 

For 2017-18, as against a budgeted target of 3.2 per cent, the fiscal deficit now stands at 3.5 per cent. This slippage is largely because of lower revenue receipts (non-tax revenue) and higher revenue expenditure. 

As against a budgeted target of Rs 15.15 trillion in FY18, revenue receipts of the government totalled Rs 15.05 trillion. On the other hand, against a revenue target of Rs 18.36 trillion in FY18, the Centre has spent roughly Rs 19.44 trillion (RE), even as it cut capex by Rs 363 billion. In absolute terms, the fiscal deficit has ballooned from the budgeted Rs 5.46 trillion to Rs 5.94 trillion in FY18, rising further to Rs 6.24 trillion in FY19. 

But despite this deviation, the finance minister stated his commitment to fiscal consolidation. 

“In order to impart unquestionable credibility to the government’s commitment for the revised fiscal glide path, I am proposing to accept key recommendations of the Fiscal Reform and Budget Management Committee relating to [the] adoption of the Debt Rule and to bring down [the] Central Government’s Debt to GDP ratio to 40 per cent. [The] government has also accepted the recommendation to use fiscal deficit target as the key operational parameter,” he said. 

For calculating the FY19 fiscal deficit, the Centre has assumed a nominal GDP growth of 11.5 per cent. As the Economic Survey released a few days ago had projected real GDP to grow between 7 per cent and 7.5 per cent in FY19, this implies that inflation is expected to range between 4 per cent and 4.5 per cent in FY19.

Deficit graph

Meanwhile, the government's net market borrowings are expected to rise to Rs 4.62 trillion in FY19, up from Rs 4.59 trillion in FY18. The latter has increased by more than Rs 300 billion from the earlier expectation of Rs 4.23 trillion. 

“The slippage in the fiscal deficit targets for FY2018 and FY2019 is largely in line with expectations. However, the Revised Estimate for the revenue deficit for FY2018 is sharply higher than the budgeted level, which is a cause for concern,” said Aditi Nayar, principal economist at ICRA. “Moreover, the capital expenditure for FY2018 has been revised downward by Rs 364 billion, entailing a 4 per cent contraction over the level for FY2017 and a concomitant worsening of the quality of expenditure and fiscal deficit. With the net G-sec borrowing for FY2019 placed slightly higher than expectation, bond yields have hardened further.” 

In 2017-18, the Chad budgeted the revenue deficit at 1.9 per cent of the GDP. But Revised Estimates show that the deficit has shot up to 2.6 per cent. For FY19, the Centre expects to bring it down to 2.2 per cent of the GDP. 

On the revenue side, the budget has assumed gross tax revenue at Rs 22.7 trillion — up 16.7 per cent in FY19 from 13.4 per cent in FY18 (RE). Direct tax revenues are estimated to grow at 14.4 per cent to Rs 11.5 trillion in FY19, slower than the 18.3 per cent growth in FY18 (RE). Indirect taxes (including compensation cess and IGST) are estimated to grow at 19.2 per cent, up from 8.6 per cent this fiscal. 

Within direct taxes, corporate tax collections are projected to grow at 10.2 per cent, down from 16.3 per cent (RE), while the growth of personal income tax collections has been kept at 19.9 per cent, marginally lower than the 21 per cent in 2017-18 (RE). 

On the expenditure side, the government’s total expenditure is estimated to grow by 10.1 per cent in FY19, rising to Rs 24.4 trillion. This is marginally lower than the 12.3 per cent growth observed in FY18. Both revenue and capital expenditure are projected to grow at roughly 10 per cent in FY19. The expenditure on centrally-sponsored schemes is projected to grow by 7 per cent in FY19, to Rs 3.05 trillion — up from Rs 2.85 trillion last year.