Not many knew it, but the Centre’s fiscal deficit touched 4.3 per cent of the country’s gross domestic product (GDP) in 2015-16 against the budget and revised estimates of 3.9 per cent for that year.
The information was contained in a report by the Economic Research Department of the State Bank of India.
SBI chief economic advisor Soumya Kanti Ghosh cites Comptroller and Auditor General of India (CAG) report presented in Parliament in December, 2016 to buttress his point.
Taking from these numbers, Ghosh made a case for higher fiscal deficit than 3 per cent for 2017-18, given in the fiscal consolidation roadmap. His prescription came on a day a committee on the Fiscal Responsibility and Budget Management (FRBM) Act, headed by N K Singh, submitted its report to the finance ministry.
Experts are, however, not on the same page if these numbers could be given in the actual numbers of 2015-16 in the Budget for 2017-18.
Rating agency ICRA principal economist Aditi Nayar points out there are some differences in classification of revenues and expenditure in the budget and the CAG’s report, resulting in divergent deficit figures.
For instance, the fiscal deficit as per the revised estimates for 2015-16, was printed as Rs 5.35 lakh crore in the Budget for 2016-17, and Rs 5.89 lakh crore in the CAG’s report.
“Hence, we should refrain from interpreting the data as a slippage in the deficit to 4.3 per cent of GDP as per the actuals for 2015-16, from 3.9% of GDP as per the revised estimates for that year,” she says.
Ghosh pegs fiscal deficit at 3.4 per cent of GDP for 2017-18. “Indian economy is facing tough times today. The demonetization has changed the entire gamut of the economy. We are pegging fiscal deficit target of Rs 5.75 lakh crores for FY18, at 3.4 per cent of GDP. We are convinced that the Government must shift its fiscal objective,” he said.
Rating agency ICRA also says the government is unlikely to budget a fiscal deficit for FY18 that is higher than 3.5 per cent of GDP or lower than 3 per cent of GDP.
It says assuming nominal GDP growth of 11.2 per cent in FY18 over that in the Advance Estimate for FY17 released recently by the Central Statistics Office, a fiscal deficit range of 3-3.5 per cent of GDP in FY18 translates to Rs 5.1-5.9 lakh crore in absolute terms.
The SBI report says the Government should not get Budget 2017 straitjacketed in the fiscal consolidation agenda so as to compromise development goals.
Textbook macroeconomics suggests fiscal policy should ideally be countercyclical, that is, fiscal deficits should decline when the economy is expanding and increase during downturns.
The FRBM Act does exactly the opposite and FRBM rules are currently loaded against the best fiscal practices in other countries. This should be corrected, the SBI research note says.
Ghosh pegs the Centre’s net market borrowings at Rs 4.05 lakh crore with gross borrowing at Rs 5.80 lakh crore after adjusting for net redemptions of Rs 1.75 lakh crore (buyback at 50k crore) for 2017-18.
The report also says the Government’s fourth budget is likely to make a sweeping recast of direct taxes to give a boost to the economy following demonetization.
“We expect an increase in personal income tax exemption limit from Rs 2.5 lakh to Rs 3.0 lakh, increase in section 80C exemption limit from current Rs 1.5 lakh to Rs 2 lakh, interest exemption on housing loan from Rs 2 lakh to Rs 3 lakh and at least reducing (if not abolishing) the lock in period for bank fixed deposits from 5 years to 3 years for availing tax exemption,” Ghosh says.
Such giveaways will cost Rs 35,300 crore but we expect this to be more than balanced by revenues collected under Pradhan Mantri Garib Kalyan Yojana (PMGKY), or Income Disclosure Scheme-2 and cancelled note liabilities of RBI.