The government should consider deviating from fiscal consolidation roadmap for the next financial year, while retaining the focus on public expenditure, several economists suggested in Wednesday’s pre-Budget meeting with finance minister Arun Jaitley.
“We said that there can be some deviation but one has to adhere to fiscal deficit target in the medium term. Some deviation can be there for 2016-17,” S Mahendra Dev, director, Indira Gandhi Institute of Development Research said.
According to the fiscal consolidation roadmap, which was revised last year, the government proposes to reduce fiscal deficit to 3.5 per cent in 2016-17 from 3.9 per cent in the current financial year.
The finance ministry statement quoting Jaitley said that the government continues to adhere to the fiscal consolidation path.
“Some of the members suggested not to go for aggressive fiscal consolidation and continue on public spending while some of the members were of the view that higher growth can be achieved even by following the path of fiscal consolidation among others and the government should not compromise in fiscal measures,” the statement said quoting Jaitley.
Concerns of a slippage from fiscal consolidation roadmap have surfaced due to a likely shortfall in direct tax collections and disinvestment proceeds. For next financial year, the fiscal deficit target seems challenging in the wake of implementation of 7th Pay Commission as well as ‘One Rank One Pension’. Current tax and subsidy regime was discussed during the meeting. Economists gave recommendations on the need for its transformation to improve growth.
Other suggestions by economists included bringing in changes in small savings rate and to focus on increasing private and public investment.
Economists also suggested use of Socio Economic Caste Census to identify beneficiaries and doing away with the LPG subsidy as it is regressive, the statement said.
A relook into fertiliser subsidy is required, economists said in the meeting. On reduction in corporate tax, there was mixed opinion as some found it to be favoring the rich, while others found it to be a good step towards increasing investment and boosting the economy. Change in income tax slabs to bring about parity within the different sections of population was also discussed.
Other suggestions included setting up of a fiscal council, maintaining medium term fiscal targets, ensuring time bound investment under corporate social responsibility.
There were also suggestions to deal with NPAs, as declaration of ‘bad banks’ and to be strict with companies defaulting and performing at loss due to their own mismanagement and malfunctioning. Economists also suggested disinvestment of companies in small phases throughout the year according to the changes in the market such that the targets can be attained and overall better returns can be
But at FSDC meet, regulators say ‘don’t’
In a meeting of the Financial Stability and Development Council (FSDC) chaired by finance minister Arun Jaitley on Wednesday, sector regulators suggested the government to continue on the path of fiscal consolidation, provide sufficient capital to public sector banks in the upcoming Budget and exempt life insurance premium from service tax.
“Many suggestions made during the aforesaid meeting with regard to the forthcoming Union Budget 2016-17 include to continue to follow-up the path of fiscal consolidation along with quality spending of the public investment in order to achieve the higher rate of growth,” the finance ministry said in a statement after the meeting.
Reserve Bank of India Governor Raghuram G Rajan, Securities and Exchange Board of India Chairman UK Sinha, Insurance Regulatory and Development Authority of India Chairman T Vijayan and the Pension Funds Regulatory and Development Authority Chairman Hemant G Contractor participated in the meeting. Senior finance ministry officials also attended the pre-Budget FSDC meeting.
Other suggestions by the regulators include sufficient provision of funds in the forthcoming budget for recapitalisation of banks in order to clean-up their balance sheets and exemption from service tax to life insurance premium, the statement said.
As per the finance ministry estimates, Indian public sector banks need Rs 1.80 lakh crore to meet Basel-III norms that will kick in from March 2019. The government will provide only Rs 70,000 crore as equity for PSU banks and the rest they have to raise from the market and through their internal profits.
The finance ministry said that regulators also recommended continuation of the government’s contribution in the premium for Atal Pension Yojana for another year, and exemption from tax at time of final withdrawal under New Pension System, making NPS at par with Public Provident Fund.