Stubborn blindness

Published : Feb 15, 2017 12:30 IST

THE Union Budget is only one of several instruments of economic policy available to the government. It must necessarily take into account not just the national context and the prevailing distribution of economic and political power among the various social classes in the country, but also the international context, more than ever before, given that the sum of India’s exports and imports amounts to a substantial share of the country’s gross domestic product (GDP). This year’s Budget, which was presented a few months after the shock and awe of demonetisation, had to contend with that move as well. Notwithstanding these constraints and taking into account the fact that the media hype over the Budget is possibly a bit over the top, the Union Budget is nonetheless very important as the total expenditure of the Union government accounts for between one-eighths and one-sevenths of the country’s GDP.

The Union Budget for 2017-18 was presented in Parliament on the first day of February instead of the last day of that month, as had been the practice for many years. The other distinctive feature this year was that the Railway Budget was subsumed within the Union Budget and not presented separately. Both these features have some negative implications. The database for the Budget is weakened somewhat by its advancement. The subsuming of the Railway Budget within the Union Budget weakens the special attention that the Railways, with its truly all-India character, deserves. Some read this subsuming as a prelude to the privatisation of the Railways.

Be these as they may, Arun Jaitley’s fourth Budget as Union Finance Minister is wilfully blind to the serious negative economic impact of the demonetisation exercise imposed on the country by the Central government.

In a Budget speech that was true to form in terms of being long on rhetoric and short on substance, Jaitley hailed demonetisation as a momentous initiative and claimed that it would produce great benefits in the long run. The Minister presented little evidence to back his claim. His attempt to underplay the damage caused by demonetisation contrasts with the somewhat more sober, even if still wishful, assessment of the Economic Survey prepared by his Ministry.

The fact of the matter is that the demonetisation measure inflicted on an economy that was already showing some evidence of decline in momentum has caused considerable economic harm already, not to mention the tragic and entirely avoidable loss of more than a hundred lives. Estimates by various sources, including the Centre for Monitoring the Indian Economy (CMIE) and the All India Manufacturers’ Organisation (AIMO) and several independent economists, suggest substantial monetary loss and a decline of between 1 and 2 percentage points in the rate of economic growth.

Economists of widely different persuasions have shown a rare unanimity in highlighting the serious negative impact of the measure on aggregate demand in the economy. Given the damage caused by demonetisation and the consequent decline in aggregate demand, there was a general expectation that the Union Budget would provide a substantial stimulus to the economy to counteract the deflationary impact of demonetisation. However, an examination of the tax and expenditure proposals, which constitute the core of any budget, shows a failure to recognise the need for a substantial stimulus to the economy.

The Budget Estimate (B.E.) of total expenditure for 2017-18 is Rs.21.47 lakh crore as against a Revised Estimate (R.E.) for 2016-17 of Rs.20.14 lakh crore. This works out to a less-than-7 per cent increase in nominal terms. Taking inflation into account and viewed against a GDP growth estimated at 6.5-6.75 per cent, this is no stimulus at all. The total budgeted expenditure of the Union government for 2017-18 is 12.7 per cent of the GDP as against 13.4 per cent in 2016-17, a reduction in relative terms.

There is a great deal of rhetoric in the Budget speech on “large” increases in allocations for agriculture and farmers’ welfare, rural development, education and health. There is also the claim of significantly enlarged spending on infrastructure. The Budget speech suggests a thrust towards agriculture and allied activities and rural development. But the allocation for these two sectors taken together rises from Rs.167,768 crore in R.E. 2016-17 to Rs.187,223 crore in B.E. 2017-18, an increase of 11.5 per cent in nominal terms, implying only a modest increase in real terms. The allocation for education and health was Rs.114,806 crore in R.E. 2016-17. It has risen to Rs.130,215 crore in B.E. 2017-18, again a rather modest increase given the country’s overall low spending on these key sectors. The total expenditure on infrastructure as a share of Budget outlay is also marginally lower in B.E. 2017-18 compared with R.E. 2016-17.

An especially important negative impact of demonetisation has been on employment in the informal sector. There was widespread expectation that the Budget would address this issue by substantially increasing allocation for the rural employment guarantee scheme and possibly initiating a similar urban employment guarantee scheme. However, the allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) in B.E. 2017-18, at Rs.48,000 crore, is barely more than the R.E. 2016-17 figure of Rs.47,499 crore. Given the increase in wages for MGNREGS work, there will be a decline in the number of days of employment per household registered in the scheme. A larger point also needs to be made. As data from the Labour Bureau surveys remind us, job creation has nosedived over the past year, and this was a key issue for the Budget to take into account. However, it has made no serious effort in that direction.

Turning to receipts, the tax proposals in the Budget are estimated to result in a loss of Rs.20,000 crore in direct tax revenues. This continues the trend under the present government of persistent tax giveaways in respect of direct taxes even while the rhetoric is about widening the tax base and increasing the share of direct taxes. What is happening is that the indirect tax burden, a large share of which is borne by ordinary working people, is rising steadily. For instance, the revised excise duty collection in 2015-16 was Rs.2.88 lakh crore as against a B.E. of Rs.2.29 lakh crore. In 2016-17, the excise duty collection was Rs.3.87 lakh crore as against a B.E. of Rs.3.19 lakh crore.

Over the last three years, we have seen the abolition of wealth tax in a country characterised by obscene wealth inequality. We have also seen repeated overtures to tax evaders even while the rhetoric around demonetisation was on wiping out black money. These steps do not enhance the credibility of the government’s morality plays. In respect of corporate income taxes, there is reasonable ground for eliminating numerous exemptions. The clamour for lower tax rates on corporate profits is to be assessed against the reality of effective tax rates of hardly 25 per cent on profits accruing to large corporate entities. The several lakh crores in revenue foregone on account of concessions to robust corporate and individual entities does not speak of equity in budget-making.

The economic philosophy underlying the Budget is one which sees the state as, at best, a necessary evil, and believes that the sole path to rapid growth and social well-being is through incentivising corporate investment. It also places exclusive emphasis on so-called fiscal prudence, which is interpreted to mean minimising fiscal deficits essentially through expenditure reduction. The self-serving argument that a lowering of tax rates will lead to an improvement in compliance is not sustained by evidence from across the world. The reason is simple enough: if the marginal costs of tax evasion are perceived to be lower than the benefits from such evasion, compliance need not improve at all.

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