A big question mark on the quality of fiscal consolidation

The Union Budget 2019-20 presented to Parliament on July 05, 2019 is in many ways a non- event even though there were promises to move the Indian economy to a five trillion economy in dollar terms. The budget is an annual financial exercise of the government therefore, it is expected that the finance minister should in the budget speech make some reference to the estimates for revenues and expenditures. The finance minister broke this age-old practice and left citizens to search other budget documents to gain some idea about the receipts and expenditure position of the government, instead of depending on the budget speech for knowledge of the fiscal position and other announcements. This is a sad departure from the norm. Notwithstanding this, announcements like Non-banking financial companies (NBFCs) and housing finance regulations by the RBI and TDS of 2 per cent on above Rs 1 crore are welcome move. 

The savings rate which was 34.6 per cent in 2011-12 has gradually but steadily declined to 30.5 per cent in 2017-18. This is because household sector savings has declined from 23.6 per cent to 17.2 percent as both financial and physical savings have fallen. Thus, the revival of economy to 8 percent growth depends upon the turnaround in savings -investment rate and export to GDP ratio. Unfortunately, the budget does not contain any proposal in this regard.

As per the empirical exercise set out in the Economic Survey of Government of India 2018-19 the Indian economy will grow to 5 trillion-dollar economy by 2024-25 with an inflation of 4 per cent and real economic growth of 8 per cent per annum. Besides, the productivity (both labour and capital)  of the economy is assumed at 0.7 per cent increase and the  exchange rate is Rs. 75 per one dollar (US). India is currently facing a slowdown in growth (6.8 per cent in 2018-19 and is expected to record a growth rate of 7 per cent in 2019-20). The growth of the economy is critically dependent upon the investment both domestic and foreign but investment is limited by savings.

The gross savings comprising households, private and public, as a percentage  of GDP ( savings rate) has been decking. For example, the savings rate which was 34.6 per cent in 2011-12 has gradually but steadily declined to 30.5 per cent in 2017-18. This is because household sector savings has declined from 23.6 per cent to 17.2 percent as both financial and physical savings have fallen. Thus, the revival of economy to 8 percent growth depends upon the turnaround in savings -investment rate and export to GDP ratio. Unfortunately, the budget does not contain any proposal in this regard.

In the above context it is important to mention that the fiscal management of the government, particularly the revenue deficit management is critical. The revenue deficit which has been around an average of more than 2.4 per cent during the past four years  has been budgeted at 2,3 per cent in the 2019-20 budget. The persistence of the revenue deficit which is a dis savings of the government pre-empts high cost borrowing by the government for current consumption and less funds are available for asset creation in terms of capital expenditure.  Thus, with such a fiscal position a 5 trillion economy remains a promise not a reality.

The disinvestment proceeds are budgeted at Rs.1.05,000 crore as against Rs.1,02,885 crore in 2018-19 accounts. It may be mentioned that the disinvestment proceeds are garnered through window dressing because the purchase and sale of assets were done among public sectors only and not through private sector ownership.  This is against the spirit of true ownership transfer and done to reduce the deficit number.

Having said this, let us turn now to the fiscal arithmetic of the budget. The time when the regular budget is presented the accounts figure for 2018-19 is already available and also disseminated in the public domain by the Controller General of Accounts(CGA). This data shows that there has been a massive slowdown in the revenue receipts position. As against the revised estimates of Rs.17, 29, 682 crore the revenue receipts declined to Rs. 15,63,170 crore. Similarly, the tax revenue shortfall was also huge ( Rs. 14, 84, 406 crore in the revised estimates but The accounts figure was Rs.13,16,951 crore). If we consider the accounts figures, the increase in revenue receipts in the budget estimates worked out to 25 ,6 per cent and tax revenue growth is 25 3 per cent. These growth rates are certainly not tenable.

Apart from this the disinvestment proceeds are budgeted at Rs. 1.05, 000 crore as against Rs. 1,02, 885 crore in 2018-19 accounts. It may be mentioned that the disinvestment proceeds are garnered through window dressing because the purchase and sale of assets were done among public sectors only and not through private sector ownership.  This is against the spirit of true ownership transfer and done to reduce the deficit number.

Another important aspect is financing of the fiscal deficit by drawing down of cash surplus to the tune of Rs. 51,059 crore. Surplus maintenance questions the cash management of the government.

The medium term fiscal policy and fiscal policy strategy statement has set out a target of 3 per cent fiscal deficit to GDP in 2020-21, But revenue deficit remains at 1.9 per cent of GDP.  Revenue expenditure as a percentage of total expenditure in the medium term remains at around 87 percent, The subsidy expenditure has shown increases of 47 .2 per cent to Rs. 3, 38,949 crore with substantial increase in food subsidies. The fiscal strategy statement does not have any commitment to reduce the revenue expenditure.  Nevertheless, there is a questionable assumption that inflation will be maintained at the targeted rate of 4 per cent providing a cushion to interest rate and there by to the interest payments.  This questions the quality of fiscal consolidation.

With regard to expenditure it may be mentioned that the transfer to states in terms of centrally sponsored schemes has been an apple of discord between the Central and State governments. It would have been appropriate if some rationalisation was done in the budget. This is important in the interest of cooperative fiscal federalism.

Another important aspect is financing of the fiscal deficit by drawing down of cash surplus to the tune of Rs. 51,059 crore.  Surplus maintenance questions the cash management of the government. To sum up, the thrust of the budget of growth and investment is shrouded in mystery as there are big question marks on the quality of fiscal consolidation.

(Pattnaik is a former Central banker and a faculty member at SPJIMR. Views are personal)