To do a perfect job, the budget needed to provide a stimulus while raising resources. It has instead cut capital expenditure.
In a marathon budget speech, the finance minister promised many things. One cannot disagree with many of the announcements for water conservation, farmers, MSMEs, housing for all and so on.
The issue is they will only be meaningful if there is enough expenditure to back those announcements.
The finance minister, for the first time in memory, did not announce the revenue implications of her proposals. The actual text of the budget speech doesn’t contain the fiscal deficit numbers, it appears in a supplementary statement. Was this so as not to upset some lobbies that may have been expecting concessions?
Much was expected from the budget, since the economy has been slowing down and the latest quarterly growth rate has come down to 5.8% according to official data. This rate is likely to fall further in the first quarter of this financial year and if corrections are applied for the unorganised sector growth, the rate of growth would turn out to be even less.
Seen in the context of the target of $5 trillion economy in five years, this is not a good start. The economy needed a boost. It was expected that the budget would help kick start the economy to achieve a real rate of growth of at least 8%. The present budget is unlikely to do so in spite of the various provisions in it. These are specific announcements in specific sectors, but it is not clear that appropriate allocations would be made to them when revenue falls short.
India’s $5 trillion GDP target is repeatedly mentioned these days – in the budget and in the Economic Survey and so on. This point needs to be sorted out. When one talks of GDP in dollar terms, it implies real and not nominal growth. If inflation is to be used to achieve this target along with a real rate of growth of 8%, then the rupee would devalue and the target would not be fulfilled by nominal growth. If the growth has to be in real terms then one needs an average growth rate of 11.5% over five years.
Starting with 5.8% currently, one has to go to 17% at the end of the five year period. When even 8% rate of growth looks difficult now, 17% is impossible. Having such goals dents the credibility of the government. As it is there has been a lot of controversy about data on growth and employment and that has already dented government’s credibility.
The arithmetic of the present budget looks doubtful. It assumes a nominal growth rate of 12% while the current nominal growth is about 8.5%. Thus, like last year, revenue is likely to fall short and to maintain the fiscal deficit target, expenditure would have to be cut just as it happened last year. This is a bad portent, since the boost to the economy would not be forthcoming to raise the rate of growth even to 7%.
Further, the budget needs to boost demand by increasing the capital expenditure. But this has been cut from Rs 9,29,000 crore to Rs 8,76,000 crore. This does not suggest a stimulus and also it does not look like it will fulfil the target of Rs 100 lakh crore expenditure on infrastructure in five years.
To achieve such a target, one would have to allocate at least twice the money allotted this year. If the government is not thinking of spending the entire Rs.100 lakh crore from budgetary support, then it has to spell out where the resources would come from.
Private investment has also been a big problem. Its rate of growth has been tardy, with the overall rate of investment in the economy stagnating at around 30%. The problem originates from the decline in the unorganised sector since demonetisation. It was aggravated by GST and then by the NBFC crisis which led to a decline in credit. The demand problem then hit the organised sector, which also started to slow down.
The slowdown in the unorganised sector hit employment generation and incomes in the agriculture sector. Both these further aggravated the problem of demand in the economy. The budget needed to reverse these tendencies in the unorganised sector. This was not going to be easy unless the government was going to pump in purchasing power into the hands of the poor, but that needs additional resources.
The interim budget in February did allot Rs 75,000 crore to farmers, but that is inadequate.
A lot more needed to be given to them and also to the urban poor. Again, this comes down to the issue of raising resources or allowing the fiscal deficit to rise.
To raise resources, without raising the fiscal deficit, the government needed to increase taxes. But under the GST regime, one cannot raise GST rates; only the GST council can do so. Thus, increased revenue is only possible from direct taxes or from petroleum goods which are outside the GST net. The government has done both. It has increased tax on the super rich; those earning above Rs.2 crore.
The problem is that these will not garner a windfall. The real increase could have come from a small wealth tax on 5% of the population, given the huge wealth disparities.
The budget primarily therefore seems to give to India’s middle class and the poor through schemes like concession on interest payment for housing or for the loans taken by small producers in the micro sector, etc. However, these are specific to individuals and some sectors and do not benefit these classes in general. In general, if the economy slows down and if inflation kicks up due to additional indirect taxes (like on petroleum products and additional customs duties) there is a loss of income.
In announcing a large number of schemes without adequate resource raising, the government runs into contradictions. For instance, it talks of skilling the youth so that they can go abroad to work. It did not consider that no great nation exports its best talent, this indicates a distorted vision for education and society’s progress. This is also an admission of the bleak job situation facing our talented and skilled work-force. Other announcements on education are also deeply flawed, like, creating one organisation for funding research in the country.
How could more jobs have been created? By spending more on public education (goal should be 6% of GDP), public health (3% of GDP), rural infrastructure and so on. This would have created jobs for the educated unemployed. It would also have led to increased demand and a turnaround in the economy. Investment in the organised sector offers little additional employment.
In brief, the government needed to give an immediate stimulus to raise the rate of growth. Instead of that it is focused on tax concessions, which take time to work. Supply side responses and structural changes impact the economy in the long-run only and in the meanwhile the economy keeps sliding.
The government has missed a chance to do what is right. It instead has decided to dress up its image by going in for dressing up its image by appearing to do a lot for different sections of India’s population.