Fiscal fundamentalism

Finance Minister Arun Jaitley on his way to present Union Budget 2018-19, accompanied by Cabinet colleagues.

The Union Budget for 2018-19, presented by Finance Minister Arun Jaitley in Parliament on February 1, is the fifth Budget of the Bharatiya Janata Party (BJP)-led government at the Centre. It is also its last full Budget before the country goes to the polls in 2019 to elect a new Lok Sabha. It was being presented in a situation characterised by large-scale disruption imposed on the Indian economy between November 2016 and end of 2017 by the present government through its three distinct actions: Demonetisation, which sucked out 86 per cent of the currency in circulation; the ill-fated (and since withdrawn) notification of rules for the functioning of animal markets in complete violation of the constitutional provisions that make animal markets an exclusively State subject; and the hasty and ill-prepared Goods and Services Tax (GST). All three disruptive actions caused great harm, especially to the informal sector and ordinary working people. All three impacted severely on the economy.

The notification of rules in animal markets, which has not been widely discussed, allowed murderous gau rakshaks a field day in some parts of the country to attack livestock farmers, resulting in deaths, and ultimately had to be withdrawn, but not before it had caused quite some damage to the livestock economy and the rural poor dependent on livestock. GST, implementation glitches apart, was essentially an attempt to bring under the indirect tax net traders and entrepreneurs with an annual turnover between Rs.20 lakh and Rs.1.5 crore who had hitherto been outside the excise duty frame. This caused great distress to a relatively vulnerable section and exposed them to harassment by tax authorities. It dealt a serious blow to the fiscal space of the State governments, greatly shrinking their powers of flexible taxation. Demonetisation set the economy back, which is no surprise when you suck out most of the cash from an economy. It resulted in many other economic losses that have been documented by writers and scholars, not to mention the loss of precious lives of more than a hundred people.

Some of the ill effects of demonetisation have been acknowledged in Economic Survey 2017-18 presented to Parliament before the Union Budget. The difficulties in the transition to GST have also been noted, though the Survey remains optimistic on the long-term benefits of an essentially regressive tax. More important, the Survey has flagged important downside risks in the international scenario: possible sharp rise in crude oil prices (especially with Donald Trump in the saddle in the United States and his possible moves in relation to Iran), rising interest rates in the Western world and the rising tide of protectionism. However, neither the Survey nor the Budget presents any strategy to deal with these risks. Instead, what the Budget does is to stick to fiscal fundamentalism by pushing for a fiscal deficit of 3.3 per cent of the gross domestic product (GDP) in 2018-19.

Turning to outlays and expenditures in the Budget, the overall expenditure of the Union government from budgetary resources for 2018-19 is Rs.24.42 lakh crore as per Budget Estimates (BE) as against the Revised Estimates (RE) of Rs.22.18 lakh crore for 2017-18, an increase of hardly 10 per cent in nominal terms. If one takes into account the claim that the GDP is to grow at above 7 per cent and that inflation is around 4 per cent, it turns out that the total budgeted Central expenditure as a share of the GDP actually falls from 13.2 per cent last year to 13 per cent this year. This implies a contractionary fiscal stance, especially unwarranted in the wake of the deflationary impact of demonetisation and the disruption caused by GST.

Allocation for the two departments of (a) Agriculture and Farmers’ Welfare and (b) Rural Development, taken together, rises from Rs.1,57,139 crore in RE 2017-18 to Rs.1,66,904 crore in BE 2017-18, an increase of only 6.2 per cent in nominal terms, implying little increase in real terms and a decline as share of the GDP. This brings out the hollowness of the claim that this Budget is rural economy and rural development centred. There is a statement in the Budget speech that the government accepts in principle the fixation of the minimum support price for specified agricultural products at “cost plus 50 per cent”, seeming to fulfil an election promise of implementing the recommendations of the National Commission on Farmers chaired by Prof. M.S. Swaminathan. However, there is no financial allocation in this regard, and it is unclear which “cost” the Finance Minister was referring to. Besides, the implementation mechanism has been left vague, saying only that the NITI Aayog will consult with the Centre and the State governments to take this further. Turning to human resources, the allocation for health and family welfare was Rs.51,551 crore in RE 2017-18. It is Rs.52,800 crore in BE 2017-18, a rise of around 2.4 per cent, implying a decline in real terms from already abysmally low levels. The outlay for education was Rs.81,868 crore as per RE 2017-18. It is Rs.85,010 crore in BE 2018-19, a nominal rise of 3.8 per cent, implying no change in real terms and a decline as a share of the GDP.

An especially important negative impact of demonetisation has been on employment in the informal sector. There was a widespread expectation that the Budget would address this issue by substantially increasing allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS). But this has been belied. There has been only a modest increase in nominal terms for the scheme. Even this has to be weighed against considerable wage arrears. There will be a decline in the number of days of employment per household registered in the scheme. A larger point needs to be made. As data from the Labour Bureau surveys remind us, job creation has nosedived over the past couple of years. This was a key issue for the Budget to take into account. However, the Budget has made no serious effort in that direction.

Turning to taxation issues, the indirect tax burden, a large share of which is borne by working people, is rising steadily. Over the duration of the present government, the share of indirect taxes in the total tax revenue of the Central government has risen to almost 50 per cent. Taken together, the government’s tax proposals have been especially friendly to the corporate sector, as has mostly been the case in the period of neoliberal economic reforms.

The proportion of wealth in the hands of the top 1 per cent of the population was 49 per cent when this government came to office. By the end of last year, this figure had reached 58 per cent. Taxation policies need to be framed against the background of wealth and income inequalities in the country if even a modicum of economic democracy is to be achieved. This Budget does not address the issue of the huge wealth and income inequality in India at all.

Finally, fiscal fundamentalism has not only resulted in the government providing no boost to an economy with significant risks of a sharp decline in growth, but also in selling Rs.1,00,000 crore worth of public sector assets. It is a ruinous policy that sells the family silver to reduce debt.