Hearty congratulations to the government for being able to maintain a fine balance between growth and fiscal discipline. Budget FY17 has been a perfect mix of promises and accomplishments, a successful union of hopes and realisation, a commendable blend of fiscal quality and impetus to growth.
No doubt, the fiscal space of the government has been constrained this year. Even as higher nominal GDP growth helps tax revenues nearly double from 4.9% in FY16 and subsidy savings from muted international crude oil prices create an additional cushion, the government’s sizeable commitment towards wages has created an additional burden. Further, with risks of a prolonged domestic slowdown mounting, the pressure to kick-start growth has been high.
Abstaining from fiscal populism, the government has managed to adhere to its FY17 target of 3.5% of GDP, while maintaining focus on boosting growth in the medium term by way of increased allocation to infrastructure and investment, and reviving the rural sector. Budget FY16 was maintained at 3.9% of GDP, despite shortfalls on disinvestment and direct tax collections, sharply lower nominal GDP growth, and additional spending on account of bank recapitalisation and OROP. Full marks to fiscal quality as well —
* Reduction of subsidy ratio to 1.7% of GDP. In the medium term, the government aims to reduce the subsidy bill further by way of extending Direct Benefit Transfer to other products such as fertilisers, and better targeting.
* Further reduction in revenue deficit to 2.3% of GDP, from a better-than-expected 2.5% in FY16. Primary deficit has reduced 40 bps to 0.3% of GDP.
* Higher infrastructure expenditure outlay of Rs 2.21 trillion, with marked increases in allocations to roads, shipping, power, renewable energy and ports.
* Recovery of tax-to-GDP ratio to 10.8% from a five-year average of 10.3%, an eventual move towards greater reliance on tax revenues to fund the deficit, rather than one-time non-tax revenues.
There are never any easy solutions as far as fiscal consolidation is concerned; this has to be viewed in purview of short-term pains in lieu of long-term gains. Fiscal consolidation and economic growth are two sides of the same coin. A measured reduction in the fiscal deficit “crowds in” private investment. In FY04, fiscal deficit declined by 1.4% of GDP but GDP growth was high at 8%; in FY07, GDP growth was 9.6% even as the deficit declined by 0.6%. Occasionally, the public sector must act as a facilitator, rather than spend aggressively only to raise short-term growth.
Of particular concern has been India’s public debt ratio, currently close to 66% of GDP. Although this highly encouraging FY17 budget reading would, in the near term, help alleviate concerns about the ratio rising, there is a need to work on reducing it further.
A long and tough journey lies ahead. India’s underlying general government structural deficit stands at 6.9%, against the global average of 2.5%. Tax ratios have remained sticky in the 8-12% of GDP range for the past few decades, due to persistent and large gaps in tax collections and inefficiencies. Less complacency and further pathbreaking tax reforms are compulsory to raise fiscal revenues permanently. To that end, a move towards a comprehensive tax reform such as GST is appealing.
Last but not the least, structural factors binding the growth rate are still in the process of getting resolved, in turn raising prospects of higher revenue collection in the medium term. A combination of long-term growth measures, as well as commitment to fiscal quality, will go a long way in enhancing India’s investment prospects, moving it on to an all-new and a much superior orbit altogether.