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All Dressed Up But Going Nowhere

The earmarked expenditures in Union Budget 2018–19 fall far short of the government’s tall claims.

The annual ritual of the Union Budget has for long been diminishing in terms of its significance. Yet, it remains a media event in the Union Government’s calendar: an opportunity for the ruling party to grandstand as pro-people, even as it strives to mainly satisfy the fiscal consolidation requirements of the international credit-rating agencies and the world of high finance, which reward lower levels of sovereign debt and thereby frown on what they deem to be “high” public-sector borrowing requirements.

Union Budget 2018–19 is typical of this government’s political outlook. The Budget Speech was written for the media blitz that was to follow and not to present any coherent approach the government presumably has to resolve the problems of the ­Indian economy. Announcements that have been claimed to be radical policymaking initiatives are in fact a repackaging of ­existing policies. Statements of intention have been made to look like policy decisions. The crudeness with which the Narendra Modi government resorts to political posturing, aided by an ­unquestioning media, puts past governments to shame.

Nevertheless, let us see what this dressed-up Union Budget has to offer. Total expenditure in 2018–19 is budgeted to grow by 10.1% over the previous year, less than the 11.5% by which nominal gross domestic product (GDP) is expected to grow in 2018–19 over 2017–18, and slower than the 12.3% by which the estimated total expenditure for 2017–18 is expected to grow over the same in 2016–17.

Gross tax revenue is projected to grow by an optimistic 16.7% in 2018–19 over 2017–18. While the revised estimates for total expenditure for 2017–18 were higher than the budget estimates, the revised estimates for capital expenditure were lower by ₹ 36,357 crore. Capital expenditure in 2017–18 is thus lower than it was in 2016–17. Such expenditure largely goes into the creation of physical assets and is a crucial part of public investment. The reduction in the revised estimates for 2017–18 seems to be on account of cuts in the outlays for “major and medium irrigation and power projects.” Capital expenditure has grown at an average year-on-year growth rate of 10.4% between 2014–15 and 2018–19, down from 16.4% between 2009–10 and 2013–14. This is a worrying trend given that public investment “crowds in” private corporate investment, which has been faltering because of low expected profit rates, and the burden of financial stress in wake of the “twin balance sheet” problem.

The fiscal deficit (expenditure in excess of receipts) is projected to be 3.5% of nominal GDP in 2018–19. This breaches earlier targets, but it is reasonable to expect that it too will be surpassed as the GDP projection is unrealistic. To be sure, the breach in the fiscal deficit target for 2017–18 can in large part be explained by lower revenue collections. One must keep in mind that both the conservative projection of fiscal deficit, and the proposal to introduce an even more regressive commitment to a new “Debt Rule” that restricts government debt to 40% of GDP, are to show the financial markets and the ratings agencies that the government is committed to adhere strictly to a “revised fiscal glide path.” This has arguably become the primary aim of the budgeting exercise.

Politically speaking, it was reasonable to expect that the government would address the widespread agrarian unrest that marked 2017–18, which saw protests by farmers and middle-caste groups over lower returns in agriculture, and inadequate policy attention to the rural economy. The Budget Speech did go out of its way to appear to be addressing the rural economy, but the allocations underlying these intentions reveal that there is nothing to write home about. The finance minister announced a decision to hike the minimum support price (MSP) for “all unannoun­ced crops of kharif,” which will be set 50% higher than the cost of production, but right after that, the Niti Aayog was instructed to consult with the centre and states to put in place a “fool-proof mechanism” to ensure that farmers get adequate returns. In effect, this is saying that the government’s intention—an unfulfilled promise (or more accurately a jumla) from the Bharatiya Janata Party’s (BJP) 2014 election campaign—still ­remains only a possibility that is contingent on policy discussions. A little late in the day for such an approach, one would think.

The budget allocations to the rest of the rural economy were meagre in a whole set of “new” and old initiatives. Even the allocations to the Pradhan Mantri Gram Sadak Yojana, a key rural investment, have not been increased, while the finance minister’s speech says that the target date for building roads under the programme has been brought forward from 2022 to 2019. Lip service, it appears, all the way.

This same hollow approach extends to the government’s own “flagship” programmes as well. The finance minister’s speech mentions three of them: the Pradhan Mantri Kisan Sampada Yojana, the National Health Policy 2017’s “Health and Wellness Centres,” and the mysterious National Health Protection Scheme. The first one has been allocated a meagre ₹ 1,313 crore to promote the food processing sector, while the second has got only ₹ 1,200 crore to support some 1.5 lakh such centres. The third flagship programme is claimed “to be the world’s largest government funded health care programme.” To begin with, the government is packaging an insurance scheme as a public healthcare programme. Health insurance has been shown to escalate treatment costs and is known to leave patients and families vulnerable to significant out-of-pocket expenditures compared to subsidised public healthcare. Besides, nothing has been allocated in the budget documents for this year. The programme was first announced in the 2016–17 Budget Speech and has languished with the cabinet ever since.

Maternity entitlements under the Pradhan Mantri Matru Vandana Yojana (PMMVY) have been given short shrift. Sixty economists brought the facts of gross inadequacy of the financial allocation and poor implementation of the scheme to the notice of the finance minister in an open letter (EPW, 23 December 2017). The norms under the National Food Security Act, 2013 mandate that maternity benefits be provided by the government. The centre will have to allocate ₹ 8,000 crore if it were to meet its commitment in this centre–state shared scheme. In the budget estimate for 2017–18 it was ₹ 2,700 crore, but it has been allocated only ₹ 2,400 crore this time. The demand for an increase in allowance from ₹ 200 to ₹ 500 for the aged and from ₹ 300 to ₹ 500 for widows under the Indira Gandhi National Old Age Pension Scheme has also been ignored.

A noteworthy tax proposal in the budget to raise revenue is the long-term capital gains tax of 10% for amounts exceeding ₹ 1 lakh. The new “Health and education cess” of 4% that replaces the education cess of 3% raises the tax burden and does so without having to share the additional revenue with the states. The section “Relief to salaried taxpayers” hardly merits the title and grants marginal relief as the standard deduction of ₹ 40,000 will only be slightly higher than the existing exemptions for transport allowances and medical reimbursements.

Right from this government’s first budget, the Fourteenth Finance Commission’s new formula for devolution of funds to the states set in. The states took on a larger responsibility of ­social sector spending. From August 2014, just a couple of months after this government came to power, international crude oil prices fell from over $100 a barrel in August 2014 to below $30 a barrel in January 2016 and remained well below the $100 a barrel level. Such favourable conditions have now receded; the expectation now is that petroleum prices, already over $60 a barrel, will rise steadily over this year. The government used the period of low prices to mop up higher indirect tax revenue from petroleum and its products. The trade deficit was much lower with the import bill shrinking, mainly on account of low oil prices. Inflation was in check too, for which the government took all the credit. Price rise had figured prominently in the BJP’s election campaign in 2014 to discredit the record of the United Progressive Alliance government. But despite the advantage of low inflation, the Modi government’s fiscal policy has not been able to address the serious shortfall in investment in the economy. It has not been able to revive manufacturing growth. It has allowed the export sector to languish to the extent that India’s export growth lags behind the global trade recovery that is underway.

Even though the declining trend of the investment rate began before the Modi government came to power, it did not do enough to spur private investment. The government also ensured that its capital expenditure allocations languished. And now the government has engaged in merely window dressing a fiscally conservative budget.

Updated On : 7th Feb, 2018


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