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Mainstream, VOL LVI No 8 New Delhi February 10, 2018

Union Budget 2018-19: Creating a Crisis and Missing the Opportunity to Resolve it

Tuesday 13 February 2018, by Arun Kumar

The Union Budget 2018-19, presented on February 1, 2018, has confused the lay public. It purports to give something to every section and yet it is being criticised by the Opposition and the media has largely called it an election Budget. The implication of the criticism is that the Budget does not do what it should have and instead it has indulged in ‘populism’. Usually, when the media calls a policy ‘populist’ it means that it is pro-poor and does not benefit the corporate sector. Another meaning that is attached to such policies is that they are meant to garner votes for the ruling dispensation and after the elections are over they are forgotten. The reality is that in spite of the periodic implementation of the so-called ‘populist’ policies, the lot of the poor in the country has hardly improved. So, how should the Union Budget 2018-19 be interpreted?

I. The Background to the Budget

The Union Budget has been presented while the economy is still suffering from the after-effects of the twin shocks in the last 15 months. There was the demonetisation in November 2016 and then the implementation of the GST since July 1, 2017. Both these adversely impacted the unorganised sectors of the economy and, therefore, the rate of growth of the economy came down sharply, according to reports from the field. The data for the unorganised sectors comes with a time-lag of a few years; so the methodology of estimation of growth needed to be changed but that was not done. A faulty methodology continued to be used to estimate the growth rate of the economy.

The official data has been consistently talking of a six to seven per cent rate of growth in the last one year. This would be based on the data from the organised sectors of the economy even though it is quite likely that this is also an over-estimate. As businessmen say, the economy does not feel like growing at such a high rate since the feel good is not there unlike in 2004 to 2008. Be that as it may, a six per cent rate of growth would be one of the highest rates of growth in the world. If that was so, there was no crisis in the economy and there could be business as usual. If the growth rate was close to zero or even negative, as this author has repeatedly argued, then this is a cause for worry and something drastic needed to be done in the Budget to revive the economy—some observers have said there is a need to kick-start the economy.

Politically, the impact of the twin shocks on the unorganised sectors was evident from the widespread agitation by farmers all over the country and the demand for loan-waivers across various States. Many States, like Maharashtra and UP, announced loan-waivers to meet the demands of the farmers. The youth have been agitating for jobs given that there was a large-scale impact on the unorganised sector which employs 93 per cent of the workforce, according to the Economic Survey. Traders also agitated strongly after the implementation of the GST because it hit their business. They were totally confused by its complexity and implementation problems. The markets were greatly disturbed even in the organised sectors due to these factors.

The markets were greatly confused during the period that demonetisation was implemented because of the almost daily changes in the rules and something similar happened during the time the GST was implemented. The design was faulty and difficulties were not anticipated; so there were repeated changes in the rules. The notes’ shortage continued for a much longer period than the 50 days over which the old notes were returned. Similarly, the impact of the GST also persists.

Given all this, how can the rate of growth not be affected by demonetisation and GST implementation? The impact has been on the decline in demand, slowdown of the economy and fall in the rate of investment in the economy. Credit off-take from the banks declined and that is a sign of a slowdown in the economy. (See my Demonetisation and the Black Economy published by Penguin India, 2017)

The BJP has brought the problem on to itself by administering the twin shocks to the economy via the uncalled for demonetisation and a poorly designed and implemented GST. A well-functioning economy has been in a tailspin since November 2016.

Any Budget tries to address the emerging problems of the economy in the current year (in which the Budget is drafted) and give a push to the new policies that the government would like to implement. So, the Budget for 2018-19 was expected to give a push to the economy. The question to ask is: in addition to the other things in the Budget, does it address this main problem faced by the economy?

II. Key Policy Announcements in the Budget

It is estimated in the Budget that the Union Government will spend Rs 24.4 lakh crores in 2018-19. This works out to 13 per cent of the estimated GDP of Rs 187.2 lakh crores in that year. It is estimated that the expenditures would be 10 per cent more than in the year 2017-18. Revenue expenditures are slated to rise by 10.3 per cent while the capital expenditures are slated to rise by 9.9 per cent. The slated increases are less than the 11.75 per cent increase in the GDP given in the Budget document. This is strange if the economy has to be boosted.

It has announced a large number of schemes for the deprived sections. It has also announced increase in expenditures on many of the pre-existing schemes. This is not unusual for most Budgets. When Rs 24 lakh crores are available for expenditure, a lot of items can be given small sums of money. Like, giving Rs 1200 crores for the creation of 1.5 lakh Health and Wellness Centres, Rs 1290 crores to the National Bamboo Mission, Rs 500 crores to Operation Greens to take care of basic vegetables; Rs 10,000 crores are being allotted for setting up the Fisheries and Aquaculture (FAIDF) and Animal Husbandry (AHIDF) funds.

There are big-ticket items like institutional credit to the agriculture sector that will increase from Rs 10 lakh crores to Rs 11 lakh crores. The creation of livelihood and infrastructure in rural areas will be Rs 14.34 lakh crores. These huge sums will not come out of the Budget but from the banks and the extra-budgetary and non-budgetary resources.

A major announcement is the health insurance for 50 crore people to cover their hospitalisation cost of up to Rs 5 lakhs. The allocation for this is small; so it appears that the burden of its implementation would fall on the public sector insurance companies. Just as the cost of the Jan Dhan Accounts fell on the public sector banks. Another interesting scheme is to connect habitations by all-weather roads by 2019. The idea of upgradation of the existing 22,000 rural haats into Gramin Agricultural Markets (GrAMs) is also innovative but would it lead to the penetration of the organised business at the expense of the small and local businesses?

The question as always with any Budget is not announcements but implementation. Thus, the first Budget of this government had announced that farm incomes would be doubled by 2022. A laudable goal but is this feasible and now three years down the line can we say that this is likely to materialise? The Economic Survey points out that while output in agriculture has gone up, the incomes have not. Clearly, there is a phenomenal rise in costs; so the increased output has not resulted in additional incomes. The government has now announced that it would fix the Minimum Support Prices for various crops at 50 per cent above cost—a promise made at the time of the 2014 elections. Would this help double farm incomes by 2022?

Other laudable announcements, made earlier, like Swatch Bharat, Smart Cities and Good Governance do not seem to be anywhere near yielding the expected results. That is the reason why analysts are skeptical about the large number of announcements in this Budget. Many of these announcements are to favour the farmers, the poor, the youth and so on. Given the past experience, many of the targeted beneficiaries are left wondering if they would get anything. The poor, who are now promised medical insurance for hospitalisation, point to the fact that the crop insurance money that the farmers were supposed to get never came to the farmers and instead went to the insurance companies. Given the poor state of health infrastructure many wonder if the scheme can deliver to the poor.

The health insurance scheme is desperately needed by the poor given the rising cost of health, especially given the rapidly degrading environment—air, water, food and so on—which is impacting the poor the most. But for this to succeed, a low cost and efficient public health system needs to be in place. Since such a system does not exist, the end result is likely to be another failure of expectation for the poor.

The lesson from this and the past Budgets is that in the Part A of his Budget speech, the Finance Minister announces many things so that it appears that he has taken the interest of every section of society. As pointed out above, in this Budget also he has referred to every section of society—farmers, SC/ST, poor, youth and increased allocation to all sectors whether it be education, health, farming, infrastructure and so on. This is the political part of the Budget speech.

The effective part of the Budget speech usually is the Part B where the overall revenues and expenditures are discussed. That is the macro-economic part which determines whether the micro part of the Budget in Part A will work out or not. Policies have a financial component and this is determined by the macroeconomic constraints—how resources are to be allotted to competing demands. This clearly depends on the priorities of the ruling dispensation. If health is a top priority, it would receive a large allocation so that the policy will get implemented assuming that it is well-thought-out and that the administration is capable of delivering it. It often happens that the funds are allotted to a scheme but remain unspent during the year since the scheme does not take off given the difficulties of implementation.

III. Budgetary Arithmetic and Some 

Tax Proposals

In the last Budget (for the current year 2017-18), it was expected that the rate of growth would be 11.75 per cent and revenues were expected to increase as per this expectation. The revenue deficit was expected to fall to 1.9 per cent of the GDP and the fiscal deficit (a number watched by the international agencies) would turn out to be 3.2 per cent of the GDP. These expectations have been belied. Revenues show a decline of Rs 10,000 crores. But expenditures show an increase of Rs 7000 crores.

More importantly, capital expenditures show a fall of Rs 36,000 crores over what was expected. This is the important component essential to boost investments in the economy that have been flagging since the private sector is investing less.

The net result is that the bad deficit, the revenue deficit, has shot up from the expected 1.9 per cent of the GDP to 2.6 per cent of the GDP. The implication is that more of the borrowing is being used for current expen-ditures by the government. This would lead to a further increase in the interest payment in the coming years since on this part of the borrowing no return would be earned by the government. The fiscal deficit has increased from the expected 3.2 per cent of the GDP to 3.5 per cent. If bank recapitalisation is counted then the fiscal deficit will be even higher.

This increase in the fiscal deficit is neither too big nor too bad as is being made out by the fiscal conservatives who dominate Budget-making and the financial markets. According to this line of thinking, the rise in the fiscal deficit above the planned one will lead to a decline in resources available to the private investors. However, this is unlikely when demand is slack and there is spare capacity in industry which is leading to a low level of investment and slow credit off-take. Further, this would boost demand and lead to better capacity utilisation in industry. So, it would crowd in private investment rather than crowd it out as the conservatives suggest.

To control the revenue deficit, there was a need to raise more tax and non-tax revenue. Last year due to the GST implementation, the revenue collection from indirect tax was for 11 months only. Further, the States had to be compensated for the loss of revenue they suffered. On the non-tax revenue front, there was less of transfers from the RBI (due to the cost of demonetisation) and less from auctions of spectrum. These falls in revenue were com-pensated by the rise in corporation tax collection and the bonanza from the tax on petro products.

Surprisingly, the customs duties collection fell sharply in 2017-18 from Rs 2.45 lakh crores to Rs 1.35 lakh crores. They are slated to fall further in 2018-19 to Rs 1.12 lakh crores in spite of the increase in customs duties on all kinds of products announced in the Budget of 2018-19. So, while the Budget gives the impression of greater protectionism, actually it must be lowering the degree of protection in other areas.

The government has garnered extra resources from disinvestment. Instead of the planned Rs 72,500 crores, it is projected that a sum of Rs 1,00,000 crores would be raised. This is due to the big-ticket item of disinvestment in Air India. For the year 2018-19, disinvestment of Rs 80,000 crores is planned. Thus, the most rapid disinvestment in the last 28 years since the new economic policies were launched in 1991 is now taking place.

Disinvestment implies that the capital expenditure in the Budget is less by this much amount. It crowds out private investment in the economy. The funds, that could have been invested elsewhere by the private sector, are invested in the existing capital while the government uses the money it receives to cover its current expenditures and not to boost capital expenditures.

The big news item for the corporate sector, apart from the slippage in the fiscal deficit target, is the reintroduction of the Long Term Capital Gains (LTCG) tax after a decade. This is crucial for curbing speculative increases in share prices. It should be welcomed but the issue is whether this is the correct time to implement this tax.

There is a portfolio adjustment that has taken place in middle class savings. They find that real estate has been stagnant, gold is not giving much of a return and fixed deposit rates had come down substantially and were giving negative return after adjusting for tax and inflation. Thus, huge sums of money were put into the stock markets via the mutual funds. So, even though earnings of companies have not risen much, the price of equity has risen substantially. The P/E ratio, as it is called, has risen to record highs (comparable to the levels in 2007-08 when the stock markets collapsed). The motive of investment is capital gain and not the dividend return.

With the LTCG tax, even though it is not too high, the return on the mutual funds and equity will decline; so less money will go into mutual funds and the capital gains will reverse. The sharp fall in the markets have signalled that. This makes the markets unstable. There is additional instability due to the lowering of the US corporate tax rates from 35 per cent to 21 per cent, announced in the new tax bill approved in the closing hours of 2017. This could lead to an outflow of capital from the Indian markets to the US. In effect, while the capital gains tax is a good thing to have, it has perhaps been timed poorly. The markets needed to be cooled down before the tax was imposed or at least indexation should have been allowed.

IV. Steps to Boost the Economy

The biggest problem faced by the Indian economy was the slowdown. So, if there is one thing the Budget needed to do, it was to give a boost to the economy. Since the unorganised sectors were the ones to got hit the most, the need was to revive the fortunes of the unorganised sector and not just the small and medium enterprises. In last year’s Budget speech the FM pointed to six crore enterprises of which only a few lakhs come in the tax net. The latter can be affected by the Budget but what about the rest? They need a boost via indirect means. It is the decline in these enterprises that has perhaps given a boost to the organised sector which seems to be growing at about six per cent.

So, the Budget has a package to address the crisis in rural and farm sectors but, as argued earlier, it is grossly under-funded and possibly not well conceived. For instance, the huge health insurance plan has been allotted wholly inadequate funds. Revenue buoyancy is not high enough to collect the needed funds. So, additional large expenditures are only possible if the fiscal deficit is allowed to rise. The government is not willing to do this. It has allowed the Fiscal Deficit to rise by 0.3 per cent to 3.5 per cent and even that it has done reluctantly.

If the schemes announced had been properly funded then the economy would have seen a rise in demand. However, that is unlikely from the budgetary resources. The schemes are dependent on the Extra-Budgetary resources and on borrowings. The burden of all this would fall on the public sector and its profitability would decline.

There is also the worry about non-implementability of the schemes given the poor governance and inability of the government machinery to deliver. For instance, according to the farmers, the crop insurance scheme has not benefited them but the benefit has accrued to the private insurance companies. The same could happen in the case of health insurance for the poor. Farmers also do not believe that the scheme of fixing the MSP at 50 per cent above the cost of production would be implemented. It has not been implemented for four years since it was promised in the BJP manifesto and the PM promised that this would be done.

Without demand reviving, investment would not get a boost. It would not be resolved simply by tackling the huge NPA problem or by giving tax concessions. The Economic Survey had noted that investment governs savings and not the other way round. So, higher profits based not on increased sales but greater tax concessions by themselves would not do the trick.

Since private investment is down, public investment required a boost but that is not in sight in the Budget. While infrastructure expenditure has been raised, what was needed was to boost capital expenditures in general which, as pointed out above, has not been done. The capital expenditures planned for 2018-19 (Rs 3,00,441 crores) are slightly less than what was budgeted in 2017-18 (Rs 3,09,801 crores).

So, if the GDP does not rise by the planned 11.5 per cent, revenues will fall short and the deficit would tend to rise and given the conservative fiscal stance of the government, capital expenditures would again be cut. This would further lower demand and the economy would not get the boost it so badly needs.

V. Conclusion

The BJP created the problems that led to slow economic growth due to the twin shocks it administered in quick succession. The Budget of 2018-19 was a chance to give a boost to the unorganised sector so that the economy could revive but that chance has been missed. The need was also to revive investment in the public sector so that the private investment (which is at a record low) could be crowded in and that is also unlikely given the stagnancy in capital expenditures and the large disinvestment target.

So, while there are a lot of good schemes that have been announced in the Budget as is usually the case in Part A of the Budget speech, their funding and implementability are in doubt. It is in this sense that the benefits of the Budget to the poor, farmers, traders, unorganised sectors of the economy are going to prove to be illusive. Even if the economy had revived in a general way they could have benefited but that is most unlikely.

The Union Budget 2018-19 tried to create a perception of feel good in the population but not very successfully given the erosion of credibility of the government because the past announce-ments have not yielded the desired results. The Budget just presented is the last full Budget before the next general elections; so it was designed as a pre-election Budget. However, as has been argued above, it is unlikely to help boost the sentiment of the people in favour of the ruling dispensation because of lack of credibility. The Budget falls between two stools —neither changing perceptions nor giving a boost to the economy.

The author, a former Professor of Economics (now retired), Jawaharlal Nehru University, New Delhi, is currently the Malcolm S. Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi. He is the author of ‘Indian Economy since Independence: Persisting Colonial Disruption’ (Vision Books).

ISSN : 0542-1462 / RNI No. : 7064/62