Budget 2016: Some hard questions
The third budget of the Modi sarkar set out a desire, a dream and a vision, the stuff of “champions” as the Finance Minister put it toward the tail end of his 12,000 word budget speech. He offered this without overstepping the boundaries, in fact staying within targets, with money still available for the rural sector, the social sector, employment generation and infrastructure.
At the same time, he brought down the revenue deficit estimates to 2.3 per cent of GDP as compared with 2.5 per cent in the revised estimates for 2015-16. The fiscal deficit at the targeted 3.5 per cent of GDP is down from the 3.9 per cent in the 2015-16 revised estimates. And in doing all this, the FM has factored in headwinds like the impact of a global slowdown on India, the looming burden of the seventh central pay commission, the defence one-rank-one-pay and other challenges.
But what is the fiscal arithmetic behind this deft balancing act?
The revenue deficit, which is the amount the government spends to keep itself going, is calculated to come down through higher non-tax revenue – money flowing in from (possible) spectrum auctions and dividend and profits from Public Sector Undertakings (PSUs) and the Reserve Bank of India (RBI). The revenue receipts are augmented by higher dividend from PSUs, which will go up to 33 per cent from the range of 20 per cent to 30 per cent now.
This was an opportunity for the FM. He could have signalled zero tolerance for large defaulters, and spent more time spelling out the government’s philosophy on addressing a concern that touches the common man, impacts the banking sector and fuels the feeling that the big defaulters can get away under the current system. Instead, the FM has allocated Rs. 25,000 crore for re-capitalisation of banks and said he will explore ways to raise more capital if needed.
All of these signal an overdependence on one-time revenue measures, which are neither dependable nor sustainable. Telecom sector receipts at about Rs.99,000 crore for fiscal 2017 are budgeted at 70% higher than the revised estimates last year. While this is in principle feasible, the question is just how appropriate or desirable is it to force-create fiscal space with one-offs and in a manner that is not likely to be sustained?
Similarly, transferring receipts from PSUs to the government account through higher dividend is essentially in the nature of inter-governmental adjustments and does the trick of managing numbers without any prudent fiscal strategy.
Currently, revenue deficit targeted at 2.3 per cent of GDP pre-empts two-thirds of the borrowing requirement (fiscal deficit) of the government. Use of high cost borrowing for normal running of the government in principle is lack of fiscal prudence. Moreover, revenue deficit is also tantamount to dis-savings by the government. Since economic growth is a function of investment limited by savings, sooner the revenue deficit is eliminated, the better it is for us to move to higher growth trajectory.
The fiscal deficit numbers are helped by a jump in estimates from disinvestment proceeds, which are shown to be at more than twice the revised estimate. Such a strong reliance on disinvestment, given that the disinvestment targets have not been met historically and even in 2015-16, raises its own questions.
Evidence suggests that there has been deviation from the budget estimates to revised estimates and finally to the accounts. This is typically found in an overestimation of capital expenditure and other discretionary expenditure. For an example, in the budget estimates for 2015 -16, capital expenditure was placed at Rs. 241,430 crore but reduced to Rs. 237,718 crore in the revised estimate. Similarly, disinvestment proceeds were reduced to Rs. 25,312 crore revised estimates from the budget estimates of Rs. 69, 500 crore for FY 2016.
In the end, the act of balancing the books and keeping a check on the red is not an exercise on paper but must flow from a belief and conviction in the fiscal direction we seek to take as a nation in the medium and long term, and some hard steps that are required to achieve this goal. Such a conviction is clearly missing in the budget, which instead seeks to adjust, please and sail by.
A more appropriate approach could have been increasing usage charges on social and economic services and at the same time sending strong signals that these services will be delivered efficiently.
Politically speaking, this would have been a difficult call at a time the euphoria around the government and its ache din has waned if not died completely and the gap between expectations and achievements is rising.
But it is these gaps that also throw up opportunities to seize the agenda politically and economically. One of gaps is the lack of action, perceived and real, on the government’s part at cleaning up the balance sheets of banks which are saddled with Non-Performing Assets (NPAs) at alarmingly high levels.
This was an opportunity for the FM. He could have signalled zero tolerance for large defaulters, and spent more time spelling out the government’s philosophy on addressing a concern that touches the common man, impacts the banking sector and fuels the feeling that the big defaulters can get away under the current system.
Instead, the FM has allocated Rs. 25,000 crore for re-capitalisation of banks and said he will explore ways to raise more capital if needed. Since the bank NPAs are largely due to structural weaknesses and not cyclical in nature, any money to finance this gap is not in line with prudent norms for expenditure prioritisation.
A firmer approach would have argued that it is not the government’s job to fill up the holes caused by banks and their poor decisions compounded by lack of follow up to correct their sins of omission and commission.
That one signal would have helped change the mood and build the perception of a government that means to act decisively in areas it should.
In sum, the goal of transforming India by working for the benefit of farmers, poor and the vulnerable is highly laudable but it is not in sync with approach adopted for mobilising resources in this budget. Fiscal consolidation, fiscal integrity, fiscal prudence and fiscal rectitude critically hinge on fiscal empowerment (which is to maximise revenue to budget in a sustainable manner). Only this will enable the government to create fiscal space. The sustainable way to do so is to enhance tax to GDP ratio along with prioritisation of expenditure. In the absence of this, desires, dreams and vision are but words that mean nothing.
(Dr. R K Pattnaik is a Professor of Economics, SPJIMR. Jagdish Rattanani is Editor at SPJIMR.)