Overstatement of revenue and understatement of expenditure is a constant problem with Indian budgets.
The interim budget once again shows that the agricultural schemes announced are just a part of any government’s political arithmetic ahead of the Lok Sabha elections. We saw how the promise of farm loan waivers played out in the recent assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh.
The income support to farmers announced in the budget is likely to cost the government 0.11 per cent and 0.36 per cent of the Gross Domestic Product (GDP) respectively in 2018-19 and 2019-20.
While the government is definitely right in announcing relief/support to a section of society that is facing stress, it is equally important to budget for the right amount as expenditure for these schemes, and present a true picture of the revenue.
Overstatement of revenue and understatement of expenditure is a constant problem with Indian budgets, and the trend becomes more prominent in election-year budgets that are heavy on schemes.
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Consumption over investment
Through this interim budget, the government has decided to put more money into the pockets of rural and urban consumers. This is likely to result in increased consumption and provide some support to low household savings rate. Increased consumption will translate into demand for FMCG products and consequently lead to an increase in revenue in the form of GST on them.
However, the focus of this budget is clearly on consumption rather than investment. Central government’s capital expenditure is expected to grow 6.2 per cent in 2019-20, whereas the revenue expenditure is expected to grow 14.4 per cent. At a time when the economy is showing some early signs of investment revival, shifting focus from investment to consumption is not a good policy and may lead to hardening of inflation.
The credibility of any budget can be determined by how accurate the assumptions are. The crucial assumptions made in budget preparation are:
- GDP growth
- Expenditure growth
- Revenue growth
- Disinvestment
- Non-tax revenue collections
Deficit numbers – fiscal, revenue and primary – are the end results of these.
GDP growth
The nominal GDP growth assumed in the budget is 11.5 per cent. This looks plausible, although global factors can have a destabilising impact as witnessed in 2018-19.
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Expenditure growth
Revenue expenditure (expenditure such as salary, pension, interest payments, or the expenditure on items that doesn’t translate in assets creation) growth in the budget is 14.4 per cent, higher than 13.9 per cent in 2018-19.
On the face of it, it gives an impression of adequate budgeting for schemes announced in the budget. If one adjusts the revenue expenditure for PM-Kisan, which stands at Rs 75,000 crore for 2019-20, the revenue expenditure growth declines to 11.9 per cent.
Interest payment is a sticky number and the government should have a firm estimate of it. On the whole, the expenditure growth appears to be understated in 2019-20 budget.
Revenue growth
While the expenditure growth is understated, revenue growth assumptions look overstated. The aggregate tax revenue growth estimate of 14.9 per cent for 2019-20 is lower than 19.5 per cent achieved in 2018-19. However, a closer look at the estimate of various tax revenue components does not inspire confidence.
The Goods and Services Tax (GST) collection growth in 2019-20 is estimated at 18.2 per cent, whereas the 2018-19 growth pegs it at 9.1 per cent. This is a tall order. A slippage of 1 percentage point (pp) in the GST growth will wipe off Rs 37 billion (or Rs 3,700 crore) from the gross tax revenue. Since 42 per cent of gross tax revenue is shared with the states, overestimation of revenue growth affects state budgets too.
Disinvestment and non-tax revenue targets
The Narendra Modi government is hopeful of collecting Rs 800 billion (Rs 80,000 crore) in 2018-19 and has budgeted Rs 900 billion (Rs 90,000 crore) for 2019-20. It will be extremely difficult for the government to reach this financial year’s target as its disinvestment of Air India could not take off due to lack of takers.
The government is hopeful that Power Finance Corporation (PFC) buying government stake in the Rural Electrification Corporation (REC), and share buybacks will help it reach the targets. But unless there is big-ticket disinvestment in 2019-20, small buybacks and IPOs are unlikely to help the government achieve the target.
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Deficit and borrowing
Based on the revenue and expenditure assumptions, it appears that the government may slip on its fiscal deficit target in 2019-20.
One of the factors to consider is that the budget is prepared with old GDP numbers. The Central Statistics Office (CSO) has released first revised GDP estimates for 2017-18 on 31 January.
The nominal GDP estimates could then be revised upwards for 2019-20, giving the government scope for some fiscal slippage while retaining the 3.4 per cent fiscal deficit to GDP ratio.
A larger market borrowing, besides making Reserve Bank of India’s job difficult, will also result in a higher bond yield in 2019-20. Although the RBI is expected to change its monetary stance to neutral from calibrated tightening in its February 2019 policy review, rate cut will become a difficult exercise in the present global situation.
The budget arithmetic is questionable and the government may find achieving the stated targets difficult, if not impossible.
The author is the chief economist, India Ratings & Research. The views are personal.
1. All citizen-voters have a right to express views on Interim Budget presented on 1st February, 2018 and accordingly I am stating my views. This Budget is a sort of manifesto and BJP need not be apologetic about it. I do not see anything improper in BJP wooing the citizen-voters through the provisions in Budget 2019-20 and in fact I welcome them. Why should we think that mixing economics with good politics is always a bad thing? 2. As I see it, the Union Government has for the first time acknowledged that an overwhelmingly large number of rural households, who may be suffering from poor income from farming activities, need direct financial assistance. Accordingly a pension scheme has been announced in the Budget and it is hoped that intended beneficiaries, those below the poverty line in rural areas, will receive the pension. 3. However, I think providing such income support, through a pension scheme, is only a part-time solution for eliminating agricultural distress. I believe farming activity can be profitable only if our small farmers stand on their own legs, without too much government help. In fact, farmers can come together and setup their organisations, either cooperatives or limited liability partnerships, which could provide them technical advice, farming tips, market information and marketing support whenever needed. I also believe that through these organisations, which may need some govt funding initially, farmers can augment their income from noncore farm activities like sale of milk, eggs, etc. 4. Incidentally, I wholeheartedly support the increase in amount of relief under Sec. 87A. However, I see one problem for senior citizens like me. If my taxable income is under Rs 5.00 lakhs, I have to neither to invest in Sec. 80C schemes nor have to pay any tax. But I am not free from hassles of filing Income Tax Return (ITR) every year. Further there is a penalty of Rs 1,000/- for not filing ITR. Hence, my request to the Union Finance Minister will be to reconsider levy of penalty for delayed filing ITR when the tax liability is Zero, at least in case of senior citizens.
We shameless Indians don’t care about budget arithmetic, we care only about doles and handouts.