The problem with Budgets in recent years is not that they didn’t do enough. Rather, finance ministers have tried to do too much. This is not just with regard to tax revenue, on which the assumptions went particularly wrong last year (2018-19) and may do so again this year, but also with expenditure. For instance, this year’s central expenditure on “schemes” and projects is slated to be fully 48 per cent more than two years ago. Even if the money were available, would government departments be able to spend on that scale?
When it comes to gross tax revenue, though the numbers have fallen short of what was announced, the fact is that the ratio of such revenue to GDP has been growing through the six years of the two Modi governments — from 10.14 per cent in 2013-14 to an expected 11.72 per cent this year. Even if revenue this year were to fall short by, say, Rs 2 lakh crore (or about 8 per cent), as some commentators expect, the figure in relation to GDP (itself smaller than expected) would still be notably better than in 2013-14 — despite disappointment with collections under goods and services tax (GST).
In other words, while there is an issue with GST, the real problem is that budgeting has been too ambitious. Note that a good bit of the surge in revenue has come from non-tax sources — transfers from government companies in the form of extra dividends, offloading government shareholding (including to cash-rich government enterprises because there was no time to sell to others), revenue from licence fees and spectrum use, and the like. And so, this year’s non-tax revenue is slated to be 63 per cent more than what was achieved two years ago. It won’t happen, of course.
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The price for over-budgeting is paid by the sectors that have been bled white, like telecom and government companies. It is also paid by organisations to which the government owes money but they don’t get paid (think Hindustan Aeronautics), by organisations like Food Corporation of India that are forced to borrow from wherever they can because the government is not paying them on time, and by states which don’t get their share of central taxes when they are due. There is a price for trying to do too much, and the larger economy pays it more than the central government because New Delhi is allowed to get away with behaving arbitrarily and then hiding the reality behind the bogus numbers that it presents to the country.
Over-budgeting happens in particular during periods of economic slowdown — which the government either does not anticipate or is unable to foresee. It is hard, for instance, to understand how the government assumed 7 per cent real GDP growth (and about 12 per cent nominal growth) this year, when it was already clear in July that the system was on the skids. It is no defence to say that others too (like the International Monetary Fund) did not anticipate the extent of the slowdown; everyone knows that the IMF habitually gets its numbers wrong in its World Economic Outlook. The result was that the government sector grew in the last quarter by 15 per cent, while the rest of the economy was growing at barely 3 per cent.
The debate about whether the government should stick to a modicum of fiscal discipline in its Budget for 2020-21, or forget the deficit and open the tap, should be seen against this backdrop. It should also be viewed from the perspective of the level of debt in relation to GDP (too high and climbing higher), and what a higher level of borrowing might do to interest rates, which too are high. While it could be argued that a counter-cyclical fiscal policy points to opening the tap, the reality is that the fiscal sins of the past are already extracting their price in different ways. There is a time for atonement, and for lowering one’s expectations of the economy — and therefore not trying to do too much in the Budget.
By Special Arrangement with Business Standard
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I agree with views expressed here. It is not for the first time that the Union Budget has become a topic of a very intense debate. 2. There are so many sectors of economy which need Central government support for getting back to growth ways. 3. Central government has to take several important steps so that our economy gets back to the growth path. In this context my observations are as follows: (a) we have to take steps to be serious about implementation of fiscal disciplinary measures. (b) Increasing tax revenue is one way of prudent financial management. What is observed is that the Central government is simply not able to reduce wasteful expenditure in form of populist subsidies. Even as the Central government makes efforts to increase revenue, all such efforts will not be successful without controlling expenditure. Efforts to control expenditure will have to be made by the state governments too. (c) To minimize scope for tax evasion and to improve fiscal discipline, particularly of indirect taxes, there should be good coordination between the Central and State governments. Unfortunately there is very little cooperation today and that leaves scope for tax evasion. (d) As pointed out by the author in an earlier article, both the Central and State governments will have to adopt commercial systems of accounting on a top priority basis. Once commercial system of accounts is adopted, it would be possible for placing governments’ annual financial statements in the public domain. This step will be a major step forward to improve governance.
An excellent piece. Deficit in Gross Revenue Collections is effect rather than cause of slow down in economy. This is why the huge deficit persists despite improvement in Gross Revenue Collections/ GDP ratio. Over-budgeting should be avoided, so also the knee-jerk solutions. Government should now focus on structural reforms rather than dreaming overnight transformation in the economy. The target of 5 trillion dollar economy is over ambitious and needs to be toned down. Modi may not like it, but he has no magic wand. The country had to be patient and toil hard. There is no easy way.