Election manifesto in disguise

Print edition : March 01, 2019

Stand-in Finance Minister Piyush Goyal arrives in Parliament to present the 2019-20 Budget on February 1. Photo: ADNAN ABIDI/REUTERS

Prime Minister Narendra Modi during the Budget Session of the Lok Sabha. Photo: PTI

In keeping with its scorn for institutional propriety, the Modi regime presents a full-fledged Budget instead of a vote on account, that too full of thoughtless schemes, with an eye on the Lok Sabha election.

The last budget of the Narendra Modi government, desperately aimed at reaping dividends in the upcoming Lok Sabha election, offers too little too late to those who lost heavily during its tenure.

In a cricket-crazy country, only a cricketing analogy can perhaps explain stand-in Finance Minister Piyush Goyal’s Budget: he was playing a five-day Test match in what was billed to be a 20-over game. Goyal was supposed to present a vote on account, essentially a Budget for the first two months of the next financial year, after which a newly elected government would present the accounting exercise for the full financial year. Instead, he presented not just a election manifesto but a vision that extended up to 2030.

Budgets are generally assessed immediately for their impact on “sentiment”, of two kinds: one, the “sentiment” that it arouses to the person on the street, and two, the way it sways the sentiment of the markets, that abstract construct that supposedly reflects the will of the well-heeled. Goyal’s Budget falls flat on both counts. It is obvious that the markets will, sooner than later, look through the badly done window dressing behind that most dreaded of numbers in post-reform India—the fiscal deficit.

While nothing is more annoying to investors than the unsettling need to reconcile unbalanced numbers, the ugly truth is that the prime so-called sops in the Budget—the handout of a princely sum of Rs.6,000 over a year to small peasants, the utterly laughable pension scheme for workers in the unorganised sector and the tinkering with tax rates at the lowest end of the tax base—are possibly just too little, too late.

It is likely that sentiments of both kinds may well turn heavily negative simply because the track record of the Modi government does not allow its audience the luxury of hope.

Four aspects of the Budget are particularly vexatious. The first pertains to the very propriety of abusing the interim nature of the budgetary exercise, akin to the manner in which a caretaker government is expected to conduct itself on the eve of an impending election.

The second pertains to the numbers in the Budget, particularly as they come in the context of the Modi regime’s demonstrated cavalier disdain for data of many kinds, but particularly in this context, of the economic variety. This not only threatens the internal consistency of the numbers in the Budget but may well pose conundrums for the incumbent government that assumes office after the forthcoming election.

The third is the manner in which it aggressively undermines the resource mobilisation possibilities of the States and hinders their ability to perform a meaningful role in providing relief from the grave problems caused by issues such as the agrarian distress or the utter stagnation in employment.

The fourth arises specifically from the Budget’s three key proposals announced with great fanfare: the programme to provide income support to farm households, the exemption proposals at the lowest level of the income tax bracket, and the insurance scheme for workers in the unorganised sector.

Incoherent numbers

The substance of Goyal’s Budget lies in the receipts side. Gross tax revenues are projected to increase by 13 per cent in 2019-20, notwithstanding the fact that they are projected to miss the Budget target for 2018-19. A slowdown in tax collections is thus clearly evident. A significant component of the slowdown has obviously come from the shortfall in the Centre’s collection of goods and service tax (GST).

Revenues from GST are likely to miss their target set in the last Budget by a whopping Rs.1 lakh crore (a 13 per cent target shortfall). This shortfall in GST implies not only that the Centre is taking a huge hit on its balance sheet, but that there are serious consequences for the States.

The pace of growth of total revenue receipts, which includes tax and non-tax revenues, is also decelerating significantly—from about 20 per cent between 2017-18 and 2018-19 (Revised Estimates) to 14 per cent in 2019-20. Clearly, the increased splurge on the schemes announced in the Budget is projected to be funded from other receipts that are capital in nature.

Goyal’s Budget projects that capital receipts are likely to grow by only 2.9 per cent in the current year but will increase by close to 11 per cent in the next financial year. This is, in part, the secret to his success in hiding the true extent of the fiscal deficit. A significant part of this is expected to accrue from disinvestment as well as what the Reserve Bank of India, now under a new steward, may provide the government by way of a transfer of its accumulated capital “surplus”.

Given that such accruals are, in their very nature, one-time transfers of resources, the question that arises is, Is it prudent to back expenditures of a recurring kind—cash transfers to farmers, for example—by one-time provisions that cannot be repeated in subsequent years? This is what accountants would label as a recipe for a serious asset-liability problem in the future.

Apart from this, the Budget numbers indicate that receipts from income tax have been stagnant, which is rather surprising for an economy that is clipping along at the pace that the controversial gross domestic product (GDP) estimates claim. This is particularly relevant because the collections from income tax should logically rise with an increase in national income—if not at the same rate, at least by a rate close enough to it.

In his long speech, Goyal waxed eloquent about how the Modi government had reined in inflation from near-double-digit levels to barely 3 per cent. There is some truth in this, although the causes of this lower inflation numbers are hardly flattering to the Modi regime. The reality is that the lower inflation levels attest to a significant collapse of prices, especially agricultural commodity prices (see R. Ramakumar’s article on page 18).

But the collapse of the inflation rate raises yet more embarrassing questions about national income statistics, most notably the estimates of GDP, which have a bearing on the Budget. Although the most recent estimates for GDP in 2018-19, released just before the Budget, place it at Rs.188.40 lakh crore in nominal terms, the Budget assumes that the nominal GDP will be Rs.210 lakh crore in 2019-20, an increase of 11.46 per cent.

The Central Statistics Office’s most recent projections estimate GDP growth in real terms (at constant prices) at 7.2 per cent in 2018-19, whereas in nominal terms (current prices) the GDP was expected to grow at 12.3 per cent. The difference between the two growth rates is what economists refer to as the implicit GDP deflator.

The fact that the actual inflation rates (currently less than 2.9 per cent) do not match the implicit deflator has two important consequences. For one, it undermines the already diminishing confidence in the national income estimates that were controversially reworked after the Modi government assumed office.

Crucially, in the immediate context, the variance also undermines the logic and internal consistency of the estimates presented in the Budget. Logically, a lower inflation rate ought to lower the nominal GDP, which has implications for tax collections because they are a function of current incomes generated by economic activity.

The difference of 2.1 per cent between the implicit deflator and the inflation rate is not trivial in the context of the national GDP. A quick calculation indicates that this would amount to about Rs.4.41 lakh crore in 2019-20. Tax revenues account for 12 per cent of the GDP, which means that a downward revision of the nominal GDP by about 2.1 per cent would result in a tax revenue shortfall of about Rs.53,000 crore in 2019-20.

Thus, the widely suspect numbers pertaining to the GDP cast a huge shadow over the sanctity of the estimates in the Budget. That these are not merely confined to the extent of the fiscal deficit is obvious.

States shortchanged

Goyal’s Budget indicates that the States’ finances are seriously adrift for three reasons. The shortfall in the States’ share of tax revenues is as much as Rs.27,000 crore; in fact, it was enough to cover the shortfall in gross tax revenues of the Centre in 2018-19.

More critically, as has been repeatedly emphasised by several economists, including Kerala’s Finance Minister, T.M. Thomas Isaac, the recourse to raising revenues through the imposition of cess, “additional” duties and surcharge, especially on petroleum products during the spectacular rise in their prices, has enabled the Centre to avoid sharing such revenues with the States.

Goyal has projected that Rs.4.4 lakh crore—more than 17 per cent of gross tax collections—will be raised through such means during 2019-20. This implies an increase of 45 per cent over the resources raised through this method of taxation, which avoids paying the States their share.

But the sting in the tail for the States lies in GST collections. As mentioned earlier, the shortfall of the Centre’s collections of GST amounts to Rs.1 lakh crore. Given the fact that the design of GST is such that the States stake claim to half the tax that is paid by taxpayers, this immediately implies that the States too have collectively lost an amount of a similar magnitude.

Indeed, the shortfall in GST collections raises serious issues of propriety in financial relations between the Centre and the States. GST has generated widespread protests, and faced with this backlash, the Modi regime has constantly been tinkering with the GST regime. The periodic reassigning of tax rates on various commodities has meant that the Centre has robbed the States of one of their main avenues of resource mobilisation.

The GST Council, in which the Centre enjoys a position of power by virtue of its superior voting clout, has functioned in a manner that undermines the States’ access to resources. After all, the States’ dependence on GST is far greater than the Centre’s dependence on it, as is evident from the massive recourse to cesses and duties that are available to the Centre, apart from others.

While it is not possible to estimate the extent of the shortfall on account of GST, it is evident that a 13 per cent shortfall for the Centre does not translate into an overall shortfall in its revenues. But since the States’ dependence on GST is far greater, it is obvious that they would be hit worse by this shortfall.

Clearly, GST, which was touted as a game changer, is proving to be—at least in its current design—a millstone around the neck for the States. It is evident that the deepening farm crisis; the worsening employment situation; and the slide in access to public health, education and several other areas places the States in a difficult situation. After all, since these are issues of immediate concern and since State governments are perceived to be closer to ground realities on these matters, there is greater popular pressure on them to deliver on these fronts.

Even the erstwhile BJP governments in States such as Madhya Pradesh and Chhattisgarh were forced to undertake measures, even if ill-designed, to provide a measure of relief.

A genuine effort at providing relief to the beleaguered peasantry, for instance, would have required the Modi government to discuss the contours of its PM-Kisan scheme with State governments if it was sincere in addressing the issue of farm distress. As the accompanying story by Prafulla Das shows (page 18), even a poor State such as Odisha appears to have initiated a scheme for cash transfers with far better resolve and purpose. Although critics may say the scheme is opportunistically timed, there is no denying the fact that it has a far better insight into the nature and depth of the crisis in the countryside. It, thus, provides support not only for cultivators and even landless labourer households but other “vulnerable” sections in the rural areas.

Unlike Goyal, Odisha Chief Minister Naveen Patnaik appears to have done his maths as well, having a ready estimate of the number of beneficiaries. In short, the scheme appears to be better targeted and better designed. In contrast, Goyal’s Budget exercise pretends to have forgotten what was promised in Arun Jaitley’s last Budget, when he promised a scheme involving the States that would address the question of paying peasants the promised minimum support price.

This Budget is in keeping with the Modi regime’s scorn for institutional propriety. The interim budget, by masquerading as a full-blown budgetary exercise, threatens to tie the hands of any government that assumes office after the election. For instance, it would be difficult for a new government to rescind the allocation of Rs.75,000 crore for the PM-Kisan scheme; it would not be able to design a better programme based on a more realistic assessment and informed by a more genuine concern for the extent of rural distress.

The tall promises and a sudden discovery of the need to make amends for the colossal pain that was inflicted on large swathes of the population—most notably peasants and small producers—in the wake of demonetisation and GST may well boomerang. Unfortunately for Modi, there is some time between Goyal’s Budget and when people will actually vote, which gives them the time to think things through. In effect, the nightmare of actually experienced five-year “achhe din” is likely to cloud hopes of yet more “achhe din”.

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