It is that time of year in India, when all eyes and ears turn to the Finance Minister to learn what she will unveil in the annual Union Budget.
But it is a moot point whether, even in a year of the novel coronavirus pandemic and economic crisis, that speech will be of much significance.
Indeed, it could be argued that there may be little point in listening to or poring over a speech that is likely to conceal more than it reveals.
International Monetary Fund’s (IMF) Chief Economist Gita Gopinath has favoured the extension of the pandemic support measures, thrust on investment in infrastructure and expanding health sector programmes such as Ayushman Bharat and a very credible divestment path for commercially viable companies.
Budget and Constitutional Provisions:
According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement (AFS).
In Parliament, the Budget goes through six stages:
- Presentation of Budget.
- General discussion.
- Scrutiny by Departmental Committees.
- Voting on Demands for Grants.
- Passing of Appropriation Bill.
- Passing of Finance Bill.
The Budget Division of the Department of Economic Affairs in the Finance Ministry is the nodal body responsible for preparing the Budget.
Annual Financial Statement (AFS) is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). In addition to it, the Budget contains:
- Estimates of revenue and capital receipts,
- Ways and means to raise the revenue,
- Estimates of expenditure,
The economic and financial policy of the coming year, i.e., taxation proposals, prospects of revenue, spending programme and introduction of new schemes/projects.
Balancing Fiscal deficit and the Fiscal Responsibility and Budget Management Act Target:
India’s GDP is estimated at ₹200 lakh crore. The first priority for spending should be health and infrastructure.
India has only five beds for 10,000 Indians and ranks 155th on bed availability in the Human Development Report of 2020.
Experts opine that the government should increase healthcare spending from 1.5% of the GDP to 2.5%.
- The pandemic has severely affected growth. The government was quick to announce a package of ₹20 lakh crore.
- Fiscal deficit could overshoot the target set by the Fiscal Responsibility and Budget Management Act.
- Spending more is going to be difficult. According to the Centre for Monitoring Indian Economy, unemployment, both rural and urban, is surging, and health and infrastructure budgets are getting stretched.
- Going by past experience, we can make some predictions about the Finance Minister’s Budget Speech this year.
- It can be expected that it will be full of self-congratulatory declarations of how the country, the economy and the government’s finances have withstood the pandemic and how the economy is set on a path of revival.
- It will claim that the government’s policies have enabled the country to deal with the spread of COVID-19.
- It will downplay the completely inadequate health spending even in the face of the pandemic, and use absolute numbers rather than rates of change to suggest that public spending has been directed towards those in need.
- Finance Minister may take credit for controlling the fiscal deficit as much as possible despite the reduced tax collections, and even claim that she has been munificent to the State governments by increasing their borrowing limits.
Criticism needs to be check in: Expenditure estimates and Actual Revenues Expenditure:
- Every year, Actual revenues being much less than the Budget projections: each year, this mistake is repeated and even amplified.
- The expenditure estimates are even more disingenuous, because they understate the actual expenditures that should be counted.
- This concern has been repeatedly brought up by the Comptroller and Auditor General of India (CAG).
- A CAG report in 2018 identified at least three methods of reducing the stated expenditure: not paying for the full fertilizer subsidy by using “special banking arrangements”; not paying the central government’s dues to the Food Corporation of India (FCI) for the food subsidy, and forcing the FCI to borrow from the market; using other special purpose vehicles to pay for infrastructure investment, like the Long Term Irrigation Fund.
- In 2017-18, just those three items amounted to ₹1,29,446 crore, or 1.8% of GDP.
- To these could be added other strategies the central government uses to “reduce” its own spending, like not paying States their rightful dues under the Goods and Services Tax Compensation Fund, or not paying what State governments have already spent on the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which is legally mandated.
- These strategies are problematic not only because they are non-transparent: they also force other agencies (like State governments and public sector enterprises) to go in for expensive commercial borrowing that unnecessarily adds to their future interest costs.
- But what all this does underline is that the numbers presented in the Budget are not to be taken seriously, either for current year projections, or for the next year’s estimates. This also effectively means that Parliament is reduced to approving a piece of fiction.
Government reduced its real spending over the period of the pandemic: Controller General of Accounts (CGA) data and spending:
- The data from the Controller General of Accounts provide the most reliable information.
- Between April and November 2020, revenues of the central government predictably collapsed, by around 18%, or ₹181,372 crore, compared to the same period of the previous year.
- But despite that, expenditures should have gone up, because the lockdown-induced collapse in economic activity meant that public spending would be the only thing keeping the economy afloat.
- Indeed, that is what the government promised: in three rounds of stimulus packages, it claimed to inject amounts of ₹1.7-lakh crore in March, ₹20-lakh crore in May and then ₹2.65-lakh crore in November.
- But it turns out that very little of these apparently large amounts involved actual commitments of more public spending.
- And the public accounts show that total spending of the central government increased by only ₹86,301 crore. That was only a 4.6% increase — not even enough to keep pace with inflation.
- In other words, the central government reduced its real spending over the period of the pandemic and economic crisis.
- This fiscal stance obviously adds to the material suffering of the people and deprives them of basic goods and essential public services at a time of much greater need.
- But it is also a macroeconomically stupid strategy, because it adds to contractionary tendencies in the economy, and prolongs the severe demand recession facing millions of small and informal enterprises and hundreds of millions of self-employed workers.
RBI must chip in:
The RBI will also have to play its part and continue with its accommodative stance.
With the central bank making it clear that it now prioritises growth over inflation control, there are some economists who expect it to cut interest rates further if the price situation shows signs of coming under control.
This will bring down the cost of money for Indian businesses and help improve consumer sentiment, a key prerequisite for people to once again start spending on discretionary goods.
Way Ahead with the Budget:
The Finance Minister has left significant imprints in the Budgets she has presented.
The lowering of corporate tax rates, the introduction of the option to choose the tax rate both for companies and for individuals up to fixed monetary limits, the introduction of the Vivad se Vishwas scheme without sacrificing revenue, and the structured infusion of fiscal stimulus without accelerating inflation all point to a right approach to Budget-making.
We can expect a never-before Budget to be presented to meet the crisis created by COVID-19. The super-rich must co-operate without insisting on tax concessions.
As we saw after demonetisation, policies that destroy informal economic activities set in train processes of economic contraction that eventually come to bite formal enterprises as well.
A similar process is under way in India now. Those who celebrate the higher profits of some large corporate houses or the gains in the stock market will find out soon enough that these are ephemeral if the vast bulk of the economy continues to stagnate or decline.
Moving to a more expansionary fiscal stance that prioritises employment generation and public service provision, would the Budget speech this year be worth listening to.