The Budget’s a fiscal conundrum

The Union Budget 2017-2018 presented on February 1, 2017 by the Finance Minister ostensibly enmeshed the Railway Budget with it for the first time since 1924. My first observation: In the 2016-2017 budget, estimates of the Union was Rs.19.78 lakh crores and that of the Railways was Rs.1.71 lakh crores, totalling Rs.21.49 lakh crores. In 2017-2018, total expenditure has been budgeted at Rs.21.46 crores. Does it mean this year budgeted expenditure has gone down? It is obvious that Railways statements have been shown separately and have not been taken into account to compute fiscal deficit.
An analysis of the major heads of expenditure of budget estimates for 2016-2017 and 2017-2018 would show the following figures:  

                                     2016-2017                                                    2017-2018

                                     ------------                                                        ------------

Interest payment ---Rs.4.92 lakh crores       --                           Rs. 5.23 lakh crores

Defence                  ---Rs.2.49 lakh crores                                    Rs.2.62 lakh crores

 Total Subsidy        ---Rs.2.50 lakh crores                                    Rs.2.40 lakh crores

[Only fertiliser, food and petroleum subsidies have been shown in the document ‘BUDGET AT A GLANCE’. Considering that food subsidy has been budgeted to increase by Rs.10,504 crores, the total subsidy budgeted for this year would be more than last year]

Pension                    ---Rs.1.23 lakh crores                                  Rs.1.31 lakh crores


Total Transfer

To States/UTs         ---Rs.9.30 lakh crores                                 Rs.10.85 lakh crores


It would be observed that all the above (non-plan) expenditure has increased substantially this year. Expenditure on account of police, which was budgeted at Rs.59,000 crores last year, could not have been reduced this year. Also, a combined budgetary allocation of miscellaneous services, general services, economic services and social services which was Rs.1.37 lakh crores last year also could not have been reduced this year. So, the total non-plan expenditure of Rs.14.28 lakh crores of last year would have surely increased this year.

Unfortunately, this year these figures of non-plan expenditure remain unclear due to the new system being followed. To state clearly, the estimated receipts and expenditure of the Government of India in respect of the ensuing financial year is the constitutional mandate under article 112 of the Constitution.  The Constitution only mandates that expenditure on the revenue account ought to be distinguished from other expenditure.

This mandate surely does not obviate the need to clearly state all the other expenditure at a glance for the benefit of the legislature so as to have a healthy debate in Parliament. Not everyone can digest the voluminous documents of the budget running into several hundreds of pages, filled with endless numbers and figures.

Whilst the decision to introduce a simple one page income tax return is laudable, it is time to switch back to the system of plan and non-plan expenditure in budget documents in addition to capital and revenue expenditure.

It is clear that the fiscal situation is less comfortable than what the budget figures tend to indicate. First, non-plan expenditure has increased by leaps and bounds. Secondly, allocation for growth to different ministries cannot possibly be curtailed this year. So, the expenditure figure of Rs.21.46 lac crores is highly optimistic. Besides, non-tax receipts have been budgeted to be slashed hugely from Rs.3.22 lakh crores to Rs.2.88 lakh crores this year.  Growth rate of 27.5 per cent of central excise budgeted figure from Rs.3.19 lakh crores to Rs.4.07 lakh crores is highly optimistic amid the slowdown in the economy.

Growth rate of direct tax at 15.7 per cent from Rs.8.46 lakh crores to Rs.9.79 lakh crores has been projected primarily because of personal income growth of 24.9 per cent from Rs.3.53 lakh crores to Rs.4.41 lakh crores. Corporate tax growth rate has been budgeted to increase only by 9.12 per cent from Rs.4.93 lakh crores to Rs.5.38 lakh crores. This shows that the FM is banking more on individuals rather than corporates to raise direct tax revenue. This trend is inequitable.

The economy is submerged under a huge debt; the cost of debt servicing has been swelling [interest payment Rs.5.23 lakh crores]; it is time, therefore, for Parliament to limit borrowing of the Union through article 292 of the Constitution of India.

Also, it is to be noted that the ratio between direct tax collection and indirect tax has now fallen to 1.05 : 1 [Rs.9.79 lakh crores direct taxes and  Rs.9.27 lakh crores indirect taxes]. This ratio last year was projected at 1.08 : 1 [Rs.8.46 lakh crores direct taxes to Rs.7.80 lakh crores indirect taxes]. This is not a healthy trend. This reflects that the government has been steadily failing to collect direct taxes optimally. One amnesty scheme after another has vitiated the direct tax collecting machinery.

Even the fiscal deficit figure estimated at 3.2 per cent of GDP is unrealistic. Budget estimates of GDP for 2017-2018 is Rs.1.68 crore crores from Rs.1.50 crore crores of last year, reflecting a GDP growth of 12 per cent.  It is on this inflated base of GDP that fiscal deficit of Rs.5.46 lakh crores has been projected at 3.2 per cent of GDP.  A more accurate estimation of GDP growth rate would increase the fiscal deficit.

Overall, it is not clear at all from  the document   BUDGET AT A GLANCE 2016-2017 released by the Ministry of Finance as to how enmeshing the Railway Budget and discontinuing plan and non-plan expenditure would facilitate optimal allocation of resources.  

Another disturbing aspect is the ever swelling debt situation of the Government of India. The outstanding debt and other liabilities of the Government of India at the end of 2017-2018 have been estimated to Rs.77.21 lakh crores as against Rs.72.15 lakh crores at the end of 2016-2017 (revised estimates). The economy is thus submerged under a huge debt; the cost of debt servicing has been swelling [interest payment Rs.5.23 lakh crores]; it is time, therefore, for Parliament to limit borrowing of the Union through article 292 of the Constitution of India.  The fiscal situation is far from rosy!

(The writer is Senior Advocate, Supreme Court of India and a former Additional Solicitor General of India in charge of Revenue (direct & indirect tax) and banking)