The Budget preparation has brought the focus on the fiscal deficit target that Finance Minister Arun Jaitley is likely to announce. However, the challenge will be even greater on the revenue deficit front arising from higher government expenses on salaries and pensions. A likely higher revenue deficit has the potential to make India's fiscal balance sheet unhealthy.
The revenue deficit is a situation when the government's outgo on salaries, pensions and subsidies is higher than receipts, not resulting in any asset creation. The government's efforts to contain the revenue deficit at 2.4 per cent of the gross domestic product in 2016-17 appears to be an uphill task with Jaitley expected to make a provision of Rs 1.1 lakh crore in the next financial year to implement the recommendations of the Seventh Pay Commission and the one rank, one pension (OROP) scheme.
The costs of OROP and the Food Security Act were not taken into account at the time of making the road map for containing the fiscal deficit at 3 per cent of GDP by 2017-18. The revenue deficit essentially arises when capital expenditure and receipts are taken off the fiscal deficit.
The revenue deficit in the current financial year is estimated at 2.9 per cent of the GDP against the 2.8 per cent target under the Fiscal Responsibility and Budget Management road map. This is mainly on account of lower than expected nominal GDP growth of 8.6 per cent, led by lower than expected inflation.
The government intends to bring the revenue deficit down to 2.4 per cent of the GDP by 2017-18, and the effective revenue deficit to zero by then from about 2 per cent in the current fiscal year, according to the FRBM road map.
Besides, the government had recently set a deadline for the nationwide implementation of the Food Security Act by April 1. As a result, the food subsidy bill was expected to exceed Rs 1.30 lakh crore next year.
The Seventh Pay Commission's recommendation of a 23.55 per cent increase in the pay and allowances of government employees from January 1, 2016, will need an estimated Rs 1.02 lakh crore extra expenditure. "The targets under the existing FRBM need to be re-looked at, if not for the fiscal deficit, then for the revenue deficit. When the existing FRBM was drawn up in February 2015, the OROP and food security were not factored in," said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy.
The defence pension budget was likely to be around Rs 65,000 crore for 2016-17, up 20 per cent from the 2015-16 budget estimate of Rs 54,000 crore, the defence ministry said last week. It said the annual recurring financial implication on account of OROP would be around Rs 7,500 crore. The statement said the arrears from July 1, 2014, to December 31, 2015, would be about Rs 10,900 crore
"The Seventh Pay Commission and the OROP will indeed exert pressure on the revenue deficit target in the next fiscal year. The government will need to re-look at the targets," said Pronab Sen, chairman, National Statistical Commission.
"Currently there is a classification issue with the revenue deficit because any expenditure in the form of a grant to states is shown as revenue expenditure while a large part of these are capital in nature." Sen added expenditure on government services towards law and order, health care and education were central to asset creation and "we actually spend very little on these, which we should try to enhance".