Budget lacks direction in reviving growth

The Union budget 2020-21 comes against the backdrop of a massive slowdown of economic growth and escalating inflation. It was expected that the budget would put in place forward guidance to revive growth. However, the budget proposals in term of expenditure provisions and tax estimates reveal that there is a big question mark on the revival of growth even to 6.0 - 6.5 per cent as set out in the Economic Survey 2019-20. In addition, the credibility of the budget estimates, in terms of budget integrity, fiscal slippage and fiscal consolidation is lost.

This budget is woven around three prominent themes, viz. Aspirational India, Economic Development and a Caring Society. Furthermore, as the budget claims, these three broad themes are the flowers in a bouquet that has been called “Ease of Living”. The above statements are appealing but lack operational significance. 

When the budget estimates for the 2019-20 were translated to the revised estimates, substantial slippages were recorded in fiscal deficit as a proportion of the GDP. The fiscal deficit, which was budgeted to be 3.3 per cent of the GDP, has come in at 3.8 per cent in the revised estimate. This was mainly due to a decline in tax revenue by 8.8 per cent and lower disinvestment proceeds, which recorded a decline of 61.5 per cent. The total expenditures showed a decline due to the drop in central sector schemes/projects by 12.7 per cent for Central government expenditure and transfer to State governments under centrally sponsored schemes by 4.4 per cent. These expenditure heads are welfare and growth-oriented expenditure and therefore, such a decline in expenditure puts a break on the revival of growth.

As set out in the Union Budget 2020-21, this budget is woven around three prominent themes, viz. Aspirational India, Economic Development and a Caring Society. Furthermore, as the budget claims, these three broad themes are the flowers in a bouquet that has been called “Ease of Living”. The above statements are appealing but lack operational significance in the context of the revival of growth to a higher trajectory.

To analyse this further, let us turn to expenditure provisions. As per the provisions in the budget estimates, expenditure under the heads: pension (Rs. 2,10,682 crore), defense (Rs. 3,23,053 crore), and subsidies including fertiliser, food and petroleum (Rs. 2,27,794 crore) and interest payments (Rs. 7,08,203 crore) together account for 48.3 per cent of the total budgeted expenditure. This expenditure is broadly non-developmental in nature. Besides, the expenditure under the head transfer to States at Rs. 2, 00,447 crore accounts for 28.9 per cent of the total expenditure. Thus, in this context, it is important that for the revival of growth the expenditure management of the States is critical.

The budget has assumed a nominal growth of 10 per cent in 2020-21. In some of the growth-oriented expenditure, like education (4.5 per cent), health (5.7 per cent), rural development (0.98 per cent) and transport (6.7 per cent), these are budgeted lower than 10 per cent, implying expenditure elasticity is less than unity. In other words, this developmental expenditure will not be growth supportive.

It is pertinent to mention that not only does the budget have expenditure provisions which are not growth supportive, but also that the budgetary arithmetic in terms of the receipt side is such that the budget integrity and credibility are in question. For e.g. the gross tax revenue against the backdrop of a negative growth of 12 per cent in the revised estimates for 2019-20 has been budgeted to grow at 12 per cent. Similarly, most of the tax revenues, for e.g. corporation tax, personal income tax, customs, union excise and GST, which recorded a negative growth in the range of 1.7 per cent (personal income tax) and 20.3 per cent (corporation tax), are in the coming year budgeted to record increases in the range of 7.7 per cent (union excise duty) to 14 per cent (personal income tax).

Thus, the tax buoyancy in case of most of the tax receipts is greater than unity, implying if economy grows at 1 percentage point, the tax revenue growth will be higher than 1 per cent. However, in a slowdown phase, tax buoyancy greater than unity is practically infeasible. In addition, the disinvestment proceeds at Rs. 2,10,000 crore estimated in the budget as against a decline of 62 per cent in revised estimates of 2019-20 looks highly optimistic. 

Not only does the budget have expenditure provisions which are not growth supportive, but also that the budgetary arithmetic in terms of the receipt side is such that the budget integrity and credibility are in question. Also, revenue deficit fuelling the fiscal deficit creates a vicious cycle of deficit and debt and thus makes the debt position unsustainable. 

Economic growth is critically dependent on the investment rate (change in capital stock relative to GDP) and investment rate emanates from savings rate (savings as per centage of GDP). As the National Statistical Office (NSO) data reveals, for 2018-19 (for which latest data are available) both investment rate and savings rate have slowed down. For e.g. the savings rate was lower at 29.7 per cent in 2018-19 than that of 32.0 per cent in 2017-18. Similarly, the investment rate was lower at 32.2 per cent than that of 34.2 per cent in the same period. The savings rate was lower because of negative savings of the government sector and particularly the Central government. The negative savings of the Central government is akin to revenue deficit (revenue expenditure minus revenue receipt) which is budgeted at 2.7 per cent of the GDP. At this level, not only does the revenue deficit work as a drag for the total savings but also preempts 77 per cent of the borrowed funds (fiscal deficit) of the government.

Thus, continuation of the revenue deficit at such a high level is against moving towards a higher growth trajectory. Therefore, elimination of the revenue deficit is critical. However, it is important to mention that in the medium term fiscal policy cum fiscal policy strategy statement, there is no effort by the government in this direction. As far as the debt level is concerned, as per the FRBM Act, the Central government debt should come down to 40 per cent of GDP but in the medium term document, it is still estimated at 45.5 per cent in 2022-23. The revenue deficit fueling the fiscal deficit creates a vicious cycle of deficit and debt and thus makes the debt position unsustainable. Since the Union Budget has not made any announcement in this regard, all other announcements in the budget speech running into 45 pages become redundant in the revival of growth.

(Dr.R.K.Pattnaik is a former central banker and a faculty member at SPJIMR. Views are personal)