How will the Centre meet the 3.5 per cent fiscal deficit target?

In the run-up to the Budget, there was a debate on whether the government should stick to the fiscal deficit target of 3.5 per cent in 2016-17. While letting go off the target would mean slipping off the fiscal path, adhering to the target would most likely come at the cost of investment spending.

The Centre has finally decided to keep the fiscal deficit to 3.5 per cent of the gross domestic product (₹5.34 lakh crore) in 2016-17. While that is desirable, the devil lies in the details. The budget estimates for financial year 2016-17 reveal that the government is banking on a significant jump in tax and non-tax revenue in the coming fiscal year.

Also, it is providing for only a modest increase in capital expenditure (investment spending). This is to compensate for the sharp surge expected in revenue expenditure in 2016-17.

Tax revenue (after excluding the states’ share in Centre’s taxes) for 2016-17 is estimated to be ₹10.54 lakh crore, 11 per cent more than that in 2015-16. This growth is much higher than the 5 per cent clocked in 2015-16.

Apart from taxes, the government will be relying on telecom spectrum charges of ₹98,994 crore in 2016-17. The amount is 75 per cent more than what it collected in the current fiscal year.

Given that telecom players are already squeezed, the ability of these operators to shell out additional amount this fiscal year remains uncertain.

The Centre also continues to remain optimistic on disinvestment, despite its past record of missing the targets by a wide margin. The government is expecting disinvestment proceeds of ₹56,500 crore in financial year 2016-17, more than double of what it managed in the current fiscal year. Given the volatile market, this figure looks unachievable.

The government is budgeting for capital expenditure of ₹2.47 lakh crore in 2016-17. This is a mere 3.9 per cent increase (or an additional ₹9,300 crore) over what was spent in the current fiscal year. This can have adverse implications for long-term growth. This is in sharp contrast to the 21 per cent surge in capital expenditure in 2015-16.