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Budget Blues

The government will need to boost consumption and demand as our economy remains primarily consumption driven; consumption contributed 72 per cent to our GDP last year. This implies that people should have money in their pockets and must be encouraged to spend it


After the disruptions caused by the pandemic forcing the government to dole out various stimulus packages, no one expects the budget numbers to hold. Even though the stimulus packages of Rs 20 lakh crore plus were more about easing liquidity than budgetary outgo, their impact on the fiscal deficit is not insignificant. It has taken a further blow from the revenue estimates falling way short of the target due to the prolonged interruption of economic activities. Even though these activities seem to have gathered some pace now, return to normalcy is still a far cry; in fact, we may not return to the old normal anytime soon and a new normal has to be calibrated and adjusted downwards.

According to the first advanced estimates released by the NSO, the real GDP is expected to contract by 7.7 per cent in 2020- 21, while nominal GDP will contract by 4.2 per cent to Rs 194.8 lakh crore. A research estimates by the SBI projects a growth of 11 per cent in the real GDP for FY- 2022 and 15 per cent in the nominal GDP to 224 lakh crore, as against 203 lakh crore in the last fiscal. SBI also expects the net revenue shortfall to be Rs 3.2 lakh crore and expenditure to exceed the budget estimates (BE) by Rs 3.3 lakh crore this fiscal, leading to a fiscal deficit of Rs 14.46 lakh crore, or 7.4 per cent of GDP, against the BE of Rs 7.96 lakh crore.

Actual data from the Controller General of Accounts, available till November 2020, shows fiscal deficit of Rs 10.76 lakh crore or 35 per cent more than BE by November end, and Government’s market borrowing of more than Rs 12 lakh crore to finance this deficit. These figures corroborate the SBI research findings. Ms Nirmala Sitharaman will have to prepare her budget within the constraint of these numbers; she has very little fiscal space left for manoeuvring, given the stressed revenue position and spending pressures to spur economic activities. She has little option but to give fiscal consolidation a holiday and forget the FRBMA for the time being for reviving growth.

Next year, revenue may grow by an estimated 20 per cent to Rs 21.8 lakh crore. The December GST collections have surged to a peak of Rs 1.15 lakh crore. The Government is tightening controls against evasion and fraud at last; this must be accompanied by a reduction in the number of slabs, by merging the 12 and 15 per cent slabs, and possibly eliminating the 5 per cent slab by distributing its taxable goods among the lower and upper slabs. This will significantly reduce classification disputes and litigation. An estimated Rs 9.56 lakh crore at the end of FY-2019 is locked up in tax litigation (direct taxes: Rs 8.02 lakh crore; indirect taxes Rs 1.54 lakh crore). Government should make all out efforts to settle these, if necessary, by giving concessions, to realise the much needed revenue and also to release tax manpower for fresh assessments and follow up.

A major reason for receipt shortfall this year was the failure to achieve the disinvestment targets due to the disruption caused by the pandemic; against an estimated 2.1 lakh crore, the actual receipt so far is a dismal Rs 12,778 crore. The process of disinvestment of Air India and BPCL is on, and with forthcoming disinvestments of LIC, SCI and Pawan Hans, the government can possibly garner Rs 2 lakh crore in the next fiscal. More non-strategic PSUs need to be privatised to generate more revenue.

As regards expenditure, there is an obvious need for trimming the umpteen number of Centrally Sponsored Schemes. Their restructuring into 28 schemes means very little as numerous schemes have been bundled together under a few umbrella schemes. The current budget provided Rs 3.4 lakh crore or 1.7 per cent of the GDP to these, and their rationalisation is essential for allocative efficiency.

For boosting growth, the budget priorities must be health, agriculture and infrastructure. The health expenditure in India is a paltry 1.15 per cent of GDP, and the PM has promised to raise it to 2.5 per cent by 2025, which is a tad too far if we are to combat the disruption by the pandemic. Even the 15th Finance Commission whose report is likely to be placed in Parliament along with the budget is believed to have recommended substantial increases in health expenditure. As it is, by the share of GDP spent on health, India ranks at 170 out of 188 countries as per the WHO’s Global Health Expenditure database; its share of 1.15 per cent is way below the USA’s 16.9 per cent, OECD’s 8.8 per cent, or China’s 5 per cent. The immediate priority is vaccinating as many people as possible, and using the budget to boost the rural healthcare infrastructure.

To generate funds for investments in infrastructure and agriculture, the mechanism of tax-free bonds may be used to divert some of the funds from an overheated stock market with the Sensex getting within striking distance of 50000, buoyed by substantial FPIs of some $25 billion during the last 4 months despite the sub-optimal fundamentals of a Covid-battered economy. The recently released Financial Stability Report of the RBI also highlighted the strong disconnect between the real economy and the financial markets as investors chase returns in the prevailing low interest-rate scenario, making the financial sector increasingly vulnerable to risk. The report warned banks and financial intermediaries to be cautious against spillovers in an interconnected global financial system in a period of continued uncertainty, which may spread to the corporate and household sectors as well. I have elsewhere argued for taxing the agricultural income but given the ongoing impasse between agitating farmers and a determined government, this is probably not the time to push it through. But the budget gives an opportunity to the government to pacify farmers. It will indeed be sad if the government is forced to repeal the bills or dilute these so much under pressure that their intent gets sabotaged, for this will permanently bring the curtains down on reforming the agriculture sector, so essential for realising the promise to double farmers’ income ~ if not by 2022, a couple of years later.

For that promise to be realised, more reforms need to follow, including ending of Subsidy Raj for water, electricity and fertilisers that distort crop patterns and water usage, and the MSP that mostly benefits the farmers of a few northern of states. Budget allocation on agriculture also needs to be increased substantially, with more funds to the Agriculture Infrastructure Fund scheme for setting up storage and processing facilities, besides supporting farmers, PACS, FPOs, etc. in building community farming assets and post-harvest agriculture infrastructure to get the farmers higher value for their produce. Scope of the PM KISAN scheme may also be expanded. Last year the budget allocation on agriculture was only Rs 1.4 lakh crore, compared to Rs 4.7 lakh crore for Defence, which of course cannot be curtailed under the present scenario. Side by side the government will need to boost consumption and demand as our economy remains primarily consumption driven; consumption contributed 72 per cent to our GDP last year. This implies that people should have money in their pockets and must be encouraged to spend it.

This demands that firstly, there should be no new taxation in the budget, secondly, the existing income tax rates must be rationalised further, extending the initiative the FM launched last year and reduce the tax burden especially at the lower slabs, and thirdly, interest rates should be kept low to discourage savings with appropriate incentives for senior citizens. One understands that given the stretched finances, there is little scope in reducing tax rates, but bringing it to the level of the reduced corporate tax rate of 22 per cent may be good for the economy and revenue in the long run.Export is another sector to boost growth. Our total trade amounted to 39.6 per cent of GDP in FY-2020, but its contribution to GDP as net exports was negative at -2.8 percent. However, from April to November, 2020, there was a net trade surplus of $13.9 billion. In November, the Government announced Production Linked Incentives in 10 sectors like pharmaceuticals, automobiles, telecom, steel, etc. to reduce our dependence on China by giving 4-6 per cent incentives to companies on incremental sales from products manufactured in India. The scope of this may be extended to exports, over and above the other export incentives. The yawning economic inequality that exists in society has been accentuated by the pandemic. If we have learnt any lesson from the long lines of migrant labourers trudging home from all corners of the country after losing their livelihood, then the FM must use the budget to reduce this gap. As Joe Biden had said, “Show me your budget, and I’ll tell you what you value.” The FM must show that she values the lives and livelihood of the dispossessed and marginalised millions.

The writer is a commentator, academic and author