FM agrees to budget support of 5.3% (4.1%) of GDP in XIIth Plan on strong revenue expectations

NEW DELHI: The usually tight-fisted finance ministry has approved a sharp step-up in developmental spending in the Twelfth Five-Year Plan beginning next financial year, promising to substantially enhance budgetary support for the entire plan.

It has agreed to a higher budget support of 5.3% of GDP, bumping up the total plan resources to an average of 8.1% of GDP, much higher than the 6.6% of GDP in the current financial year. “Revenue projections for the 12th plan look very healthy and form the basis for a higher GBS (gross budgetary support),” a government official privy to the deliberations told ET.

A higher allocation for funds will come handy for the Planning Commission, which has an ambitious social agenda that includes implementing right to education, food security bill and better healthcare for all.

A full commission meeting on August 20 is likely to finalise the approach paper for the 12th plan. Chief economic advisor Kaushik Basu headed the group that decided on the financial resources for the plan. Anticipating an average 9% GDP growth in the five years of the plan, the commission had earlier pegged the budget support at 4.1% of GDP and total resources at 5.8% of GDP.

The finance ministry has now brushed aside all fears of slowdown, estimating its net tax collections (after giving out states'share) at an average of 8.7% of GDP in the plan against 7.4% of GDP in the current year. Even without a significant step-up in GDP, the ministry expects the taxto-GDP ratio to rise significantly in the coming years because of various administrative and tax reforms.

The new direct taxes code and the goods and services tax ( DTC) are expected to boost the net revenues of the centre, which are now projected to rise to 8.9% by the terminal year of the plan (2016-17) from 7.4% currently. The direct taxes code is expected to come into force from the first year of the 12th plan but the GST rollout may be a bit delayed.

The stepped-up allocation has not been at the cost of fiscal consolidation. The centre's fiscal deficit is still projected to come down to 3% of GDP by 2014-15, considered sustainable by experts and in line with the fiscal deficit reduction road map committed to by the government in February when it presented the budget.

The finance ministry has also committed to expenditure discipline through compression in non-plan spending--expenditure that is not considered productive-which is estimated to come down to 7.4% of GDP in the penultimate year of the plan from 9% in 2012-13.