Planning commission trims down fiscal deficit targets for the 12th Five-Year Plan

The Planning Commission chaired by the Prime Minister Manmohan Singh, has reduced its fiscal consolidation targets compared to the recommendations given by the 13th Finance Commission. The planning commission estimated the government’s fiscal deficit to come down to 3% of the gross domestic product (GDP) by 2014-15, third year of the next five year plan and then to stay there for remaining years of 12th plan. However, the onetime payments such as spectrum sale or disinvestment in the Public Sector Units (PSUs) are not likely to give this much of revenue as a proportion of the GDP.
 
On the other hand, the Finance Commission wanted the government to reduce its fiscal deficit to 3% by 2013-14, the second year of the next five year plan, a year ahead than the Planning Commission’s projection. For 2013-14, the planning commission expected the deficit to be 3.5% of the GDP. Initially, as per the Fiscal Responsibility and Budgetary Management (FRBM) Act, the central government’s fiscal deficit was expected to reduce at 3% of GDP by the 2008-09. However, because of the global financial crisis, the government was forced to give stimulus packages, doubling the fiscal deficit to more than 6%.

The approach paper to the 12th Five-Year Plan assumes that the fiscal deficit figures to decline, mainly on the back of the healthy tax collections. The fiscal deficit estimations are based on the assumption of 14% nominal GDP growth rate a year on an average in the 12th plan, including 9% GDP growth and 5% inflation. 

For the first year of 12th Five-Year Plan i.e. 2012-13, the approach paper, estimates fiscal deficit to be around 4.10% of the GDP. For the current financial year, government has targeted fiscal deficit to be around 4.6% of the GDP, for the 2010-11, fiscal deficit was 4.7%. The approach paper of 12th plan, also estimates that the net revenue of the central government is likely to increase to 8.91% of GDP in 2016-17, the terminal year of 12th plan from 7.4% of GDP on 2011-12.

However, the approach paper, expects non-tax revenue to decline from the current level of 1.4% in 2011-12 to 0.88% in 2016-17. This estimated decline in non-tax revenue would be because of absence of any prospect of large revenues from one time sale such as spectrum. The planning commission also expects that the share of non-debt capital receipts, which includes disinvestment of PSUs process.

The central government’s aggregate resources are also likely to decline from 14.01% of GDP in 2011-12 to 13.11% of the GDP in 2016-17.  As per the approach paper of the 12th plan, the subsidies or non planned expenditure that are likely to account for 18.8% of the total non-plan expenditure in the 12th plan are estimated to reduce from an estimated 1.6% of the GDP in 2011-2012, which is based on the Budget estimates, to 1.24% of the GDP in the terminal year. The decline in subsidies is serious from the resource point of view as in the past subsidies have been increasing as a percentage of GDP. Other alternative solution would be to increase the Tax GDP ratio by more than 12% of the GDP.