Goodbye to fiscal consolidation 

Goodbye to fiscal consolidation 

What is meant by fiscal consolidation?

Fiscal consolidation is a reduction in the underlying fiscal deficit. It is not aimed at eliminating fiscal debt

Fiscal deficit data

Revenues healthy

Capital receipts are expected to exceed the budgetary estimate thanks to record disinvestment revenues of ₹100,000 crore (₹27,500 crore higher than targeted).

But Concerns on the expenditure side

• Revenue expenditure grew by 15% compared to the Budget estimate of 6%.
• Major increase in establishment expenditure: An increase in establishment expenditure accounts for more than 40% of the increase in revenue expenditure.
• Capital expenditure lower: Capital expenditure ended up lower than in the previous year by 3.9%.

Reason for fiscal slippage

• Expenditure has got out of control or was under-estimated in last year’s Budget.
• Moreover, revenue, not capital, expenditure is the villain.
• The revenue deficit for 2017-18 is 2.6% of GDP, way above the Budget estimate of 1.9% of GDP.

Projections for new fiscal

What do we make of the projections for 2018-19?

• The Budget projects an increase in tax revenues of 16.6% compared to 15.3% in the previous year, which appears achievable.
• Total expenditure is expected to grow by 10.1% compared to 12.3%, which could turn out to be an under estimate.
• Capital expenditure has been set 9.9% higher which is modest given that there had been a decline in the previous year.
• Growth in public investment is tepid.
• There are no big tax giveaways either in the Budget. Clearly, fiscal policy is not being used to stimulate growth.
• With inflation running at 5%, the scope for monetary easing too is limited.
• The government is leaving it to market forces to drive growth in the coming year.

Will it work?

The budgetary projections for 2018-19 thus hinge critically on nothing going wrong with the equity markets and investors shrugging off the tax on long-term capital gains.

Ratio of gross tax revenues to GDP risen

On the positive side, the ratio of gross tax revenues to GDP, which had been stagnating at around 10% since 2008, has risen to 11.6% in 2017-18 and is projected to rise further to 12.1% in 2018-19, 12.4% in 2019-20 and 12.7% in 2020-21.

• What this means?
  • This shows that demonetisation and GST are beginning to pay off by widening the tax base and increasing the buoyancy of tax revenues.
  • There is reason to be optimistic, therefore, about the medium-term outlook for government finances whatever the problems in the next year or two.

Rural foray: Budget mainly focusses in rural sector; already discussed

New schemes announced have no actual budget outlays and only depends on external agencies and extra budgetary resources to fulfil the demands for funds needed to implement them.

Discussed in detail in the next article

Conclusion

It is clear that a return to a high growth trajectory of 8% is unlikely before the 2019 election. The BJP seems to have reckoned it has the urban middle class with it regardless. It is the rural constituency that needs focus. The Budget for 2018-19 has expenditure items planned accordingly while ensuring that the fiscal deficit stays within reasonable bounds.