Recognising the requirements for health and education to build human capital, the Budget has proposed doing away with the concept of revenue deficit as part of the Centre’s fiscal consolidation roadmap.
Though the Budget documents have given targets for revenue deficit, the amendments to the Fiscal Responsibility and Budget Management Act 2003 has proposed to substitute the definitions of “effective revenue deficit” and “revenue deficit” with those of “Central government debt” and “general government debt” respectively.
New framework
The FRBM Act of 2003 had suggested lowering the fiscal deficit to 3per cent of the GDP and eliminating the revenue deficit in a specified time frame, although subsequent governments kept shifting the goalposts due to various reasons.
“In the new proposed framework, the Revenue Deficit targets shall not enjoy the pre-eminence as it did earlier. This is to remove the anomaly created by a preference for capital expenditure that was inherent in the framework where the revenue deficit was following a declining trend,” said the Budget document, adding that apart from the creation of assets, there is also a need to focus on the correct maintenance of the assets that have been set up.
Similarly, the expenditure on education and health through payments of well-trained teachers and doctors, is as important as creating buildings for schools and hospitals, it noted.
The move comes at a time when Finance Minister Arun Jaitley in the Budget has also announced the world’s largest government-funded healthcare programme – the National Health Protection Scheme. The total Budgetary expenditure on health, education and social protection for 2018-19 has been pegged at ₹1.38-lakh crore against an estimated expenditure of ₹1.22 lakh crore in 2017-18.
Finance Ministry officials have time and again also pointed out that differentiating between revenue and capital expenditure is difficult at times, and that it is not always correct to consider revenue deficit as wasteful spending.
The NK Singh committee report on fiscal consolidation had also called for more focus on fiscal deficit and government debt.
Experts said human capital formation is also important, although in many countries such as the United Kingdom, the golden rule is that economies can only borrow to the extent they create physical assets.
“This is in favour of the old argument that education and health require expenditure,” said DK Srivastava, Chief Policy Advisor, EY (India), who was also a member of the Twelfth Finance Commission.
Srivastava, however, warned that a complete elimination of the revenue deficit in the long-term may not augur well for growth as it could impact the already declining savings rate.
DK Joshi, Chief Economist, Crisil, said: “Whichever measure of deficit is taken, the numbers behind it are equally important in terms of how the deficit is being financed and what the expenditure is being used for.”
Inflation
The Budget also seems to be preparing for a higher inflation in 2018-19. Budget documents have pegged nominal GDP growth in 2018-19 at 11.5 per cent and the real GDP growth at 7.2 per cent.
“The implicit GDP deflator of these estimates work out to 4 per cent on an annual basis,” said the medium term fiscal policy statement.
Officials, however, stressed that this would be the outer limit and still be within the comfort of the Monetary Policy Committee that targets retail inflation. Analysts said high international crude oil prices and proposed increase in Minimum Support Price of crops could have an impact.
“The main challenges this year are likely to come from domestic demand pressures as growth is likely to pick up combined with the added uncertainty due to rising crude oil prices... A higher MSP generally tends to provide a floor for prices thereby pushing inflation on food prices. As such, we are likely to witness a year of higher inflation and macroeconomic management due to these challenges,” said Deloitte.
Rating agency Crisil has also pegged at 4.6 per cent in 2018-19. “Inflation will pick up due to rising consumption demand, impact of house rent allowance revisions on housing inflation, and higher global crude oil prices. Food inflation is likely to stay benign given a normal monsoon,” it said.
It has forecast CPI inflation at 4 per cent in the current fiscal. The Finance Ministry has also said the Budget would not have an inflationary impact despite the increase in the MSP and higher cess.