In the wake of the recent announcement that the UK has officially entered a recession, the economic landscape appears increasingly challenging for Prime Minister Rishi Sunak and his Conservative government.
Acountry’s budget, as a macro concept, is a projected statement of sources and applications of fund for a particular fiscal year. Empirical analyses of the budget statement based on widely accepted methods can reveal how realistic it is. If this year’s budget is analysed by these methods, a different picture is captured. Obviously, a question arises in our mind. Is the budget placed by the Finance Minister realistic and achievable in terms of figures? Is the macroeconomic scenario projected by the government likely to go haywire? Before we conclude, let us discuss in brief the methods followed to find out whether the budget is realistic or otherwise.
First, trend analyses and variance analyses of historical data. Second, finding out the basic assumptions underlying this year’s projection for various components of the budget. This exercise is done on the basis of data generated from trend and variance analyses. Third, we compute the figures with respect to various components of budget based on results of these two analyses. Finally, we compare those with the figures shown in the union budget. Trend analyses of the past five years data (2014-15 to 2018-19) show that the Centre’s net tax revenue (NTR) as percentage of GDP was 7 in 2014-15 which increased marginally to 7.65 in 2018-19 (mean value 7.30 per cent).
Non-tax revenue as percentage of GDP fluctuated. Minimum was 1.60 in 2014-15 and maximum was 3.50 in 2015-16 (Mean value was 2.70 per cent). Mean value of total revenue receipt (TRR) during the last five years was 10 per cent of GDP, while the mean value of total capital receipt (TCR) during the same period was 31 per cent of GDP. Mean ratio of TCR and TRR during the last five years was 3 indicating TCR was three times the TRR. Debt receipt (DR) as percentage of TCR increased from 91 per cent (2014-15) to 98 per cent (2018- 19). DR as percentage of total receipt (TR) increased from 27 per cent (2014-15) to 76 per cent in 2018-19.
Compared with GDP, DR increased from 3 to 35 per cent during the last five years. This shows Centre’s increasing reliance on outside debt. Interest payment as percentage of revenue expenditure remained at about 25 per cent during the last five years ended 2018- 19. This was the same as percentage of GDP and remained at about 3 per cent. However, higher incremental growth rate of revenue expenditure compared to interest payment is a clear symptom of declining debt servicing capacity (DSC) and interest servicing capacity (ISC).
DSC of a country indicates how much of the total borrowings and other liabilities a country can pay on demand from TRR. ISC indicates how much of interest payment can be made from interest collected. Looking at the figures of revenue expenditure (RE) during the last five years, one can see that RE as percentage of GDP remained at about 12. On the other hand, mean value of capital expenditure (CE) as percentage of GDP, was 28. Trend analysis of revenue deficit (RD) and fiscal deficit (FD) showed that both these important indicators of economy remained almost same at about 2.5 per cent and 3.5 per cent of GDP respectively.
Interestingly, GDP’s average y-o-y growth rate is less than that for total expenditure (TE). This is an alarming situation. Rate of increase in income is less than rate of increase in total expenditure. This leads to more dependence on outside borrowings. Such a situation might impair sovereignty of a country. Declining DSC and ISC are deterring factors for sustainable growth. Variance analysis of past data shows interesting features. Receipts showed favourable variance. Expenditures showed adverse variance. Gap between capital receipts and capital expenditure widened.
The result was increase in revenue deficit (RD). How about the Centre’s efficiency in collecting interest due on loans given by it? This can be captured from efficiency index for interest collection (EIIC). Amount of interest received during a particular year as a percentage of mean value of total loan outstanding at the beginning and at the end of the year is considered as EIIC. In reality, this declined during the last five years. Understanding the past trend, we can now give opinion whether the figures estimated for various components of this year’s union budget are realistic and achievable.
Results of empirical analyses reveal that the amounts projected for main components of union budget differ from the realistic estimate on the basis of trend analyses. This is, however, on the realistic assumption that GDP will grow at the rate of 6 per cent and not at the rate of 10 per cent projected by the Finance Minister. Budget estimates thus appear to be unrealistic and, therefore, not achievable. What would be the consequences? Revenue deficit, fiscal deficit and primary deficit would be much more than projected in the union budget. These deficits, in any case, are to be met by the government.
But then, how? Either by borrowing more from the markets or by curtailing the expenditure in important sectors, namely, education, health, infrastructure, agriculture etc or by disinvestment of more financial assets owned by the central government. Such a step is not only against the public interest but also reduces both debt and interest servicing capacity of the government. To sum up, macro analysis of this year’s union budget suggests that the Government of India is increasingly relying on external borrowings. High borrowings without much cut in government’s spending may lead to a further inflationary situation.
The most important issue is that increasing reliance on borrowings may lead to a situation of a debt trap. In order to avoid this situation, a focused approach should be taken to introduce integrated invigorating economic reforms including reforms in labour laws, infrastructure and large manufacturing sectors. The government should take multi-layer strategies to effectively implement second generation reforms which will create additional factor inputs with improved efficiency by means of technological upgradation driven by innovative methods.
This would help create an investment opportunity and, in turn, would increase GDP growth which is very poor in the recent past. Though nothing much has been spelt out for labour reforms and further reduction in non-performing assets (NPA), silver lining in this budget is that many measures have been announced to bring back the MSME manufacturing growth on track. Many measures have also been proposed to boost infrastructure development, agriculture production and to improve farmers’ income. It is expected that these measures should increase the GDP growth gradually so as to make the national economy self reliant and save it from falling into a debt trap situation.
(The writer is Director and CEO, Sayantan Consultants Pvt. Ltd. Kolkata)