In countdown, moving deficit goalposts starts debate in Govt

Subramanian & team back investment boost, Rajan-led economists caution

Written by Sunny Verma | New Delhi | Updated: February 9, 2016 8:37 am
deficit goalpost, RBI, fiscal year, union budget, raghuram rajan, Arvind Subramanian, modi Union Minister Arun Jaitley. (Express Photo by Prem Nath Pandey)

Loud calls from the RBI to resist fiscal expansion have not stopped the government from discussing a postponement of deficit goalposts, thereby allowing higher spending to stimulate the economy.

Ahead of the Union Budget to be unveiled February 29, the idea whether the government should stay wedded to the deficit reduction plan or loosen its purse strings to boost investment and economic activity, is being debated at the level of the Prime Minister’s Office, a senior official said.

In 2015-16, the government aims to keep fiscal deficit at 3.9 per cent of Gross Domestic Product (GDP), or Rs 5.5 lakh crore, of which Rs 4.5 lakh crore will be spent on paying interest on loans taken to finance this deficit. For 2016-17, the target is to reduce deficit further to 3.5 per cent.

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With persisting weakness in private investment, leading economists, including Finance Ministry’s Chief Economic Adviser Arvind Subramanian, have suggested the need for accelerated public investment and reassessment of the fiscal deficit goals. Higher public investment financed through loans would boost economic growth, kick-start private investment and reap dividends in future years, they say.

On the other side of the divide are economists led by RBI Governor Raghuram Rajan who last week argued that higher government spending can jeopardise macro-economic stability and hurt the country’s debt dynamics. On Saturday, Finance Minister Arun Jaitley said it was the first time he had come across sharply divided views on reworking the fiscal consolidation plan.

Citing Brazil’s experience of using massive public stimulus only to witness its economy shrinking in later years, Rajan said the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies.

“Deviating from the fiscal consolidation path could push up government bond yields, both because of the greater volume of bonds to be financed and because of the potential loss of government credibility on future consolidation,” Rajan said.

Axis Bank Chief Economist Saugata Bhattacharya said the government should step up capital expenditure but without raising extra debt.
“Fiscal consolidation, in principle, is inviolable. The key question is, can government permit a slight slippage for a year or two? My view is that adhering to the announced path is preferable. Yes, the government might need to spend more on capex (capital expenditure) at the present moment, if private sector risk appetite is low,” Bhattacharya said.

“But the only way to meet these two conflicting objectives is through exploring greater and innovative monetisation of government assets, without resorting to expanded borrowings, resulting in a debt build-up,” he said.

The government should step up capital expenditure but the fiscal deficit should not be allowed to increase, as this would put pressure on interest rates, which have just started to soften, CII president Sumit Mazumder said.

Instead, the government should raise revenue by higher disinvestment, lower subsidy outgo, staggering pay commission pay outs and increasing tax revenue through expansion of base, he said.

The government expenditure is set to rise sharply in the next financial year on account of implementation of the Seventh Pay Commission award and One Rank One Pension (OROP).

In addition to Rs 8000-10000 crore that would be needed for OROP as per government estimates, the Centre’s salary bill would increase by Rs 1.02 lakh crore in 2016-17 if the Seventh Pay Commission’s 23.55 per cent hike in pay, allowances and pensions of government employees is fully implemented from January 1.

The Finance Minister will have to balance the expenses on higher salaries and pensions with the need to step up spending on social sector and infrastructure projects. With the stock of stalled projects estimated by the government at Rs 8.8 lakh crore or 7 per cent of GDP, the Budget for next year is expected to announce steps to improve the public private partnership (PPP) model for the infra sector.

In its report submitted to the government last November, a panel headed by former Finance Secretary Vijay Kelkar on reviving the PPP model suggested easier funding for projects with long gestation period, review of the model concession agreements, raising of funds through zero coupon bonds and setting up of independent regulators.

On the corporate tax side, the government would move to trim exemptions and reduce tax rate for companies in line with Jaitley’s announcement in the last budget to pare it to 25 per cent from 30 per cent in four years. Industry chamber CII has suggested that the government announce a year-wise roadmap for reduction of corporate tax rate to 23 per cent.

With regard to personal income tax, the Finance Minister is expected to keep the slabs and rates unchanged, while announcing higher incentives to boost savings. Bankers and industrialists, in pre-budget meetings with Jaitley, argued for raising tax-exempt savings limit to Rs 2.5 lakh per year from Rs 1.5 lakh per annum currently.

While the challenge of reducing fiscal deficit to 3.5 per cent seems more pronounced in the next year, for the current financial year the government seems on course to meet its deficit goals.

While the government will fall short of expected inflows from disinvestment and direct taxes, it would compensate from higher indirect tax collections, extra dividend from state-owned companies and savings in expenditure by some ministries.

“Even as low disinvestment inflows relative to the budgeted level remain a risk, the probability of a slippage relative to the absolute fiscal deficit target of Rs 5.6 lakh crore in 2015-16 (Budget Estimates) appears muted,” said Aditi Nayar, Senior Economist at rating agency ICRA Limited.

The government has so far raised Rs 13,500 crore through disinvestment in PSU companies, far short of the Rs 69,000 crore target for the entire fiscal.

The government expects its full year direct tax collections to fall short of the budget target by Rs 30,000-40,000 crore. The government had set a direct tax collection target of Rs 7.97 lakh crore this fiscal, up 26.5 per cent from Rs 6.30 lakh crore in financial year 2014-15.

On the indirect tax side, the government is set to receive a bonanza on account of higher excise collections of around Rs 1.5 lakh crore in 2015-16 on petrol and diesel.