FinMin may stick to 3.5% fiscal deficit for FY17

Modi govt faces extra spending burden due to policies like 7th Pay Commission and OROP

With less than 40 days left for Finance Minister Arun Jaitley to present Union Budget 2016-17, its makers are said to be veering towards sticking to the current medium-term fiscal consolidation schedule and set a fiscal deficit target for the next year at 3.5 per cent of gross domestic product (GDP).

Prime Minister Narendra Modi is likely to meet ministry officials in the first week of February. The government faces a substantial spending burden in 2016-17, primarily due to implementation of recommendations of the 7th Pay Commission, the One Rank, One Pension (OROP) issue and maintaining capital spending levels.
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For these reasons and a less than expected GDP growth, 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. He’d lowered 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 real 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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Finance ministry officials are wary of delaying the fiscal consolidation schedule for another year. In the earlier Budget, Jaitley went for a 2015-16 fiscal deficit target of 3.9 per cent of GDP, instead of the 3.6 per cent the schedule had mandated. The road map forecast a fiscal deficit of 3.5 per cent of 2016-17 and three per cent for 2017-18.

Sources said a further delay in the schedule would hurt the government’s credibility and it could be met even with the additional burden. Of course, the Prime Minister will decide.

TAKING THE LONG VIEW

• Two different viewpoints in North Block on FY17 fiscal deficit target
• One view, as laid out in mid-year review, calls for re-assessment of target
• Second view says existing fiscal road map should be adhered to
• Budget makers said to be veering towards second view
• Prime Minister Modi may take a final decision
• Budget preparation so far is based on existing fiscal road map

As to what Jaitley thinks or is likely to recommend, sources said that so far there have been no instructions from any of the senior ministry officials that the Budget preparations should be done keeping in mind any other number but 3.5 per cent.

Sources said the targets can be met by staggering the pay panel recommendations and no compromise might be necessary on other initiatives, including OROP, capital spending and the rural sector push. The difference between 3.9 per cent for this year and 3.5 per cent for 2017-18 should not be more than Rs 6,000-8,000 crore, it is learnt.

As reported earlier, the government is planning to defer implementation of the 7th Pay Commission award. Last week, the Cabinet approved the formation of an empowered panel of secretaries to work out ways for staggering the award through more than one financial year, instead of letting the Rs 1.02 lakh crore bill from the implementation come up at one go. Of that, Rs 74,000 crore is supposed to be the burden on the Union Budget and the rest on the rail Budget.

Additionally, Jaitley and other senior officials have pledged to continue the Centre’s public spending push at a time when the private sector suffers from stretched balance sheets. Capital spending for April-November 2015 was Rs 1.59 lakh crore or 31 per cent over the same period last year. With a pressing need to boost rural consumption after consecutive years of poor rain, Budget 2016-17 could also see a significant increase in allocation to programmes like the Pradhan Mantri Krishi Sinchai Yojana, Rashtriya Krishi Vikas Yojana and Pradhan Mantri Gram Sadak Yojana.