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Mainstream, VOL LV No 8 New Delhi February 11, 2017

Union Budget 2017-18: Inadequate Response in Times of Crisis

Sunday 12 February 2017, by Arun Kumar

The Budget is an instrument of macroeconomic policy first and then anything else. If its aggregate figures are found wanting, its allocations and goals would also not be attained. In times of a shock to the economy, chances that the figures may be incorrect become greater. Assumptions underlying the preparation of the Budget have a high probability of being incorrect. The chances of this turning out to be true become greater if the government does not acknowledge the problem it may have created and wishes to portray the opposite image of successful policies or if it tries to show that it is business as usual. All this applies to the just presented Union Budget 2017-18.

The FM is correct to anticipate that there are huge global uncertainties that face the nation as a result of major advanced countries changing policies or planning to do so in the near future. Brexit and the US elections are posing huge challenges for India’s exports. The Rightward drift in large parts of Europe are likely to aggravate the situation further in the coming times. The Budget needed to take this into account but seems to have done little in this direction. External instability is aggravating the difficulties created by demonetisation.

A Budget which plans to spend about 14 per cent of the GDP has a lot of resources to give to every section of society and to every sector of the economy. This is the political aspect of a Budget. If this is not done, some section or the other would complain. However, the issue is whether the expenditures are adequate to solve the problems faced by various sections of the population. For instance, whether allocations to the MGNREGS are adequate to resolve the problem of the poor in the rural areas. Of course, if expenditures do not lead to outcomes, then the problem is greater. In all these regards, this Budget is no different than the earlier Budgets and it allocates some funds to everyone. Let us see what are some of the key proposals.

I. Some Key Features of the Budget

It was expected that the Budget would have a strong political element. That is because demonetisation had severely impacted the marginalised sections of society and especially those belonging to the unorganised sectors of the economy. Five Assembly elections, and especially the UP elections, are around the corner; so some message of helping the pro-marginalised sections was required. Such a focus was also needed to counter the popular perception of the government being pro-rich and pro-corporate sector. Consistent with this, the FM said: ‘My Budget proposals (will be) under ten distinct themes to foster this broad agenda.’ The first four of these ten themes were focused specifically on the marginalised sections—farmers, rural population, youth, and the poor and underprivi-leged. Quite considerable space was devoted to enumerating the steps that will be taken to favour these sections of the population.

Saying that these sectors will be prioritised should imply large increases in allocation to them. The FM’s speech mentions that the ‘total allocation for the rural, agriculture and allied sectors in 2017-18 is Rs 1,87,223 crores, which is 24 per cent higher than the previous year’. Sounds impressive. But as usual the Budget compares the allocations planned to be spent (called Budget Estimates) in the previous year with the estimates for the year just ahead. However, this is not a valid comparison since it should be with what has been actually done, namely, the Revised Estimates for the current year. Such a comparison shows that the increase is 12 per cent which is not too large. The allocation for this sector turns out to be 8.7 per cent of the total expenditure planned. Does not sound big given that the rural population is still 70 per cent of the total and the unorganised sector employs 94 per cent of the total work force.

Similarly, it is argued that the allocation to the MGNREGS will rise substantially from Rs 38,000 crores to Rs 48,000 crores but the actual to be spent in the current year will be Rs 47,500 crores so that the planned increase is negligible. If the spurt in demand post-November 2016 is projected, then the amount required may be Rs 80,000 crores. It is by now well known that a large number of workers in urban areas did not find work due to demonetisation and went back to the villages and needed work. That is why the demand for work under the MGNREGS rose rapidly. It is quite likely that the full demand for work was not met because the administration is not geared to meeting such a spurt in demand. Since the conditions in urban areas are likely to remain adverse, the demand for the MGNREGS can be expected to remain large and the allocation should have been higher.

Another aspect of the Budget is that many policies proposed/mentioned do not have any budgetary implication. For instance, the target for agricultural credit has been enhanced to Rs 10 lakh crores. An impressive amount; but this will be from the banks and not the Budget. Schemes like the Long Term Irrigation Fund, Micro Irrigation Fund and Dairy Processing and Infrastructure Development Fund will all be set up in NABARD with its funds. These proposed Funds alone are slated to increase by Rs 27,000 crores but the overall Budget for the relevant Ministries has been raised by only Rs 13,000 crores. Since there have been other increases as well, even this amount would not be available for the creation of these Funds. The burden will clearly fall on NABARD.

II. Education Related Aspects

Under programmes for the youth, attention is focused on education, skills and jobs. The section starts loftily by quoting Vivekananda and then degenerates into business as usual and enume-rating the same things that have not worked in the past. A radical new approach was needed but this is missing because the vision is absent.

To begin with, the FM says it is ‘proposed to introduce a system of measuring annual learning outcomes in our schools’. Nothing wrong with that but can the goal be measuring how poor the outcomes are? Why not focus on the root cause, namely, poor standards of teaching based on rote learning. What are we doing to improve teaching which will then automatically improve outcomes? How do we get the best to come into teaching rather than go to sell oil and toothpaste? Why not work to improve the relative salaries of teachers?

Today, teachers are increasingly marginalised as technology is pushed. For instance, it is proposed to launch SWAYAM (whatever that stands for). The government is good at the coining of such new acronyms which sound good but lack content. The idea is to have online courses. Good, but local teachers will be marginalised. They will further lose credibility in the eyes of their students. But, teachers can be role-models for the youth. They are an important interface with society. Online courses obtained via net will only individualise and atomise learning without necessarily enabling the students to create a framework for social interaction. Local conditions are important for learning while the online courses would not cater to that. So, good local teachers are absolutely essential. Encouraging that is difficult but that is the only way to improve teaching and the teacher-taught relationship which deepens social relations and socialises the youth. There are no short-cuts but the FM’s speech enters an arena which is not properly its domain and should be left to a well-thought-out education policy. Possibly, the government had little to say; so it included some clichés.

The FM has proposed to ‘establish a National Testing Agency as an autonomous and self-sustained premier testing organisation to conduct all entrance examinations for higher education institutions’. If local conditions are important for learning and teachers’ autonomy crucial for better teaching, then such homogeni-sation is harmful. It is premised on the idea that like in a factory, standards can be achieve by standardisation, and the same can be done in education. It does not recognise that education is very different from commercial routine work and where quality is at least as important as quantity. As far as possible, testing should be decentralised. Again this is not something that a Budget should comment on.

Reform of the UGC is proposed but why in the Budget? What financial implication is there? The content of the proposal seems to be driven by greater commercialisation of colleges, in the name of autonomy, as the next sentence in the speech makes clear. That privatisation in education has been going on apace for 25 years and that massive irregularities are associated with this is also known. How to achieve a balance is the real question but the Budget cannot go into it; so why bring it up?

After SWAYAM, it is proposed to have PMKK, SANKALP, STRIVE and in the coming years more such acronyms are likely to appear. But is school teaching going to improve? Without that, any number of such programmes will not achieve much. The so-called demographic dividend is turning into a demographic nightmare with ill-trained young people not able to land well-paying jobs or at times any work.

It is suggested that jobs will be created in the textile, leather, footwear and tourism industries. That is all very well; but the real issue is jobless growth due to automation. It is leading to job losses as more and more investment takes place in the organised and corporate sectors. The real issue is: how is investment going to be rebalanced to create jobs? How will more public investment be ensured in rural areas and especially in infrastructure? Is there a strategy of getting more private capital into the rural infrastructure?

The Infrastructure section of the FM’s speech also focuses mostly on transportation and especially the railways since the Railway Budget is now merged with the regular Budget. How these proposals would mesh in with the rural infrastructure needs is unclear since this is relegated to the section on ‘Rural Population’. Then what of the statement that there will be an integrated view of the infrastructure needs?

III. Revenue-related Features for 2016-17

The critical issue for any Budget is whether there are enough resources to finance the proposed expenditures? Governments like to claim credit for a lot and, therefore, often show higher revenue collections. When this does not materialise, as happens when there is a crisis, then quietly expenditures are curtailed. No one is the wiser till the next year’s Budget is presented and at that time the focus is on the next year and not on the past. So, governments get away with claiming more than what is possible.

The present Budget faces a similar problem. Will it garner the resources it claims it will? But before we get into that, it is important to analyse what is happening to the resources in the current year which is not yet over, namely, 2016-17. This is the year in which the crisis of demonetisation suddenly hit the economy. Kumar (2017) has argued that demonetisation has hit production, employment and investment. Kumar (2016) argued that all this is also impacting banking profitability and their capacity to lend more in spite of a flood of funds into savings accounts. It was also argued that in spite of a cut in the bank’s rate of interest for borrowers, the demand for credit will remain slack. It has been pointed out that credit offtake is now at the lowest point in the last 50 years.

The implication is that the rate of growth of the economy dropped sharply post-November 8. If that be so, how will the revenue target for the current year be achieved? The Budget for 2016-17 had assumed that the GDP would grow by 11 per cent. Since for 2016-17, the rate of growth has come down and the rate of inflation has been around four per cent, the nominal rate of growth could not have been 11 per cent. The government claims that the rate of growth of the economy would be hardly affected by a per cent, not taking into account the impact of demonetisation. In other words, the economy was already slowing down prior to the demoneti-sation; so the impact of demonetisation would be on top of that.

If it is assumed that demonetisation adversely affected the unorganised sector and the organised sector only marginally, even then the implication would be that the rate of growth of the economy for the period after November 8, 2016 would be zero if not negative. (Kumar, 2017b) If that is so, tax collection would be adversely hit.

However, the government has claimed that tax collection has been buoyant. Both direct and indirect tax collections, according to it, have risen sharply. As explained in Kumar (2017c), there could be special reasons for why this may be the case for the period up to December but post that the tax collection would be negatively impacted. For instance, old notes were allowed to be used for payment of taxes and people paid advance tax. In the case of income tax, people had to pay a new instalment of tax in June which was earlier not the case. In the case of excise duties, the increased consumption of petroleum products and increased excise collection contributed substantially to the rise. In contrast, various surveys have pointed to a fall in demand and an impact on output. Thus, collection of high amount of tax for the year as a whole would be doubtful at best.

Can it be the case that more revenue has been collected because of the declaration of black incomes? Indeed, under IDS, which closed on September 30, 2016, about Rs 65,000 crores was declared and it was expected that about Rs 30,000 crores of taxes would be collected. Another such scheme was opened in conjunction with demonetisation. How much has been declared under this has not been revealed as yet; so we do not know what has happened. Coming so soon after the previous scheme, it may not have garnered much. Reports are that those with black money managed to recycle most of these into new notes.

The real issue is: can the big deposits in the banks by the businessmen and the rich be classified as black and taxed? The government has recently claimed that 18 lakh such cases have been identified. But for businessmen to have crores of rupees of funds as working capital is not unusual. To prove that the deposits were indeed black funds is a time-consuming affair. The Income Tax department would have to assess the people and that takes time. Then there are provisions for appeal and that takes more time. Finally, the Income Tax department is usually able to audit only one per cent of the people (five lakhs) who are in the tax net; so how will it now assess tens of lakhs of more people? Thus, in this year (2016-17) or the next financial year (2017-18) hardly much additional tax revenue can be obtained from this source. So, the figures for 2016-17 are in doubt. This puts the figures for the next year also in jeopardy.

IV. Budgetary Calculus for 2017-18: Is the Rate of Growth Achievable?

The rate of growth underlying a Budget is important to predict the resources that would be available for development. The Budget assumes a rate of growth of 11.75 per cent for 2017-18. Given the impact of demonetisation, which has led to recessionary conditions in the economy, this seems to be highly doubtful, to put it mildly. The government does not wish to admit that due to demonetisation there is a fall in the rate of growth in 2016-17 or that this effect will continue in the next year. It is putting up a brave face and arguing that whatever the effect, it was small and in the future, this will reverse quickly.

The FM makes an error of judgment by identifying the current problem of slowdown as one originating in cash shortage only. While the problem started with cash shortage, it soon transformed into decline in output, employment, investment and banking crisis. This implies recessionary conditions have taken hold and these are irreversibilities which do not disappear with cash coming back into the system (as it eventually will). There is a change in expectations and this will not reverse soon.

The government needs to act to boost demand because the private sector does not automatically start investing more when it has large spare capacity and its profitability is hit. The banks and the infrastructure sector already face large NPAs which would only increase. In such a situation neither would the private infrastructure sector invest more nor would the banks lend them more.

V. Stimulus Needed

The stimulus from the government could have been through higher public expenditure, higher deficit and tax concessions.

The Budget only increases expenditure for 2017-18 by six per cent over the expenditure (Revised Estimates) shown last year. This is quite small as a stimulus when inflation is taken into account. Compared to last year also it is small when the expenditure was increased by about 11 per cent.

The Fiscal Deficit, if anything, is lower. The target for 2016-17 was 3.5 per cent but that in the revised figures is 3.2 per cent and for 2017-18 it is also slated to be 3.2 per cent. In the name of fiscal prudence, it is suggested that deficit should rather be allowed to shrink. If the government’s claim that there is no impact on growth is correct and the economy was running as usual, this argument would be alright but when that is not the case, it will dampen the economy. But the government has to first admit that there is a problem; then only can it justify the solution.

However, if the growth targets are not met (as is likely), the fiscal deficit will tend to rise and then the government will have to cut back expenditures which will mean that there will be no stimulus. The government could have allowed the fiscal deficit to rise somewhat to, say, four per cent of the GDP without attracting too much opprobrium from the Credit Rating agencies. If our economy is seen to be in recession, then anyway there would be a downgrade.

The government has given tax concessions to the lower middle class by lowering the tax rate for those in the tax bracket up to Rs 5 lakhs. This would benefit crores of taxpayers earning up to about Rs 40,000 per month. The benefit would also extend to those in the upper brackets up to Rs 50 lakhs of annual income. These people could then spend more and generate additional demand. This is a possibility but not a certainty. During troubled times people may end up saving more for a rainy day rather than spending more. But, how much is this stimulus? The tax concessions amount to Rs 22,700 crores. This is hardly 0.15 per cent of the GDP and not much of a stimulus when the economy has lost its growth by several points. Each point would amount to Rs 1.5 lakh crore of loss for an economy of Rs 150 lakh crores.

Companies with a turnover of Rs 50 crores have also been given a tax concession of five per cent on their profits. So, 96 per cent of the companies will benefit from this concession. Will they start producing more or investing more? Indeed not if the demand is as slack as it currently is.

In other words, none of the moves to stimulate the economy will deliver and the recessionary conditions will deepen in spite of the reduced cash shortage. The Budget lacks a strategy to tackle the problem confronting the economy.

VI. Black Money Schemes

Demonetisation was supposed to eliminate the black economy but now it is clear that it does nothing of the kind. (Kumar, 2017d) So, the government had to show that it means business and it has announced certain steps to tackle this menace. These do not necessarily have anything to do with the Budget but they are there.

It has announced steps, proposed by the Election Commission, to bring about transparency in election funding. Until now, names of those contributing up to Rs 20,000 were not required to be disclosed. According to experts, up to 65 per cent of the funding was coming under this head; so the parties were getting away with not disclosing the names. Now this limit has been lowered to Rs 2000. But how does this matter? Bulk of the election funding is not disclosed at all and no account of it is presented anywhere (neither to the Election Commission nor to the Income Tax department). This will continue and this is where the real black money is used and the nexus between politicians and businessmen etc. created. (Kumar, 2017d) Thus, this provision will not resolve the problem but yes, it may create more of an accounting mess which the parties are capable of handling.

The government is going to get the RBI to issue electoral bonds purchasable only by cheque or the digital mode; these would be donated to the political parties and they can encash them within a certain specified period. But again this does not overcome the problem of the use of black money in elections to carry out various activities that are disallowed. Further, it leads to non-transparency in election-funding since the public would not know who is funding whom and if there is a hidden agenda of the donor. After all, it is well known that those who fund parties expect a quid pro quo. Yes, it does marginally get over the problem of the ruling party getting to know who the financiers of its opponents are. But, this may also not work since there will be a record of purchase of the bonds in the banks and a determined ruling party can get access to the data. But none of this may matter since all businessmen are known to contribute to all parties because they do not wish to fall foul of a party that may come to power in the future in the Centre or a State.

There is also a provision of confiscation of property for those who escape the country after committing economic offences. This proposal may be a useful device but could not be used as a political device. Further, would risk-averse businessmen start keeping more of their assets outside the country just in case there is some problem some day? Those who committed fraud and escaped the country are known to live a life of luxury there because they had already spirited a large part of their assets abroad.

The government has accepted the suggestion of the Supreme Court ordered SIT that cash expenditures of above Rs 3 lakhs should be disallowed. But what is the mechanism for detecting such transactions? Without that what difference will there be? Currently, all manner of high value illegal transactions take place and the government is unable to detect them.

The problem of black economy needs to be dealt with more holistically. (Kumar, 2017d) Some short-term measures could be the following, even though the problem is long term. The limit for cash contribution could be made zero. RTI should be applicable to political parties. There is need for judicial accountability, and time-bound hearing and disposal of cases. The Election Commission should be able to disqualify parties for violation of the Code.

VII. Conclusion

The Budget 2017-18 does not acknowledge the external and the internal problems confronting the economy and the country. It therefore does not offer a solution. The FM ended his speech with the lofty couplet: ‘When my aim is right, when my goal is in sight, the winds favour me and I fly.’ All one can say is this: the aim is not right, the goal is not in sight and the winds do not favour him; so flying is out of question. Then who will help the nation in this hour of crisis?

References

1. Kumar, A., 2016, “39 Days Demonetisation: Recessionary Conditions Take Hold”. The Citizen,http://www.thecitizen.in/index.php/NewsDetail/index/1/9457/39-Days-Demonetisation-Recessionary-Conditions-Take-Hold Accessed on December 17, 2016.

2. Kumar, A., 2017a, “Economic Consequences of Demonetisation: Money Supply and Economic Structure”, Economic and Political Weekly, January 7, Vol. LII, no. 1, pp. 14-17.

3. Kumar, A., 2017b, “What to trust on demonetisation: Official data or grim reports in media?”, Scroll.inhttps://scroll.in/article/827790/what-to-trust-on-demonetisation-official-data-or-grim-reports-in-media Accessed on January 31, 2017.

4. Kumar, A., 2017c, “Economic Survey 2017: There Can Be No Solution Without Admitting the Problem”, The Wire,https://thewire.in/104631/economic-survey-2017-there-can-be-no-solution-without-admitting-the-problem/ Accessed on January 31, 2017.

5. Kumar, A., 2017d, Understanding the Black Economy and Black Money in India: An Enquiry into Causes, Consequences and Remedies, New Delhi: Aleph Books.

The author, a Professor of Economics (now retired) at the Jawaharlal Nehru University, New Delhi, is the author of Understanding the Black Economy and Black Money in India: An Enquiry into Causes, Consequences and Remedies (Aleph Book Company, New Delhi).