Jaitley postpones fiscal deficit control target deadline by a year

Finance Minister Arun Jaitley Saturday extended the target deadline for controlling fiscal deficit to three percent reasoning that insistence on a pre-set timetable to contain the deficit would harm growth prospects.

"I will complete the journey to a fiscal deficit of three percent in three years, rather than the two years envisaged previously," Jaitley told the Lok Sabha while presenting the NDA government's first full budget.

"Thus, for the next three years, my targets are 3.9 percent for 2015-16, 3.5 percent for 2016-17, and 3.0 percent for 2017-18," he said.

The finance minister said the 14th Finance Commission's recommendation to increase the states' share of taxes in the divisible pool to a record 42 percent had considerably "squeezed" the Centre's fiscal space forcing him to push back the target for deficit control.

"The total transfer to the states will be about 62 percent of the total tax receipts of the country," Jaitley said.

Explaining the tightrope walking he has to engage on this count, Jaitley told the House that with economic growth this year being lower in nominal terms by about two percent due to lower inflation, tax buoyancy, consequently, was also significantly lower.

"Despite this we will meet the challenging fiscal deficit target of 4.1 percent of GDP, that we had inherited," he added.

The revenue deficit for April-December 2014 has already exceeded the estimates for the full fiscal, the government's annual report card on the economy said Friday.

The Economic Survey 2014-15 said the country can balance short-term boosting of public investment for economic growth along with "fiscal discipline".

Jaitley has a headache in controlling the fiscal deficit because the tax revenue earned by the central government as a percentage of the GDP has been falling over the years.

Tax revenue in 2007-2008 stood at 11.9 percent of the GDP. By 2013-2014, it had fallen to 10 percent of GDP and in 2014-2015 is expected to fall further to 9.6 percent, signifying the government's declining ability to service its accumulated debt.

Towards raising revenue, the 2015-16 union budget announced a divestment target of Rs.69,500 crore, higher than the current fiscal's target of Rs.58,425 crore.

In the current fiscal, the government has so far raised only a small fraction of its ambitious divestment target.