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Extra tax mop-up will help government achieve its fiscal deficit target
June, 30th 2016

Implementing the Seventh Central Pay Commission's recommendations could make it difficult for the government to achieve its fiscal deficit target if revenue falls short of estimates, although the possibility of granting allowances from a later date gives it some wriggle room.

Together with arrears payable from January 1, 2016, the additional burden for the government will be Rs 60,608 crore in the current financial year.

Finance minister Arun Jaitley said adequate provisions had been made in the budget for the Pay Commission award. He had estimated fiscal deficit of 3.5% of GDP in the budget for FY17. The Pay Commission had projected a Rs 72,800 crore impact because of pensions and salary increases and Rs 29,300 crore on account of allowances. SBI said the budget had made a provision of Rs 53,844 crore, only marginally less than what the government expects, excluding allowances.

Part of the payout will be recouped through higher taxes on increased salaries and indirect taxes on goods purchased by government employees. Besides, with allowances delayed until a committee reviews them, the government has a better chance of meeting its target. Calculations could be upset if some revenue assumptions go awry, in particular funds raised from sale of telecom spectrum and disinvestment.

"The additional expenditure burden is not very big in the larger context of the fiscal situation, but the challenges may come from the aggressive tax targets and large capital receipts from disinvestment and spectrum sale," said Abheek Barua, chief economist at HDFC Bank. "In the worst case scenario, the overshoot will not be more than 0.2-0.3%."

 
 
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