Red flags and many questions as the middle class laps up Budget 2019-20

The Union Interim Budget which was placed in Parliament on February 01 2019 has broken all the conventions of an interim budget. It has expenditure proposals, tax proposals and above all a vision for 2030. In the interest of prudency in the budget making process, the government should have appropriately done these in the 2018-19 budget. The 2019-20 budget should have in the true characteristic of an interim budget only sought a vote on account for expenditure and receipts.

With the normalisation of the monetary policy in the US, the pressure on capital outflows remains large enough to falsify the condition of financing CAD through net capital inflows in a non-disruptive manner. In addition, the global economic growth scenario is bleak.

The interim budget was presented against the backdrop of an upward revision of growth rate for 2017-18 (8.2 per cent against the previous 7.1 per cent) and for 2016-17 (7.2 per cent as compared with the previous 6.7 percent). The growth rate for 2019-20 in the budget has been estimated at 11.5 per cent in nominal terms and assuming an inflation rate of 4 per cent, the real growth could be 7.5 per cent. This is broadly in line with the estimates of the RBI in the fifth Bi- monthly Monetary Policy Committee resolution. Thus, the domestic macro-economic environment remained favorable in terms of growth, price stability (low inflation) and low current account deficit (CAD). It is important, however, to mention that both carry the potential of an upwards risk of account of crude oil prices. With the normalisation of the monetary policy in the US, the pressure on capital outflows remains large enough to falsify the condition of financing CAD through net capital inflows in a non-disruptive manner. In addition, the global economic growth scenario is bleak.

Against the backdrop, how does the budget document stand up to scrutiny on four broad aspects: (a) revised estimates for 2018-19 (b) budget estimates for 2019-20 (c) medium term fiscal policy and (d) Vision for 2030.

While assessing the revised estimates for 2018-19, it is pertinent to mention that the tax revenue net to the Centre has gone up (from Rs. 14,80, 649 crore to 14,84, 406 crore) while the States’ share has come down (from Rs.7,88,093 crore to Rs.7,61,454 crore). This is primarily due to the predominance of cess and surcharges in the Central Budget which are not shareable with the States.  Another disquieting feature is the disinvestment proceeds, which is kept unchanged at Rs. 80,000 crore. This needs to be seen in the context of the realisation of only 20 per cent of the disinvestment receipts during the period April- November 2018 for which actual data is available with the CGA. To realise the remaining 80 per cent in a period of two months seems difficult if not impossible, unless the government resorts to the imprudent practice of selling of one government undertaking to another, as it was done in the past.

The government should seriously consider reintroducing the monitoring mechanism which was set out in the Fiscal Rule, 2004 i.e. taking appropriate action when the fiscal deficit exceeds 70 per cent of budgeted target and disinvestment falls below 40 per cent in the mid-term review. This is important and desirable as in a democracy the budget making process inherently falls prey to underestimation of expenditure and overestimation of revenue collections.

There has reportedly been an interim dividend payment from the RBI to the government to the tune of Rs. 28,000 crore besides the surplus transfer of Rs. 40,000 crore in August 2018. The practice of an interim dividend transfer has been started from financial year 2017-18. Any interim transfer without finalisation of audited profit and loss account is against the norms of sound accounting principles. This unpleasant budgetary arithmetic may be reviewed by the Committee to review and recommend the appropriate economic capital of the RBI.

The budget for 2019-20 has estimated that tax revenue, non-tax revenue, disinvestment proceeds and borrowings will meet 61.2 percent, 9.8 per cent ,3.2 per cent and 25.3 per cent, respectively of the total expenditure of Rs. 27,84, 200 crore envisaged in the budget.  It is important to mention that fiscal slippage usually crops up due to shortfalls in disinvestment proceeds and overshooting of the revenue component of the budget. This needs to be carefully monitored. It is appropriate therefore that the government should seriously consider reintroducing the monitoring mechanism which was set out in the Fiscal Rule, 2004 i.e. taking appropriate action when the fiscal deficit exceeds 70 per cent of budgeted target and disinvestment falls below 40 per cent in the mid-term review. This is important and desirable as in a democracy the budget making process inherently falls prey to underestimation of expenditure and overestimation of revenue collections.

As long as the revenue deficit persists, the borrowings to finance fiscal deficit will be used for current consumption of the government and there will be lower provision of capital expenditure. This trend needs to be reversed. Unless this is done, the vision for a five trillion and ten trillion economy remains utopian.

One of the disquieting features in the budget making process relates to financing of the fiscal deficit in terms of drawdown of surplus cash balance. The budget for 2019-20 has estimated an amount of Rs. 51,297 crore as the drawdown of surplus cash balances. If prudent budgetary practice would have been followed, this amount should have been “zero”. Maintaining a surplus cash balance to finance fiscal deficit is the result of either over borrowing or withholding the payments. In either case, it is against prudent fiscal management.

The medium-term fiscal policy statement sets out a fiscal deficit relative to GDP at 3 per cent in 2020-21 and 2021-22 accompanied by revenue deficit of 1.7 per cent and 1.5 per cent of GDP, respectively. Persistence of the revenue deficit results in a dis savings of the government and thus would drag the growth prospect of the economy. As long as the revenue deficit persists, the borrowings to finance fiscal deficit will be used for current consumption of the government and there will be lower provision of capital expenditure. This trend needs to be reversed. Unless this is done, the vision for a five trillion and ten trillion economy remains utopian.

To sum up, the budget cart should run on the four wheels of fiscal transparency, fiscal marksmanship with budget integrity, fiscal space and fiscal prudence. The interim budget has broken wheels in all aspects to appease the electorate making a mockery of the budget making process.

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