Congress and BJP poll manifestos: High on largesse, low on fiscal prudence

Both the Bharatiya Janata Party (BJP) and the Congress have promised a host of costly giveaways to the people as they vie for power at the Centre in the ongoing Lok Sabha election. The irony is that both political outfits have vowed to remain fiscally prudent inspite of the burden that their largesse is likely to exert on the exchequer.

What the Congress has promised

For instance, the Congress' much-talked of Nyuntam AAy Yojana or NYAY -- the acronym means justice in English -- will hit the exchequer with a staggering Rs 3.6 trillion a year if and when fully executed. It entails a guaranteed cash transfer of Rs 72,000 a year to 50 million of India's poorest families, which constitute 20 per cent of the country's population.

The party also said it would bring down fiscal deficit to three per cent of GDP from 2020-21 onwards.

Fiscal deficit, the gap between the Centre's expenditure and revenues, is pegged at Rs 7.04 trillion in 2019-20 or 3.4 per cent of GDP. Considering 11.5 per cent growth over an estimated GDP at current prices of Rs 210.1 trillion for 2019-20, the size of economy would come to at about Rs 234 trillion for 2020-21. We have taken 11.5 per cent growth because that was what was assumed in the interim budget document for 2019-20. Three per cent of this figure works out to Rs 7.02 trillion. If other revenues and expenditures remain constant, the Rs 3.6 trillion outlay for NYAY would work out to a starggering 50  per cent of this deficit.

The manifesto, whose drafting committee was chaired by former finance minister P Chidambaram, cannot be so far removed from numerical logic.

The manifesto says the Congress intends to implement NYAY as a joint scheme of the Central and state governments, but is silent on the burden to be borne by each. However, Congress sources said that the cost was likely to be borne in the ratio of 60:40 between the Centre and states.

This means the Centre would bear Rs 2.1 trillion out of Rs 3.5 trillion when the scheme is fully implemented. Where will this money come from? Doesn't the scheme go against the party's resolve to remain fiscally prudent?

Will other subsidies be subsumed in it? The Congress manifesto says that current merit subsidy schemes that are intended to achieve specific objectives will be continued. However, it also says the scheme will be funded through new revenues and rationalisation of expenditure. It did not go into the details of the options to fund the scheme. However, at press conferences later, party leaders did say that they will not resort to raising taxes that would burden the middle class.

When the question of cost of the scheme was raised at a press conference after the release of the Congress manifesto, Chidambaram said the nominal GDP was rising over the years and a higher GDP would make the cost of these programmes look smaller as a percentage of the size of the economy.

At the current rate of growth, the GDP would work out to Rs 400 trillion by 2023-24. At that time, NYAY would cost just 0.5 per cent of GDP if the Centre were to bear 60 per cent of the burden.

Also, fiscal deficit at three per cent of GDP would mean Rs 12 trillion and NYAY would only be 17.5 per cent of that, other things remaining the same.

Besides NYAY, the Congress also promised to raise the allocation to education to six per cent of GDP and health to three per cent by 2023-24. Together, that works out to Rs 36 trillion, which is higher than the current size of the Budget (which, in any case, would also increase by that time). This means that the Congress also wants to share these schemes with the states, but has not not come out with any detailed plan on how it intends to go about achieving this.

The party also wants to increase the guaranteed days of employment under MNREGA to up to 150 days in cases where 100 days have been achieved in blocks and districts.

The total allocation towards MNREGA in the interim budget for the current financial year is Rs 60,000 crore. If all blocks and districts ask for the number of guaranteed days of employment to be increased to 150 days, that itself would take the allocation to Rs 90,000 crore.

The party has also promised to reward export-oriented industries through tax rebates and incentives that will also hit the exchequer.

The BJP's offer

The party has promised to expand its Pradhan Mantri Kisan Samman Nidhi Yojana (PM Kisan) to everyone. The interim budget for 2019-20 had provided for Rs 6,000 a year to all farmer families owning up to two hectares of land in three phases in a year. This would cost the exchequer just Rs 12,000 crore over the current Rs 75,000 crore a year, since 86 per cent of farmers families have already been covered under PM Kisan.

The BJP also promised zero-interest loans of up to Rs one lakh to farmers for five years. Currently, the government bears a burden of Rs 15,000 crore a year towards interest subvention of four per cent, to enable farmers get crop loans at three per cent. If three per cent additional subvention is given, the burden would at increase to Rs 30,000 crore.

That would make BJP’s promise much more prudent to fiscal consolidation than that of the Congress.  

But then you have the mother of all promises by BJP -- the party has resolved that its government will make capital investment of Rs 100 trillion in the infrastructure sector by 2024.

The total capital expenditure of the government is estimated at Rs 9.61 trillion for 2018-19 (revised estimates). This is projected to decline marginally to Rs 9.53 trillion in the Budget Estimates for 2019-20. To take this to Rs 100 trillion, or over 10x, is a tall order. Capital expenditure also includes extra budgetary resources of public sector units. Even if these are taken out, capex would be far more than the Budget size.

Perhaps the promise includes expenditure by the private sector as well. That is why the manifesto said,"We recognize that investment-driven growth requires cheaper cost of capital. By anchoring inflation at 4 per cent and cleaning up our banking system, we have created the space for structural reduction in the cost of capital. This will not only help infrastructure investment but investment also in the wider economy. Thus, new India will be built on the basis of investment driven growth."

The promises by the two main rivals at the general elections come at a time when the Centre is struggling hard to contain fiscal deficit at 3.4 per cent of GDP for 2018-19, as projected in the revised estimates of the interim Budget. Despite the fact that the projected fiscal deficit was higher than 3.2 per cent as given in the Budget Estimates for 2018-19, it had overshot revised estimates by 34 per cent till February. This means that the government will have to have fiscal surplus of 34 per cent of RE in March to contain it at 3.4 per cent.

North Block officials have already said that the deficit has been contained at the targeted level. However, it is widely believed that it has come due to expenditure compression by the government, which includes both, cutting some expenditure and carrying forward some portion.