After pains of GST and note ban, Jaitley hints at relaxing the fiscal deficit target for 2018

Finance minister Arun Jaitley on Thursday hinted at the possibility of relaxing the fiscal deficit target in next year's Budget. The Budget would be his last in his five-year term and his government, like all governments, will lean toward being populist.

“No pause (on fiscal consolidation) but challenges arising from structural reforms...could change the glide path,” Jaitley said in Singapore.

Jaitley's government had set a fiscal deficit target of 3.2% of GDP for FY18 and 3% for FY19. In the first five months of the financial year, the Centre has already touched 96.1% of the budgeted fiscal deficit target.

However, a bigger question that need to be asked is, whether the deviation from fiscal consolidation happens on account of revenue shortfall or because the government actually wants to spend more than it actually intended?

Uncertainty regarding revenues

The Goods and Services Tax (GST) has got off to a jittery start. There is no certainty around revenue collection from indirect taxes post the implementation of GST. The state of Karnataka has generated a revenue of only Rs 5,710 crore in July and August this year, as against against Rs 6,190 crore in 2016-17. State governments have demanded a 15% rise in revenue year on year for the next five years to be party to the GST.

The shortfall in revenues will have to be met by the central government through cess collection. While as of now the Centre has enough money in its GST compensation fund for states, lower revenue collection nationally will put pressure on the government to deviate from the fiscal consolidation path even to meet its expenditure requirement promised in the current fiscal.

Recapitalisation of banks

The government announced a Rs 2.11 lakh crore recapitalisation road map for public sector banks last month. The decision, in the words of chief economic advisor Arvind Subramanian, is likely to put Rs 9,000 crore interest burden on government finances. To offset the interest burden government requires higher revenue generation through increased economic activity. Though it is difficult to foresee a direct increase in revenues for the government due to banks' recapitalisation.

Pronab Sen, economist and former chief statistician of India said, “It is difficult to gauge what would be the the impact of deviation from fiscal consolidation. Ideally, it should be done to spend more to give a boost to the economy. But in the current scenario, it seems that there are chances of shortfall in revenues for the government that may force it to relax the targets a bit.”

Government cutting corners

In his Budget speech delivered in February 2017, Jaitley had announced highest ever allocation of funds at Rs 48,000 crore for Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which guarantees 100 days of employment to every rural household.

However within six months into the fiscal year the government started delaying fund release to state governments. According to data analysis done by India Spend, payments under MNREGA have not been made in 19 states as of 31 October this year. Delaying payments to state gram panchayats ensures that less number of people demand jobs under the scheme in the remaining part of the year, helping the government keep its revised estimates of budgetary expenditure lower than the budgetary estimates.

All this indicates that the relaxation of fiscal deficit targets are likely to be on account of reduced funds at government's disposal rather than government's strategy to boost the economy through higher government expenditure.