Falling oil prices have given policy makers enough headroom to prepare a multi-pronged roadmap, which could have a benign impact on India's fiscal prudence in medium to long term. India's fiscal health has been an issue of concern in the past few years for the international credit rating agencies and the same had led to the sovereign rating downgrade in 2012.
Now, all the three top global rating agencies are keeping Indian debt at the lowest investment grade rating.
With just few days left for the Narendra Modi government to table the Union Budget 2015, these agencies have been batting for fiscal consolidation-centric reforms. Recent reports also say the government is seriously looking into their concerns and might unveil a roadmap in the upcoming Budget for limiting fiscal deficit to 3 percent of GDP within 2 years despite the challenge of reviving the economy with more spending on infrastructure.
As far as Current Account Deficit (CAD) is concerned, oil prices have given a huge respite but there are still concerns looming over the fiscal deficit, which has surpassed the budgeted target in just nine months (April-December) of this fiscal. The fiscal deficit in the first 9 months of this fiscal stood at Rs 5.32 lakh crore or 100.2 percent of the 2014-15 estimates.
However, some experts feel that the government can’t take falling oil prices for granted in the long run. Oil prices have already been bottomed out and changing dynamics might trigger higher prices, resulting in the increasing vulnerability of balance of payment. Something seems to be happening on the same lines earlier, as the oil which had plunged last month to its six-year-low (nearly USD 45 per barrel), recovered by over 10 percent to above USD 55 per barrel in the last few trading sessions.
Nonetheless, the decline in global oil prices since mid-2014 has given room to the Modi government to mop up nearly USD 3.5 billion by repeated hikes in excise duty on petrol and diesel. Since November last year, the government has raised the excise duty on fuels for no less than four times. As per estimates, lower fuel subsidies coupled with the recent duty hike on diesel and petrol could together add almost Rs 1.1 trillion (USD 18 billion) to the Budget 2015-16.
It’s a major concern that the revenue realization has remained subdued continuously for the last couple of years. So the government must maintain fiscal deficit at 4.1 percent of GDP either by financing through the PSUs stake sale, cutting both plan and non-plan expenditure or enhancing excise duty on fuel.
Over the last few years, a sustained slowdown in economy has made fiscal prudence distressing by making a significant dent in the tax collection. In the current fiscal, the government has aimed to collect over Rs 13.6 lakh crore as tax revenue, which requires a 16 percent growth in direct taxes and 20 percent growth in indirect taxes to meet the target. But the government’s net direct tax revenue collection till December end was Rs 5.46 lakh crore or 55.8 percent of Rs 9.77 lakh crore estimated for the whole year. The government has also failed to meet its indirect tax collection target. It has collected Rs 3.77 lakh crore, or 60.6 percent, of budget target for indirect tax by December 2014.
Failing on tax collection front, the government has recently hinted for more cuts in non-plan expenditure apart from a 10 percent cut, announced in October 2014. For an economy where capital expenditure has so far been unsatisfactory, more cuts cannot be justified. Therefore it is the time to rationalise the government expenditure on flagship schemes and subsidies, and not to make a drastic cut.
Nevertheless, in the backdrop of favourable market conditions, divestment has given a ray of hope to the government. However, the government has so far been able to garner only Rs 24,400 crore from SAIL and CIL stake sale as compared to its total divestment target of Rs 43,425 crore for the current fiscal.
With less than 2 months remaining for the fiscal year to end, the government is trying to keep its fiscal imbalance in order by selling its stake in PSUs where the government stake is over 75 percent. Some of the major companies, in which the government may sell its stake in the coming days, include IOC, NMDC, BHEL, NALCO, PFC and REC. The market regulator SEBI had asked the government last year to cut its stake in listed public sector units to a level of 75 percent or below by August 2017.
For the current fiscal, the government might achieve the target by selling its stake in PSUs, raising duty on petro products and cutting expenditure, but this is not a lasting solution to the problem. More focus should be given on revenue realisation while making a blueprint for fiscal prudence because the respite and gains due to fall in crude oil prices and PSUs stake sales would not be sustainable in the long run. If the growth cycle revives, then there will be an automatic increase in tax, resulting in credible fiscal prudence. Short-term reliefs, like cuts in taxes will help only in the short term to boost business sentiment but could be sustainable only if the government moves ahead on its promise of removing bottlenecks for improving the overall business climate and implementing more structural reforms.