Fiscal rectitude or spending push? Budget attempts both, but half-heartedly

Two challenges confronted the makers of the Union Budget for 2020-21 that was presented yesterday. The government’s finances had come under stress and the Indian economy was in the grip of a slowdown. Thanks to a combination of unrealistic revenue projections and a decline in the growth rate, the government’s revenues had taken a big hit in 2019-20. Similarly, India’s gross domestic product (GDP) growth in 2019-20, according to the first advance estimate, was down to 5 per cent. The latest GDP numbers for 2018-19, which were revised downwards, meant that India’s economic growth in 2019-20 looked slightly better at 5.7 per cent, compared to the earlier estimate. But there was no significant change in the trajectory of the slowdown. Under these circumstances, the government had two options: Stay on the path of fiscal rectitude and undertake reforms in various areas that would over time revive the economy, or embark on reforms as well as a big fiscal stimulus by spending more on various schemes and projects to revive both demand and economic growth. What the Budget instead has attempted is to explore both the options, but with what appears to be a half-hearted approach, relying on revenue targets that look too ambitious to be achieved and expenditure outlays that are too meagre for many sectors.

On fiscal consolidation, the Budget conceded a slippage of 0.5 percentage point to 3.8 per cent of GDP in 2019-20, but promised to bring it down to 3.5 per cent next year. In doing so, the government has stayed committed to the Fiscal Responsibility and Budget Management Act that allows a slippage of no more than half a percentage point in a year. The original target under the law was 3 per cent for 2020-21. But there will be questions on how realistic these targets are. The achievement of a deficit target of 3.5 per cent is crucially dependent on a hefty increase in disinvestment receipt of Rs 2.1 trillion, an increase of 323 per cent over Rs 65,000 crore achieved in the current year. Listing the state-owned insurance behemoth, LIC, is a big move, but it will require greater planning and execution than has been witnessed in the last few years. Similarly, a gross tax revenue growth target of 12 per cent in 2020-21, when nominal growth will be no more than 10 per cent, will require a significant jump in tax buoyancy to 1.2, from a low level of 0.5 in the current year.

A laudable feature of this year’s Budget is the finance minister’s attempt to become more transparent about the government’s extra-Budget borrowings, which are expected to rise by 8 per cent to Rs 1.86 trillion. In other words, the government’s actual fiscal deficit, inclusive of these extra-Budget borrowings, would cross 4.36 per cent of GDP. The transparency with which the Budget has brought out these borrowings in the open is a welcome development and should result in its integration with the headline fiscal deficit number in due course. In spite of the plan for a massive mobilisation of disinvestment receipts and a 12 per cent growth in gross tax revenues, the government has been rather tight-fisted about its expenditure outlays. It has budgeted for just about 13 per cent increase in its overall expenditure, with little increase in major subsidies and just about 2 per cent increase in defence outlay. While the virtual freeze on subsidies is a difficult goal, which can be achieved only if the government can implement a major subsidies reform during the year, the meagre rise in defence expenditure is deeply worrying at a time when the country’s defence acquisition programme has to be speeded up. Similarly, while the 18 per cent increase in the Budget support for capital expenditure is a much-needed boost to infrastructure spending, the government’s overall capital expenditure for next year at Rs 10.84 trillion, represents only a 2.3 per cent increase and should be a cause for concern if the target of meeting an overall infrastructure investment target of Rs 100 trillion has to be met over the next four years.  Even the allocations for the rural economy have not seen a significant increase. Indeed, the absorptive capacity of the system in disbursing the money allocated to many of these schemes like the Pradhan Mantri Kisan Samman Nidhi or the Mahatma Gandhi National Rural Employment Guarantee, needs to improve with a more efficient disbursal system.

A part of the reason for the government keeping a tight control on expenditure is that the implementation of the recommendations of the 15th Finance Commission meant a relatively small increase of only 8 per cent in its net tax revenue. The devolution of tax revenue to the states will see an increase of 18 per cent next year. This will be a welcome relief for the states, whose finances should see an improvement, particularly after 2019-20, when they suffered a big decline in the transfer of central taxes to them. But the question that will be raised is that if the government did not have adequate resources to spend on the rural economy or on other projects, what was the justification for the significant tax giveaways of Rs 40,000 crore by reducing the tax rates for middle-class income earners if they opted out of some of the exemptions and another Rs 25,000 crore by taxing dividend in the hand of the recipient instead of taxing the entities that distributed the dividend. The idea of phasing out exemptions from income tax is welcome. A similar regime is already in place for corporation tax payers. But if more expenditure in the rural economy is the need of the hour to revive demand, it is debatable if such tax giveaways could have waited till GDP growth picks up a little. The Budget’s taxation policy gets further complicated with its flawed approach to raise customs duty on 22 more items including toys, footwear and walnuts. Like the past few budgets, this one too has made the mistake of raising customs duties in the mistaken belief that this would improve domestic manufacturing.