Interim Budget 2019-20: Wonky, wild and worrying

The Finance Minister while presenting the Interim Budget 2019-20 has categorically mentioned that this is not an interim budget but a medium of the country’s developmental journey. In saying so, he has broken the convention, sanctity and integrity of an interim budget and stretched the boundaries to make what essentially are a series of political announcements keeping in mind the ensuing elections. What we have as a result is a budget that is wonky in numbers, wild in its promises and worrying in its outcome.

The translation of the 2018-19 budget estimates to the revised estimates casts doubts on the integrity of the budget. For example, the government has budgeted for PSU equity sales of Rs. 80,000 crores for the year 2018-19. But the data for April-November 2018 shows that the actual sales were to the tune of Rs. 15,810 crores, or barely 20 per cent of the budget estimates.

The fiscal sops announced in the budget in terms of a) increased contribution of the government to the New Pension Scheme to 14% b) increase of maximum ceiling of the bonus and pay to labourers to Rs. 7,000 per month and Rs. 21,000 per month respectively c) ceiling for payment of gratuity at Rs. 20 Lakhs and d) Pradhan Mantri Shram-Yogi Manadhan for unorganised sector workers are populist in spirit. Similarly, on the eve of the election, an announcement, in the interim budget, to give full tax exemption up to an annual income of Rs. 5 Lakhs is politically designed to appease an estimated 3 crore middle class tax payers comprising, self-employed, small business, small traders, salary earners, pensioners and senior citizens.  The implications of this go against the spirt of fiscal prudence.

In India, the budget follows three accounting steps, viz budget estimates, revised estimates and the actuals. The budget estimates are the first indicators of how the government sees the numbers. These are revised in the light of actual data of nine months into the budget year, the so-called revised estimates. After two years, the data flows in to the actual audited final numbers. In this context, the translation of the 2018-19 budget estimates to the revised estimates casts doubts on the integrity of the budget. For example, the government has budgeted for PSU equity sales of Rs. 80,000 crores for the year 2018-19. But the data for April-November 2018 shows that the actual sales were to the tune of Rs. 15,810 crores, or barely 20 per cent of the budget estimates. Now, with just two months left for the fiscal year to end, the government expects to garner the remaining 80 per cent of the budgeted disinvestment proceeds – clearly an unachievable task. This over estimation inter alia has helped the government keep the fiscal deficit (total expenditure minus revenue receipts minus non-debt capital receipts) number at 3.4 per cent, a little above the target of 3.3 per cent.

Furthermore, the revised estimates have kept the revenue deficit (revenue expenditure minus revenue receipts) at the budgeted level of 2.2 per cent but this comes at the cost of cutbacks in the transfers under Centrally sponsored schemes, Finance Commission grants and discretionary grants to the States. This strikes at the root of cooperative fiscal federalism.

When the bulk of the money is spent on running the government, how can it help fulfil the “vision for the next decade”, as the FM has put it: the dream of becoming  “a five trillion-dollar economy in the next five years and aspire to become a ten trillion-dollar economy in the next eight years thereafter.” This transformation requires money to be spent on building real assets, which is not being done.

The total expenditure envisaged by the budget stands at Rs. 27.84 lakh crores, out of which the growth supporting expenditure (i.e. capital expenditure) is only about 12 per cent. This has been constant over the last few years. This shows that the revenue component of the total expenditure, comprising mainly of interest payments, defence, wages & salaries and subsidies, take away the bulk of the budget. When the bulk of the money is spent on running the government, how can it help fulfil the “vision for the next decade”, as the FM has put it: the dream of becoming  “a five trillion-dollar economy in the next five years and aspire to become a ten trillion-dollar economy in the next eight years thereafter.” This transformation requires money to be spent on building real assets, which is not being done. Besides, from the angle of savings and investment, the persistence of the revenue deficit implying negative savings of the government sector also comes in the way of a higher growth trajectory.

Persistence of the revenue deficit implies a hard budget constraint of the government as revenue expenditure is not fully met by the revenue receipt, both tax and non-tax. For example, the budget for 2019-20 has envisaged a revenue expenditure of Rs. 24,47,907 crores or 11.6% of GDP and revenue receipts at Rs. 19,77,693 crores or 9.4% of GDP. Thus revenue receipts have financed only 80% of the revenue expenditure. The gap, which is called the revenue deficit, to the tune of Rs. 4,70,214 crore, or 2.2% of GDP, is financed to the extent of 65% from the borrowings by the government. The remaining 35% of borrowings are used to meet the capital expenditure of the government.

The government in the revised Fiscal Responsibility and Budget Management Act, 2018, has adopted the fiscal deficit as the only operational target for fiscal consolidation. In the medium term, the government has kept it at 3% of GDP for the year 2020-21 and 2021-22. It is important to mention that the revenue deficit in these two years accounts for 57% and 50% of fiscal deficit respectively. Having a revenue deficit and financing it with borrowed funds is against any norms of prudent and sustainable fiscal policy and management.

In order to achieve fiscal sustainability, elimination of the revenue deficit is important as it is the root cause of a higher fiscal deficit and lower capital expenditure. In this context, it is important that the government should refrain itself from the populist expenditure measures and tax sops announced in the interim budget

Apart from the questionable usage of borrowings to meet the consumption/revenue expenditure, the financing of the fiscal deficit is also a matter of concern. For example, the budget for 2019-20 seeks to finance the fiscal deficit to the tune of 64% from market borrowings (government bonds and treasury bills), 30% from the non-market borrowings such as securities against small savings and state provident funds. The remaining portion is financed by a drawdown of cash balance. The maintenance of surplus cash balance with RBI is on account of poor cash management by the government.

The persistence of the revenue deficit accompanied by higher borrowings and a lower allocation of capital expenditure has resulted in a mismatch of liabilities and the assets of the government as the government records a net liability position. At the end of fiscal 2019-20, the net liability of the government will be around 26% of GDP.

In order to achieve fiscal sustainability, elimination of the revenue deficit is important as it is the root cause of a higher fiscal deficit and lower capital expenditure. Given the downward rigidity of revenue expenditure, the Tax and Non-tax GDP ratios are required to increase higher than the expected level of 12.2% and 1.3% of GDP in 2021-22, respectively. In this context, it is important that the government should refrain itself from the populist expenditure measures and tax sops announced in the interim budget 2019-20.   

(The writer is a former central banker and a faculty member at SPJIMR. Views are personal)