FISCAL MATH

For Modi to deliver on his budget promises, India needs to grow like crazy. But it probably won’t

Quartz india
Quartz india

The budget is largely a political performance, for it allows the government to announce its orientation with regards to policy and the path it intends to take; whether it follows through or not is a different matter.

This year’s budget signals a shift towards the concerns of the rural sector, battered by years of negligence and crisis. Yet it would be unwise to see this move as a reorientation of the Bharatiya Janata Party’s (BJP’s) political priorities. The present budget, much like most before, faces the hard constraint of the fiscal deficit; the urban sector must bear the brunt of increasing taxes as a result. Moreover, whether the rural sector is at all able to enjoy the benefits of greater expenditure depends largely on whether the government’s optimistic forecasts of growth will be realised.

Where will the revenue come from?

The focus on the deficit not only causes a reduction in spending, it also necessitates the search for new sources of revenue. In 2015-16, revenue receipts of the government grew by a healthy 9.5%, primarily on the back of healthy service tax collections that grew by almost 25%. Service taxes have increasingly become an important part of revenue collection—in 2009-10, this category formed about 5.7% of total receipts (net of states’ shares), increasing to 11.76% in the 2015-16.

The income tax share has increased from 13% to 16.75%, while that of corporate tax shows no significant increase, rising from 23.86% to 25.37%. Like previous governments, the BJP seems unwilling to push for a greater share of revenue from the corporate sector. Like previous governments, the BJP seems unwilling to push for a greater share of revenue from the corporate sector. 

Another important source of revenue that the government can turn to is disinvestment proceeds. One can perhaps make the argument that disinvestments allow for a fruitful way to achieve the twin goals of deficit reduction and greater spending. However, the finance ministry’s numbers vis a vis possible proceeds from disinvestment look optimistic in the extreme.

In 2014-15 and 2015-16, the government budgeted Rs63,000 crore and Rs69,500 crore respectively as possible receipts from disinvestment. The actual receipts were only Rs37,000 crore and Rs25,000 crore respectively. The current budget has marked down its expectations at just Rs56,000 crore. That is still more than double of what was realised the previous year.

In an uncertain global market, with non-performing assets (NPAs) hanging over the banking sector like the sword of Damocles, one would be extremely hard pressed to assume that the government would be able to mop up anything close to its target through disinvestment.

Any reduction in revenues would lead to a related fall in actual expenditure as compared to budgeted expenditure, simply because the BJP government, much like the United Progressive Alliance (UPA), is committed to maintaining the fiscal deficit. From 2012-13 to 2014-15, actual spending has fallen short of budgeted spending, with the largest gap of 7.3% seen in the BJP government’s first budget in 2014-15.

During this period, when revenue receipts—which exclude disinvestment—fell short of target, expenditure fell by an equal or even larger amount, so as to reduce the fiscal deficit. In 2013-14, a reduction in actual revenue receipts of 4% was met by a fall in expenditure of 6.36% relative to budgeted estimates. The fiscal deficit in that year, of course, fell by about 7%. In 2014-15, both revenue and spending reduced by about 7%. In 2015-16, even though revenue receipts increased by 5.7% over targets, actual spending was allowed to increase by only 0.45%, leading to an overall reduction in deficit. The fiscal space in these years was brought about through sharp reductions in plan expenditure.

The fiscal deficit constraint

This year’s budget projections assume a rate of growth of service and income taxes that are lesser than what has actually accrued, so no doubt it is a conservative estimate.

In any case, to bring about those figures, the government’s own figures assume an 11% growth of nominal GDP. If that kind of growth does not materialise, then expenditure will obviously take a hit. If, all else remaining constant, disinvestment proceeds are equal to the revised estimates of 2015-16, fiscal deficit will be 3.7% of GDP, as opposed to the target of 3.5%. If there is a disinvestment shortfall, then, in order to maintain the fiscal deficit, the government will have to reduce spending by 1.5% reduction.

 Some writers have found inconsistencies in the growth figures released by the CSO and the actual state of other economic indicators. The figures above represent a strong scenario, where growth and revenue receipts perform according to expectations and where disinvestment proceeds are no worse than the previous year.

The real cause for concern is a simple and basic one: how confident can one be of growth? It is only policy-makers who seem confident of it. Some writers have found inconsistencies in the growth figures released by the Central Statistical Office and the actual state of other economic indicators, pointing out glaring contradictions.

Reducing fiscal deficit removes a source of aggregate demand in the economy, in the hope that another might take its place. The notion that private sentiment would step up where deficits have reduced brings to mind certain aspects of the austerity debate, and there is plenty of cause to doubt whether such a scenario would occur in these globally uncertain times.

The ball is now squarely in the court of monetary policy. It remains to be seen, though, whether interest rate reductions would spur animal spirits in the economy. The rupee could be allowed to depreciate to push up exports, but there are very few cues in a depressed global economy that indicate such a favourable outcome.

The focus on fiscal consolidation has ensured that rural India is being set up in opposition to the urban. If growth does not occur, both sectors will be all the poorer.

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