The numbers are unconvincing: Busienss Line 1st March 2016

Jaitley banks on a high-growth mantra while leaving little room for error in revenue or expenditure

How would one evaluate the Budget for fiscal 2016-17? The choice was clear for the finance minister — either walk the path of FRBM (fiscal responsibility and budget management) or follow the Keynesian dictum of pump priming.

While most analysts and economists played safe by settling for a number in the range of 3.5 per cent to 3.9 per cent of GDP, the finance minister did surprise everyone by sticking to the number of 3.5 per cent, which is quite bold considering that there has been an increase in several expenditure numbers.

The clue really lies in garnering revenue. However, there are several questions that may come up when attaining this target.

The questions

First, the Budget has assumed a nominal GDP growth rate of 11 per cent for the year to arrive at the fiscal deficit ratio of 3.5 per cent. Now, in FY16, growth is not expected to be more than 9 per cent.

The Economic Survey also expects real GDP growth to remain virtually unchanged at 7 per cent to 7.75 per cent, which is largely the same as in FY16. In fact, it talks about the 8-per cent mark being reached in a couple of years’ time.

This means that inflation could range between 3.25 per cent and 4 per cent, which looks reasonable after a negative number in FY16.

The challenge really is that if this growth number slips by 1 percentage point from 11 to 10 per cent, then at the projected level the fiscal deficit ratio would climb to 3.7 per cent. Anything lower would push up this number further. Hence, we will begin on a rather weak statistical basis.

Second, for the numerator of the fiscal deficit ratio to be where it is at ₹5.33 lakh crore as against ₹5.35 lakh crore in FY16, we are again betting on disinvestment being as high as ₹56,500 crore, as against ₹69,500 crore targeted last financial year.

In FY16 the shortfall was almost ₹44,000 crore. Is there any guarantee that we can reach this target, because any slippage will have to be compensated from other revenue items, which may be very optimistic to begin with?

The government would have to probably follow a systematic disinvestment plan where a fixed set of shares are earmarked every month for sale.

Here, an interesting thought is to combine the sale of PSBs too, so that two objectives can be met — the ₹25,000 crore of capitalisation can come from within, this way.

Revenues, tax and nontax

Third, the Centre is banking on high nontax revenues too — which are to increase by ₹37,000 crore. The contributors are going to be PSUs, through higher dividend payments and spectrum sale of close to ₹99,000 crore.

One can see the PSUs playing a major role both in terms of disinvestment as well as dividends to assist the government in attaining its goals.

Also, PSBs will not be able to contribute significantly as they will be busy cleaning up their books. On spectrum, while the processes are clear and well defined, it will have to be timed such that it does not clash with growth in credit, which is typically in the busy season as it can create liquidity problems.

In FY15, there was an upsurge in credit towards the end of March, which was okay as private demand for credit was low.

Fourth, tax revenue too has been projected in a ultra-sanguine manner. Gross tax receipts are to increase by ₹1.71 lakh crore as against ₹1.05 lakh crore last year.

In FY16, despite negative growth in imports and low growth in industrial production, revenue was buoyant with all segments showing a rapid increase. Can we be two times lucky considering that a lot of these benefits have been availed by the government last year by not passing on the low price benefit of commodities to the consumer by adjusting tax rates?

Most of the targets have been stated at high levels. Income-tax revenue is expected to be more buoyant and we are betting on the new amnesty scheme helping to meet this target.

Fifth, based on all these assumptions, and higher allocations in virtually all areas, the Centre is still working on an unchanged gross borrowing programme of ₹6 lakh crore, which translates to net borrowings of ₹4.25 lakh crore, which will be lower than that in FY16.

Borrowings and revenue

While this will be good news for the RBI as this means there will be little pressure on liquidity going ahead, there would also be a modicum of apprehension.

While the bond market has reacted positively with yields dropping to begin with, it would have to be tracked carefully while adjusting monetary policy measures. The new committee that will be set up would have to keep this in mind besides inflation. The RBI has to be prepared for OMOs (open market operations) in case the target is exceeded.

Last, on the revenue side, we had saved quite significantly in cutting down on defence allocations on both revenue and capital account by almost ₹22,000 crore in FY16.

The capex expenditure, which normally bears the brunt when balancing the Budget, was not compromised last year. But, any slippage in revenue in FY17 may just lead to cuts, which can negate the effort put in fostering growth.

The Budget is quite tightly packed and allows little room for slippage in both revenue and expenditure.

It is banking on high growth, which is extraneous to the system. If things work out, we will emerge stronger, or else there will be expenditure cuts as we have committed to the FRBM path.