 "Final decision on fiscal deficit target for FY17 likely this week")
The government might take a final decision by the end of this week on whether to stick to a fiscal deficit target of 3.5 per cent of gross domestic product (GDP) for 2016-17 or delay the fiscal consolidation road map by another year in the face of additional spending burden.
Senior policymakers from the finance ministry are likely to have a number of meetings with the Prime Minister's office in the coming days to discuss and finalise the Union Budget 2016-17. Business Standard has learnt that the still undecided issue of the fiscal deficit target for next year will be part of the discussions.
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The existing fiscal consolidation road map aims at a target of 3.5 per cent of GDP for the upcoming financial year. However, Finance Minister Arun Jaitley faces a substantial spending burden in 2016-17, primarily due to implementation of recommendations of the 7th Pay Commission; one rank, one pension scheme; maintaining capital spending levels; and boosting rural sector demand after two consecutive years of poor rainfall. It is for these reasons that Chief Economic Advisor Arvind Subramanian called for a re-assessment of the medium-term fiscal road map in December, in the mid-year economic review.
According to government sources, both the options were being discussed and a final view might be taken only after taking into account views from Prime Minister Narendra Modi. Earlier this month, Jaitley had said both the options - of keeping the fiscal deficit target and reworking it - had their pros and cons. Jaitley has reportedly had extensive discussions on the matter with his senior bureaucrats as well as independent policy experts and economists.
"A decision on the fiscal deficit target for the next year still hangs in the air. There has been a lot of deliberation on a number of Budget-related matters. There have also been meetings with the Prime Minister's office and other departments. The coming week will see the final such meetings before the Budget goes to print," said a senior official who did not wish to be named.
Subramanian, in his mid-year review, had also cut the official GDP growth forecast for the current financial year to 7-7.5 per cent from the earlier 8.1-8.5 per cent. Subramanian also warned that if the government stuck to the current path for fiscal consolidation, demand would be hit. He had said GDP growth in 2016-17, based on an analysis of likely demand, was not likely to be significantly greater than in this year.
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Going by this lower forecast, the nominal GDP for the current financial year is likely to be around Rs 136 lakh crore, lower than Rs 141 lakh crore projected in the last Budget. If the next year, too, sees a nominal GDP growth of 8.5 per cent, then the nominal GDP for 2016-17 might be Rs 147.5 lakh crore. If the fiscal deficit target for the next year - 3.5 per cent of GDP - is maintained, that would come up to Rs 5.16 lakh crore.
That amount is only Rs 14,000 crore less than the possible revised fiscal deficit of Rs 5.3 lakh crore, which is 3.9 per cent of the likely revised nominal GDP of Rs 136 lakh crore for this year. Jaitley and other finance ministry officials have said this year's target of 3.9 per cent will be met. The budgeted fiscal deficit target in absolute terms was Rs 5.56 lakh crore.
The total expenditure burden due to the recommendations of the Seventh Pay Commission is likely to be Rs 1.02 lakh crore, of which around Rs 74,000 crore is likely to be the burden on the Union Budget 2016-17, with the rest of the onus on the Rail Budget. It has been reported earlier that some of the recommendations of the Pay Commission might be implemented on a staggered basis so as to reduce the one-time liability.
The defence ministry had said last week that the defence pension budget would be around Rs 65,000 crore for 2016-17, up 20 per cent from the 2015-16 budgeted estimates of Rs 54,000 crore. Jaitley had said on Friday that the Budget would need to provide around Rs 1.1 lakh crore combined for the implementation of OROP and the Seventh Pay Commission.
Additionally, the coming Budget will likely come good on Jaitley's promise to India Inc to continue the government's public spending push, with capital expenditure for the next year expected to come close to Rs 3 lakh crore for the first time. The Centre is also looking to boost allocation to various rural schemes such as Mahatma Gandhi National Rural Employment Guarantee Act, Krishi Vikas Yojana, Krishi Sinchai Yojana, among others.
