Budget 2018: Many big announcements by Jaitley, but where is the money?

The projected deficit for FY2019 is 3.3%. What underlies this is a tax revenue growth of 16.6% and expenditure growth of 10.1%

A budget has to be evaluated against its effectiveness in promoting the stated policy goals of the government. The primary economic function of the Centre’s budget is the maintenance of macroeconomic stability. But the specific tax and expenditure proposals in the budget impact on other policy objectives such as growth, job creation, equity and environmental sustainability.

When it comes to macroeconomic stability the main parameter that one looks at is the fiscal deficit which measures approximately the government’s draft on private sector savings. The FY2019 Budget slows down the process of reducing the fiscal deficit and, what is perhaps even more important, the revenue deficit. The deficit for FY2018 is 3.5 per cent against the target of 3.2 per cent; but this includes a substantial contribution from asset sales much of which, like the recent sale of HPCL to ONGC, was within the public sector and reduced the deficit but had no impact on overall public sector savings.

The projected deficit for FY2019 is 3.3 per cent. What underlies this is a tax revenue growth of 16.6 per cent and expenditure growth of 10.1 per cent. Take first the growth of direct taxes which is projected at 14.4 per cent relative to the Budget estimate for FY2018. For the past decade or so the buoyancy of direct taxes (ratio of direct tax growth to nominal GDP growth) has been under one. The FM argued in his Budget speech that buoyancy has been much higher since demonetisation and one will have to wait for the actual realisations to judge the reliability of this figure. As for indirect taxes we are in a different ball game as this will be the first full year of GST implementation and there is little with which one can compare the assumed FY2019 CGST collection of Rs 6.04 trillion against the estimated realisation of Rs 2.21 trillion in FY2018. But it does look ambitious.

The expenditure budget is the primary instrument in an Indian context for promoting macroeconomic policy goals such as fiscal stimulus or restraint and specific sectoral priorities. These change from year to year and will not be trend determined. This is the government’s last budget before the next national election and there are many state-level elections scheduled for this year. The planned expenditure growth of 10.1 per cent is less than recent election year expenditure growth of 13.8 per cent in 2004-05, 24 per cent in 2008-09 (a year when a large fiscal stimulus was needed to cope with the global financial crisis) and a modest 10.6 per cent in 2013-14. But it is far too low to allow any serious start on some of the ambitious schemes announced in the Budget.

The case for fiscal prudence at the present moment is clear with the potential problems that could arise if crude oil prices continue to rise and inflation risks increase. Given this perspective, is the Budget sufficiently prudent? It probably is but at the cost of substantial under provisioning for the many grand sounding schemes announced in the Budget.

When it comes to growth the main need is to raise the fixed investment rate which has fallen from a peak of nearly 39 per cent in 2011-12 to 26.4 per cent in 2017-18. The Economic Survey attributes this largely to the stressed balance sheets in the corporate sector and the corresponding NPA problem of banks. However, between 2011-12 and 2015-16 corporate fixed investment as a proportion of GDP stayed at about 13 per cent and the decline was largely due to a 5 per cent fall in non-corporate or household sector gross fixed investment. The Economic Survey is a little cautious in its prognostications about investment revival but still identifies it as a key requirement.

The Budget contains enhanced provisions for public sector infrastructure investment and the Budget extension of the 25 per cent corporate tax rate to firms with a turnover of up to Rs 2.5 billion could have a modest stimulating effect on investment by small corporations. But the Budget also introduces a 10 per cent tax on long-term capital gains on listed equities which could hit saver sentiment and roil the overheated stock market. This could turn into a rout if foreign portfolio inflows slow down with rising interest rates in the developed countries, endangering the ambitious divestment target of Rs 800 billion.

The stress in the agriculture sector, evidenced in widespread farmer protests and suicides, is widely recognised as a major challenge. Agricultural value added has stagnated over the past four years. This year, the major problem for farmers was that the prices they got in the market were below the announced MSP, since there is no effective procurement system at the MSP for crops other than rice, wheat, cotton and sugarcane. The Budget proposes to work with states to extend a scheme to compensate farmers for the difference between their local mandi price and the announced MSP or set up a procurement system to enforce the MSP. But there is no evidence of a Budget provision for this. There is a welcome provision for a structure similar to what we have for milk, linking farmer producer organisations (who have been placed on the same tax footing as cooperatives), with processing and marketing facilities for three key perishables, tomatoes, potatoes and onions, which often fluctuate wildly in price. The proposal to develop infrastructure in 22,000 village markets to allow farmers direct contact with consumers and bulk buyers is also a useful dent in the present intermediary controlled agricultural marketing system.

There is nothing very substantial on job creation though the Budget promotes horizontal equity between genders with its provisions about lower provident fund contributions for women workers. A fiscal strategy that eschews redistribution and focuses largely on macroeconomic stability and growth cannot do much for equity. An ambitious scheme for assisting 100 million poor households to meet hospitalisation costs was announced but with no evident provision in the expenditure Budget.

All in all a Budget which has let fiscal goals slip without really delivering on the needed investment stimulus or providing adequately for ambitious schemes but holding out some hope for the agricultural sector.