Budget 2016-17 should increase government's capital expenditure

Last year, when Finance Minister Arun Jaitley presented his Budget for 2015/16, he promised to cap fiscal deficit at 3.9 per cent of GDP. He also said that it would be brought down gradually and in 2016/17 it would be kept at 3.5 per cent of GDP. It is notable that in order to keep inflation in check, lowering of fiscal deficit assumes significance. As per Fiscal Responsibility and Budget Management (FRBM) Act, fiscal deficit was to be brought down to 3 per cent of GDP by 2008/09. However, the same was postponed in view of global recession.

In Budget 2015/16, provision was made for the Seventh Pay Commission, and this year's Budget will have to provide more than Rs 1 lakh crore for the implementation of the Commission's recommendations. It is a known fact that salaries and pensions eat away a huge part of government expenditure.

Now that the Seventh Pay Commission and one rank one pension (OROP) of pensioners of armed forces are to be implemented next fiscal, government expenditure is bound to increase proportionately.

For raising expenditure, it is essential that revenue also increases. Tax revenue forms a major part of the Central government's total revenue receipts (80.6 per cent in 2015/16). However, this year the government's worry is that wholesale inflation has remained in the negative zone in the past 14 months. Despite better performance in terms of real GDP, nominal increase in GDP in 2015/16 and 2016/17 would be much lower than in previous years.

There is confusion prevailing in official circles about deflation in the economy. Chief Economic Advisor Arvind Subramanian recently made a statement that India has been facing a situation of deflation, as the GDP deflator is no larger indicating inflation. Minister of State (Finance), Jayant Sinha, has cautioned that due to this deflation, government's revenue may get adversely affected.

Possibilities of Increase in Revenue

It is true that due to deflation in the commodity market, government's revenue from excise and custom duties may get affected adversely. However, due to increase in rate of excise duty on petroleum products, and in the wake of declining prices of petroleum products, government's revenue from this source is likely to increase by nearly 90 per cent. It is worth noting that in 2015/16, there has been a huge decline in international petroleum prices and price of crude oil; prices came down to less than one third of the prices of a couple of years ago.

The benefit of this fall in crude price was transferred only partially to the consumers, and taking advantage of the lower prices, government increased the excise duty manifold. As a result, petroleum excise revenue, which was Rs 78,545 crore in 2014/15, is expected to be nearly Rs 1.5 lakh crore in 2015/16. It was 0.8 per cent of GDP in 2014/15; and is expected to go up to 1.4 per cent of GDP in 2015/16.

Losers are the states whose VAT is based on value (ad valorem). Central government's advantage was three-fold, namely, increase in excise revenue, reduction in subsidy bill (with much lower prices), and increase in profits of public sector oil companies. Therefore, as price of crude is expected to remain low for some more time, taking advantage of this threefold gain from fall in crude price, legitimately the Central government should boost up infrastructure, especially rural infrastructure and other development projects.

Imperative to Increase Capital Expenditure

At the same time, the Finance Minister is under moral obligation to increase capital expenditure to boost growth. In the past few years, domestic investment has come down drastically, the main reason for which is decline in government's capital expenditure. Therefore, it is imperative to increase public investment.

There is scope for raising public investment in roads, railways, airports, sea ports etc. The government has been making efforts to raise private investment in infrastructure, including foreign investment. However, it is a fact, which even the government concedes, that to increase private investment; we need to raise public investment also. Budget 2015/16 was made to shrink due to increased share of states in the Central taxes, thanks to the recommendations of 14th Finance Commission.

Now with the implementation of Seventh Pay Commission and OROP, the Budget will again be stressed as revenue expenditure would increase significantly. However, the need of the hour is to raise capital expenditure also to give boost to infrastructure and rural development. For this, the government will have to raise its Budget by no less than 10 to 15 per cent; and increase the size of the budget to nearly Rs 20 lakh crore in 2016/17.

The nation has been in the clutches of recession in the past few years. Investment in all sectors, including agriculture, manufacturing and infrastructure, has been badly hit, pulling growth rate down. The government has been chanting the 'Make in India' mantra to boost manufacturing. However without bringing new investment in manufacturing, agriculture and infrastructure, this can't be realised.

The government's Start-Up initiative is a good start; however in case of infrastructure, the government itself has to be a partner. It is a known fact that the Golden Quadrilateral, airports, sea ports, Metro or any other infrastructure project could not have seen the light of the day without government's active participation.

All eyes are now on the Finance Minister, especially on what steps he undertakes to increase capital expenditure in this Budget and take the economy forward on 10 per cent plus growth trajectory. For increasing capital expenditure, even if fiscal deficit targets are revised upward, there may not be much problem, given the deflationary situation in the economy.

(The author is National Co-Convener, Swadeshi Jagran Manch. He can be reached at @ashwani_mahajan)