How to Make Budgets with a Dearth of Data

On 5 July 2019, Nirmala Sitharaman, the finance minister of the newly elected government, announced the budget. When she took over office, the National Statistical Office, released a report  that confirmed the National Sample Survey Organisation’s Periodic Labour Survey data, which had found that unemployment in India has been at a 45-year high, while qualifying that the data is not comparable to previous surveys. Prior to the general elections earlier this year, this data was suppressed by the Nátional Democratic Alliance-led government, but the issue of unemployment is expected to feature heavily in the budget for 2019. 

Another concern from 2017 was about the gross domestic product (GDP) numbers. The recent GDP estimates released by the government were faulted for its methodology: economists have argued that the sudden change in base year to calculate GDP was done to project a higher growth rate. According to recent Central Statistics Office data, in the last quarter of the financial year 2018–19, the GDP growth has slipped to a five-year low of 5.8%.

Sitharaman had also claimed that demonetisation had no negative impact whatsoever; she was criticised by many because her claims subsume large-scale suffering of ordinary citizens in a macroeconomic statistic. Previously, former finance minister Arun Jaitley had also claimed that demonetisation had in fact increased tax collection.

Given the debate and disagreement, the reliability of official data has come into question. Without accurate data, there is no way to understand the full extent of the issues that various sectors are facing. The confused narratives over the data betray a reluctance to acknowledge the existence of certain issues, like the widening fiscal deficit, or the effect of demonetisation on the economy. If these problems are not even accounted for, or acknowledged properly, then how can we formulate a realistic budget that will actually be able to fix the problems? While endemic issues like unemployment are not addressed, the targeted rate of GDP growth has remained at 8%, even this year. 

Furthermore, the excessive focus given to these macroeconomic indicators do little to actually increase individual well-being, because they obscure the levels of inequality prevalent in the economy. This is a structural issue that already exists in the formulation of the budget. When inaccurate data is used, the problem gets compounded. 

In this reading list, we use the previous budget as a case study to understand these problems. 

1) A Dithering Macroeconomic Policy

The 2019 budget has a reduced fiscal deficit target, down by 0.1% to 3.3% for the current financial year. C P Chandrasekhar argues that the BJP government isn’t concerned about a widening fiscal deficit per se. Rather, they worry that this will dissuade investment. Expenditure that generally widens the fiscal deficit, such as spending on “populist” measures such as Gandhi National Rural Emploment Guarantee Act, or the National Health Protection Scheme, which provides some form of protection to the poor, is frowned upon by finance capital. Thus, Chandrasekhar argues that the only such schemes that the government risks introducing in the budget are the kind that can win popular support. More importantly, however, promises of higher revenue collection through reform measures such as the Goods and Services Tax, have been unfulfilled. 

The desire of the ruling dispensation to establish that it is more “reformist” than any that has gone before has put it in a bind. It believes you are damned if the fiscal deficit rubicon is crossed. But it is damned even when it does not cross that rubicon, by relying on whatever measures are available in the limited sphere within which it is willing to extend its hand. But what is more significant is that this has frozen macroeconomic policy, foreclosing all options to adopt proactive measures that could make a difference to those who need support. Politically, this possibly explains the tendency of this regime to launch initiatives or engage in rhetoric whose rationale is difficult to explain or on which it can not really deliver. Demonetisation falls in the former category.

2) Announcements with no Allocations 

Contrary to former finance minister Arun Jaitley’s claims, the economy is not in better shape than it was under the United Progressive Alliance government. The 2019–20 budget introduces “zero-budget farming,” where chemical fertilizers and pesticides are replaced with local resources such as as cow dung. Ajit Karnik and Mala Lalvani argue that the 2018–19 budget has ignored key sectors of the economy, and the economy remains worryingly fragile. Despite the rhetoric of a “paradigm shift” in the agriculture sector, the authors argue that allocations to this sector have either remained the same or decreased. 

(i) For Department of Agriculture there was higher allocations for crop insurance scheme by about 1,600 crore, but this was offset by lower allocations of about 3,000 crore on centrally-sponsored schemes. (ii) For rural department there was higher allocations of `7,000 crore on Mahatma Gandhi National Rural Employment Guarantee Scheme. However, lower allocations of `3,406 crore on other schemes reduced the overall net increase in allocation to only `3,594 crore. (iii) For Department of Drinking Water and Sanitation, the allocation to Swachh Bharat Mission (which is a centrally sponsored scheme) have been reduced from `19,248 crore (as per 2017–18 (RE)) to `17,483, a reduction of 7.3%. It must, of course, be mentioned that 2017–18 (RE) was 18.5% higher than 2017–18 (BE).

Further, the health sector also saw token announcements. Karnik and Lalvani argue that flagship programmes such as the National Health Protection Scheme, which was expected to provide cover of up to `5 lakh for over 10 crore poor people, was announced with no fiscal road map. 

It is difficult to evaluate the feasibility and implementation issues of this scheme in the absence of more detail but past performance is usually a good guide for the future. The Rashtriya Swasthya Bima Yojana (RSBY), which is currently in operation, was allocated `1,000 crore in 2017–18 (BE) but the actual utilisation of these funds was as low as `470.5 crore as per 2017–18 (RE). With such poor performance of the existing scheme and cavalier disregard for details about the new scheme, the announcements were made with eyes set on the elections of 2019. 

3) Empty Rhetoric and No Financial Commitment

Through the 2018–19 budget, Himanshu argues that lower expenditure during a time of agriculture distress exemplifies state apathy to farmers. Budgetary support to the agriculture sector has not seen adequate expansion. Loan waivers, writes Himanshu, cannot substitute investment in agriculture. By changing budget heads,  a false increase in funds for agriculture is shown.

Since budget 2016, the government started including the expenditure on subsidy for providing interest subvention as part of the budget of ministry of agriculture. This head was earlier a part of finance ministry budget but was included as part of ministry of agriculture to show higher allocation on agriculture. But even this budgeted expenditure has not been spent in any year of this government.  

Further, Himanshu also argues that the government has failed in its commitment to adhere to the Swaminathan Committee’s recommendations on minimum support prices for crops.

Not only has this grand announcement been backed by a measly budget allocation of `200 crore only, it is also lower than the `950 crore actually spent by the government last year. Incidentally, the marginal increase on CSS is almost the same as the decline in allocations for price support operations. The net result is a zero increase in allocations for schemes which matter … Under pressure from the farmers’ groups, the finance minister did announce that the government will finally try to provide remunerative prices to farmers by raising the MSP to one and half times the cost of cultivation from the 2018 kharif season …  A later clarification also made it clear that it was not just empty rhetoric without any financial support but was also completely different from the demand that farmers were making.  

4) Flagship Reform Measures Have Failed 

For indirect taxes like the GST, there are three issues that the current budget should have addressed: first, revenue mobilisation through GST, and second, the uniform GST rate. The 2019 budget speaks of easing GST filing, but how does it plan to do so? R Kavita Rao argues that the introduction of the GST, just seven months before the 2018–19 union budget was presented, raised questions on tax collection. Rao writes that if the BJP government wants to fulfill its promises of infrastructure development and capacity creation, they will need to look elsewhere for revenue generation. Even in terms of direct taxes, Sitharaman in her speech in Parliament said that the rich need to pay more for development, but can income tax contribute to revenue as much as it needs to when drastic measures like demonetisation have failed to address tax evasion?

The budget estimates for 2017–18 imply a 21% growth in personal income tax collections and 11% growth in corporate income tax. It can safely be assumed that the sharp increase in personal income tax collections might have been expected from improved compliance/enforcement following demonetisation. 

The revenue collections till December 2017, however, seem to belie these expectations … While the government could meet its revised estimates of corporate tax collections, it could fall short of on the personal income tax front. In other words, this rough estimate suggests that for 2017–18, there could be a shortfall in direct tax collection as well. While such a shortfall would not alter the fiscal deficit by much in 2017–18, it would render the targets for 2018–19 that much more difficult to achieve: a 29% increase in personal income tax or in other words a buoyancy of over three.

Further, Rao argues that the government’s decision to increase customs duties, and also introduce a social welfare cess to fund initiatives such as Make in India are flawed. The “privileged” businesses chosen to benefit from the additional revenue are done on an ad-hoc basis, and the government is incorrect to assume that it knows the “right” sectors that require this intervention.

The sectors selected for the “privilege” are distributed all across the chapters ranging from fruit juices, perfumes and toiletries to mobile phones and motor parts to tyres for buses and trucks. In other words, there is no discernible focus on a few sectors. The wisdom backing the choice of these sectors is not revealed in the budget documents … While this could have been an interesting opportunity to undertake strategic intervention in the economy and encourage investments in some sectors, in the absence of such an articulated position, it appears to be a revenue raising initiative which rolls back the consistent effort made open up the economy and encourage competition.