Fiscal Deficit

The question is; what happens to fiscal deficit next year?

The finance minister was emphatic in underlining that the government will meet its 3.5% fiscal deficit target in the fiscal year 2015-16. He is probably right. At the current juncture, it does look like he will be able to meet the fiscal target for the year 2015-16. There are worries on the disinvestment front. Against the target of Rs.69,500 crore, they have garnered less than half the amount. Even in the collection of direct taxes, the FM has admitted that there may be a shortfall of Rs.40,000 crore. So how will this be bridged?

This year may not be a worry…

 The shortfall for this year may not be too difficult to manage. The government always has the luxury of falling back upon taxing petrol and diesel through higher excise and customs. Remember, since this government came to power, excise on petrol has gone up two-fold and diesel has gone up three-fold. With Brent crude at $36/bbl, the government has the room to pass on more duties to the consumer without burdening them inordinately. Disinvestment is a question mark, but the government can fall back upon either a cross shareholding arrangement or the support of LIC. Hence meeting the fiscal deficit targets in 2015-16 will not be a major issue.

The challenge will be next fiscal…

The next fiscal 2016-17 will be challenging in a variety of ways. Firstly, the liability of the Seventh Pay Commission payout to government employees will kick in from next fiscal. That is likely to add a burden of Rs.100,000 crore each year and add about 0.5% to the fiscal deficit. There will be a similar payout to the state government employees, which will add to the fiscal deficit of states. Then there is the payout to the armed forces personnel under the One Rank One Pension (OROP) scheme. This is not likely to be as big a burden as the Seventh Pay Commission, but will add to the deficit, nevertheless. Add to it, if the disinvestment collections are below par, or direct tax collections falter, then it could be an added problem. Of course, if oil prices go up next year then it could add a new dimension to the problem.

And there are the big spends…

Then there are big spends the government is planning. There is $150 billion to be spent on defense and another $150 billion on nuclear energy. The bullet train project and the SAARC highway project will entail around $25 billion. While they may be financed through loans, they will have to be serviced. Above all, the government needs to spend nearly $500 billion in the next 5 years to bring India’s creaking infrastructure to Asian standards. With all these fancy projects, it is doubtful if the FM can keep fiscal discipline. Probably, the biggest casualty in the next budget could be fiscal prudence! ©

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