The Planning Commission has given the Centre fiscal consolidation targets that are relaxed compared to the recommendations by the 13th Finance Commission.
The Planning Commission projected the Centre’s fiscal deficit to come down to three per cent of the gross domestic product (GDP) by the third year (2014-2015) of 12th Five-Year Plan, and stay there for remaining two periods, even though one-time payments like spectrum sale or disinvestment in public sector units are unlikely to fetch too much revenues as a proportion of the GDP.
The Finance Commission, on its part, wanted the Centre to prune its fiscal deficit to 3 per cent by 2013-14, a year in advance than projected by the Planning Commission. By that year, the Planning Commission expected the deficit to be 3.5 per cent of the GDP. Originally, fiscal deficit was expected to be cut to 3 per cent of the GDP way back in 2008-09, as per the Fiscal Responsibility and Budgetary Management (FRBM) Act, but the target went awry after global financial crisis forced the government to give stimulus packages, doubling the deficit to over six per cent.
Officials now say the approach paper to the 12th Five-Year Plan assumes the fiscal deficit number to come down largely on the back of buoyant tax collections. The fiscal deficit projections are based on the assumption of 14 per cent nominal GDP growth rate a year on an average in the 12th Plan, comprising 9 per cent GDP growth and 5 per cent inflation.
The paper projected the fiscal deficit to be around 4.10 per cent of the GDP in the first year of the 12th Five-Year Plan (2012-17). Fiscal deficit was 4.7 per cent of the GDP during 2009-10 and is targeted to come down to 4.6 per cent this fiscal.
Officials say the approach paper projected that the net tax revenue of the Centre is expected to increase from 7.40 per cent of the GDP in 2011-2012 (the terminal year of the current plan) to 8.91 per cent of the GDP in 2016-2017 (the terminal year of 12th Five-Year Plan).
However, the non-tax revenues are expected to fall from 1.40 per cent of the GDP in 2011-2012 to 0.88 per cent in 2016-2017 largely because of absence of any prospects of large revenues from one time sale like spectrum. Officials say the Planning Commission believes that the contribution of non-debt capital receipts, which include disinvestment proceeds, will also fall.
As such, the Centre’s aggregate resources will actually fall from 14.01 per cent of the GDP in 2011-2012 to 13.11 per cent of the GDP in 2016-2017. On the non-plan expenditure side, the approach paper says the subsidies that are likely to account for 18.8 per cent of the total non-plan expenditure in the 12th Five-Year Plan are projected to decline from an estimated 1.6 per cent of the GDP in 2011-2012 (which is based on the Budget estimates) to 1.24 per cent of the GDP in the terminal year.
Officials say the ability to reduce subsidies is critical from the resource point of view since in the past subsidies have been rising as a percentage of the GDP. The other alternative would be to raise the tax-GDP ratio by over 12 per cent of the GDP.
