A tenuous grip on fiscal discipline

The fiscal deficit target of 3.3 per cent of the GDP by FY19 is likely to be breached, unless the government generates coins from behind the ears. Tax and non-tax revenue continue to disappoint, while GST collections at `8.71 lakh crore offer few crumbs of fiscal and political comfort. A sum of `4.77 lakh crore—more than half of the GST revenue earned in nine months—needs to be collected in three months now, indicating a clear shortfall of `70,000-`1 lakh crore revenue.

Actual direct tax collections stood at 64.7 per cent of annual target till December, marginally lower than previous years. Non-tax revenue too is dismal, with disinvestment proceeds likely missing the target, which is why the government is looking elsewhere, including PSU’s unspent cash and interim dividend from RBI.

Any debt must be eventually paid, by running surpluses, printing money or pruning expenditure. Or the government can take recourse in FRBM’s escape clause of 0.5 per cent fiscal deficit deviation. But that’s something Finance Minister Arun Jaitley avoided in the past four budgets, styling himself as a fiscal hawk. But with little room for tax-and-spend policies now, his party approaches elections from a position of vulnerability.

As revenue-side economics retains its tyrannical grip on our finances, expenditure compression is unavoidable, but in reality efforts should be made to reduce subsidies and interest payments, which currently are the largest component in revenue expenditure at 35.3 per cent. The change in guard at RBI could cheer the government, as 92 per cent of national debt is internal and a dovish monetary policy will give it comfort.

Jaitley did well in avoiding populism in the treasury spreadsheet last Budget, and it’s imperative to continue the Keynesian counter-cyclical fiscal policy, where deficits decline in a growing economy. Even a mild breach in fiscal consolidation will give the crying baby (Opposition) the candy, besides allowing the sovereign to get butchered by markets, bond yields, investors and rating agencies.