Budget 2016: Despite pressures, how govt can cut deficit to 3.5% next year

Sidhartha Shuklamoneycontrol.comOver the past many years, India has followed a path of gradual fiscal consolidation in line with its stated principles of sticking to fiscal prudence.Given the weakness in the economy and with spending expected to rise in the next fiscal, observers have wondered whether Finance Minister Arun Jaitley can achieve the government's previously-stated target of achieving a fiscal deficit of 3.5 percent in FY17.This, they say, cannot be achieved without the government resorting to savage cuts to expenditure -- something that would harm growth.However, a Citi Research report says that the government can achieve FY17 fiscal target without compromising on public expenditure.Arithmetic behind meeting FY17 Fiscal Targets (%GDP):As the chart above shows, cost of schemes such as ‘one rank, one pension’ (OROP) and the 7th Pay Commission, which will likely be rolled out in FY17, stands at 0.55 percent of GDP. As a result, the government will need to compress the fiscal deficit elsewhere by 0.95 percent of GDP to achieve its target of 3.5 percent of GDP (compared to 3.9 percent in FY16). Citi estimates that this 95 basis points adjustment can come largely from the revenue side and reduction from expenditure may not be required.To be more precise, as represented in the chart above, this compression could be achieved through the following manner:-A rise in excise duty collection on petroleum products, approximately 0.2 percent of GDP.-Hikes in service tax, contributing around 0.2 percent of GDP.-Divestment stake sales of approximately 0.2 percent of GDP.-Relatively subdued pace of expenditure growth against revenues can contribute around 0.15 percent of GDP.Last, but not the least, telecom spectrum auction remains a wildcard for the government which could surprise positively. Follow @shukla_05sid