The government was expected to present a big-bang Budget since it has a massive majority in Parliament. It was hoped that the Budget would help take the economy out of its current troubles. Soon after returning to power the government and the PM have repeatedly talked of the Indian GDP reaching $ 5 trillion in the next five years. This hinted at bold steps being taken. Of course in due time, the economy would become a $ 5 trillion economy but the issue is whether from the current level of $ 2.7 trillion, it can grow to $ 5 trillion, even in nominal terms, by 2024-25. This would require an annual average growth rate of 11.5 per cent.
But, the economy has slowed to 5.8 per cent rate of growth from the peak of 8.1 per cent reached four quarters back. From the evidence available at present, it is slowing further. So, how will an average growth rate of 11.5 per cent be reached? Officials argue that there would be a four per cent inflation and eight per cent real growth. But, today the economy is growing only at about 5.5 per cent (and slowing). From this current rate of growth, assuming an immediate turnaround, an average rate of growth of 7.5 per cent would require that in the last quarter of the five-year period, the economy would have to grow at about 10 per cent. This is not possible unless something dramatic is done to engineer a turnaround in the economy. That is why much was expected from the Budget.
The Budget Speech
In a departure from the past, the Budget speech did not dwell much on the budgetary arithmetic which is contained in Part B of the speech. Of the more than two hours that the FM spent in reading the speech, only 10 per cent was devoted to the fiscal aspects. The revenue to be collected, the expenditures to be incurred and the deficits were not mentioned in the speech—this is unusual. She said that these are in the Annexures but they are not there. Of course, they are in the detailed documents—Receipt Budget, Expenditure Budget and so on. These documents are usually not accessible to the lay person or even to the intelligent reader. So, non-transparency is built into the Budget speech.
The Annexures with the speech are Direct Tax proposals, Recent Direct Tax Initiatives, Changes proposed in Customs Duty Rates and Changes in GST. Of these, the second and the last are not related to the Budget for 2019-20. The GST changes are done by the GST Council; so are not budgetary policy items. It is like giving information. Similarly, the Direct Tax initiatives were the past changes and not current policy initiatives with budgetary implications.
There are two Tables showing the growth in Direct Tax collections and the number of tax- payers between 2013-14 and 2017-18. These tables show that there is nothing unusual about the trends depicted in these tables. The implication is that demonetisation and steps to tackle black economy have not had much of an impact. This is also visible in the tax collection to GDP ratio given in the Budget at a Glance. The Direct Tax to GDP ratio has risen from 5.6 per cent to 6.4 per cent and now will fall to 6.3 per cent. If the black economy had been tackled to any significant extent, it should have at least doubled to 11 per cent. The impact of the GST is that the indirect tax collection to GDP ratio has fallen from 5.6 per cent to 5.3 per cent. This contradicts the government's claim of success of the GST.
The Budget of the government is primarily an account of its expenditures and revenues. It gives the data on what transpired in the current year and what is planned for the coming year. Parliament votes on what is planned for the coming year (in this case on the current year since this is the full Budget for the year). So, the Budget speech ought to mention at least the total expenditures and revenues. Usually, the Budget speech also mentions the allocation for various schemes but this Budget speech was silent on these matters. The question is: why?
Does it have something to do with the numbers not adding up? In Part A of the speech a lot of policies can be announced but usually it is also mentioned what the allocation for each item proposed would be or how much would it be increased by to fulfil the target. For instance, allocations are not mentioned against develop-ment of 17 iconic tourism sites, IDEAS, railway station modernisation, water security, agriculture infrastructure, housing for all by 2022, etc.
The reason very likely is that there is inadequate resource raising in the Budget. So, adequate funds are not available for all the schemes put together. If little is allotted for each of these schemes then the goals set out would not be achieved. What is significant is that the budgetary allocations are very close to the figures given in the Interim Budget on February 1, 2019. However, the new initiatives and schemes are many more in number. So, resources are likely to be spread thin and adequate funds cannot be allotted to all the announcements made in the Budget.
Even the Interim Budget data was not correct. According to the CAG, there was a shortfall of Rs 1.6 lakh crores in the preceding year; so to maintain the fiscal deficit at 3.4 per cent of the GDP, expenditures had to be curtailed by this much amount. Further, in the current year, Rs 75,000 crores have been committed to the Kisan Samman Nidhi Yojana but these were not covered by raising fresh resources; so the shortage of resources was even greater.
In brief, a) the very large number of new commitments are not covered by the resources in the Budget, b) even though revenue collection figures (lower than projected in the Interim Budget) are available, they were not used, and c) to top it all, the fiscal deficit target has been lowered from 3.4 per cent to 3.1 per cent. So, the chances are that the shortage of resources would be even greater than what is apparent in the Budget. The implication is that the budgetary calculus is all wrong.
The Budgetary Calculus
In the Interim Budget for 2019-20, it was assumed that the GDP would grow by 11.5 per cent. Now it is assumed that the GDP would grow by 12 per cent. This is strange since the economy is known to be slowing down. The rate of growth has been falling as mentioned above. Since the revenue and expenditure figures depend on the rate of growth assumed, these are likely to turn out to be incorrect. Hence the only way the fiscal deficit target can be achieved is by cutting back government expenditures as happened in 2018-19.
If the CAG figures are taken into account for the Revised Estimates of revenue for the year preceding year (Rs 15.7 lakh crores), the revenue targeted (Rs 19.6 lakh crores) is almost 25 per cent higher. So, even with a GDP growth of 12 per cent such an ambitious target cannot be fulfilled.
Further, the rate of growth is falling; so the current nominal rate of growth is about 8.5 per cent and not 12 per cent. Thus, the short- fall is likely to be even greater. Finally, the actual rate of growth is less than the official rate of growth since the unorganised sector's decline due to the GST and crisis in the NBFC sector is not taken into account in the official GDP data. If this is accounted for, the rate of growth is not even 8.5 per cent—it is much less. Hence the revenue target is unachievable. Consequently, there would be a cutback on all the essential spending.
Revenue account expenditures for 2019-20 are slated to be Rs 24,47,789 crores. Of this, the main items are interest payments, subsidies, defence, pensions, establishment and transfers to the States. These are committed items and cannot be cut back. That is why there is a deficit in the revenue account—what is called the Revenue Deficit (2.3 per cent of the GDP). Thus, the leeway to spend on capital items is limited. Capital Account expenditure is to be Rs 3,38,569 crores. This is 12.2 per cent of the total expenditures.
Capital account items are the investment by the public sector. Rather than an increase, this item sees a decline in the Budget. In the revised Budget, expenditure on this was shown as Rs 9.29 lakh crores but now the figure has become Rs 8.76 lakh crores.
This is significant since the government has promised investment of Rs 100 lakh crores in five years or an average of Rs 20 lakh crores. The current allocation is hardly close to this figure. It is quite possible that the government has in mind that the bulk of this figure of Rs 20 lakh crores will come from the private sector. But the private sector investment to GDP ratio has not been rising; so, is it possible that suddenly it will start to invest a lot more?
Private investment growth has not been encouraging because there is a shortage of demand and capacity utilisation (as per RBI data) is around 75 per cent. For instance, the automobile sector is shutting down plants and cutting back on shifts. The FMCG sector is also facing a decline in demand. Demand shortage seems to be widespread; so fresh investment is being held back by the private sector. In effect, the public sector has to put in the effort to boost demand by investing more. Such an effort is not visible in this Budget.
The Problem
As this author has been arguing since the time of demonetisation almost three years back, the economy is suffering from demand shortage and the real rate of growth is not seven or eight per cent but close to 0 or one per cent. This is due to the decline in the unorganised sectors of the economy which have had to bear three shocks in quick succession. First, demonetisation, then GST and finally the crisis in the NBFCs from which it obtained credit.
The decline in the unorganised sector employing 94 per cent of the work force implies crisis in agriculture and loss of employment and rise in unemployment. These two feed on each other. If such a large per cent of the population loses incomes, demand for food declines and prices of food items tend to fall. This lowers the incomes of farmers and the demand falls further. This is what has been witnessed in the last three years.
The data for the unorganised sectors is collected once in five years so that in between, the contribution of the unorganised sector to the GDP is calculated on certain assumptions. These assumptions change when there is a shock to the economy—the ratios calculated prior to the shock change so that the unorganised sector's contribution cannot be measured using the old assumptions. Thus, the official GDP growth data only represents the organised sector. The unorganised sector data has to be separately calculated on the basis of the available data privately collected. If this is added up then the rate of growth turns out to be close to one per cent.
The demand shortage has now also hit the organised sectors of the economy and their growth rate is also falling. The data suggests that the corporate sector's profits are sluggish. That is why the GST collections and Direct Tax as a share of GDP are both falling. This tells us that the economy is in need of a boost to effect a turnaround—from a declining rate of growth make it rise again. This is what was expected from the Budget.
The government has been in denial about the adverse impact of demonetisation and GST. So, it is not willing to take the steps that are needed to boost the economy. It has tried to explain the slowdown in the economy by talking of the uncertainty due to the impending general elections. It has argued that now that the results have come, uncertainty has gone and the animal spirits of the entrepreneurs will revive and the economy will start booming. It is another matter that the stock markets have been spooked by the Budget and have taken a beating.
Before the Budget, the corporates and the honchos in the world of finance were suggesting a cut in the rate of Corporation Tax. Some even suggested that the fiscal deficit could be allowed to rise to boost demand. Corporation Tax has been cut by five per cent for companies with turnover up to Rs 400 crores. Earlier this provision was for companies with a turnover of up to Rs 250 crores.
In a situation where demand is short, a cut in tax rates does not lead to an increase in investments or in demand by the consumers. Thus, tax concessions are not useful in the present situation. It was also said that in India, the cost of capital is high and that is why investment is sluggish. So, there has been a demand for cut in interest rates. The RBI has obliged by cutting the rates of interest twice and now a third time in the last six months. But the two earlier cuts did not boost investment as expected since the problem has been the demand.
Businessmen have been arguing that there is a need for reform in land, labour and financial sector. Even if this is correct, these are long-term measures and can be handled outside the Budget. No budgetary implication is involved in these steps. The question is: how to raise demand in the economy in the short run? This is what was expected from the Budget.
What was required to be done?
The problem originated from the unorganised sectors of the economy and they needed a boost. Unfortunately, these do not get represented in the Budget-making process. Most of the influences are from the corporates and even our representatives in Parliament do not represent their interest. Since these sectors are being adversely impacted by the GST and lack of cheap credit, this is where reform is required.
A simplified GST of the kind suggested by this author is the immediate need of the hour. Credit-flow to this sector from banks is crucial. But the scheme of giving loans of up to Rs 1 crore in 59 minutes is not the way to go since there cannot be due diligence in this way and it could lead to increase in NPAs. If employment is boosted in the economy, that would also lead to an increase in demand. The amount given under the Kisan Samman Nidhi Yojana (Rs 85,000 crores) could have been increased to supplement the incomes of farmers. Finally, allotment to the employment generating sectors like education and health needed to be stepped up. Allotment to the MGNREGS (Rs 60,000 crores) and creation of rural infrastructure needed to be increased substantially.
The corporate sector of course wanted an increase in infrastructure investment of the modern kind. Unfortunately, that is highly mechanised and generates few jobs. As already argued, there is a decrease in the capital expenditures in the Budget. Customs duties on imports of certain items have been raised to boost internal demand. In the present global scenario of trade war among major trading partners, this is likely to have adverse conse-quences. Along with the increase in petroleum goods prices this would result in increased rate of inflation.
The crux of the matter is that without raising demand, the possibility of boosting the rate of growth of the economy is slim. Demand can be increased either by allowing the fiscal deficit to rise or by collecting additional tax revenue and spending that on the items mentioned above.
The fiscal deficit of the public sector is already quite high which also includes the States and the public sector enterprises. The total deficit of these entities may amount to about nine per cent of the GDP. The Central Government has been using creative accounting to show a lower deficit. It has been pushing the burden on to the public sector enterprises. Given the large deficit, the scope for increasing it substantially is slim. Yet, it can be increased by maybe half a percentage point to get an additional Rs one lakh crore. But much more needs to be done and that has to be done by raising tax resources.
The best source at present is wealth taxation. Given the huge and growing disparities, the well-off sections can pay more tax. Even if half a per cent tax is levied on the wealth of the top five per cent in the country one could raise Rs two lakh crores. This has been repeatedly suggested by this author since 1993 when the Alternative Budget was presented. For its success, it is essential that this be accompanied by Estate Duty and Gift Tax. These taxes were tried earlier but given up since these did not yield enough revenue. The reason was the large number of exemptions and the complicated valuation procedures. These earlier difficulties can be taken care of.
These additional expenditures would result in increased demand and since they would be financed by taxes, the chances of inflation rate rising are small unless the petro-goods prices flare up internationally. Today with enough spare capacity in industry and large foodstocks the chances of inflation going out of control are slim.
To conclude, now that the elections are over, it was time to take care of the economy which is in poor shape. So, the government was expected to boost the economy via its first Budget but that is not in sight. The numbers in the Budget are not commensurate with the ground reality so that the fiscal deficit is likely to rise and then to maintain it at 3.3 per cent the government is likely to cut back expendi-tures like what happened last year. This would lead the economy to slow down further thereby making the task of reaching the $ 5 trillion mark in nominal terms, by 2024, difficult.
The author, an eminent economist, is the Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi. He is the author of Indian Economy Since Independence: Persisting Colonial Disruption, published by Vision Books. He can be contacted at e-mail: nuramarku[at]gmail.com and arunkumar1000[at]hotmail.com