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Mainstream, VOL LVII No 30 New Delhi July 13, 2019

Union Budget 2019-20: The Numbers Do Not Add Up

Saturday 13 July 2019

by A. Sunil Dharan

Finance Minister Nirmala Sitharaman has presented her maiden Budget under conditions that are extremely trying for the economy. Economic growth has slumped from 8.2 per cent in 2016-17 to 6.8 per cent in 2108-19. It was 5.8 per cent in the last quarter of 2018-19. The investment-GDP ratio, which had reached a peak of 35.6 per cent in 2007, has been coming down since then. It was 26.4 per cent in 2017. Private consumption expenditure, that had kept the GDP growth rate high for some time, has also been falling in recent years. The rural economy is in distress. The growth rate in agriculture has come down from a little over six per cent in 2016-17 to less than three per cent in 2018-19. Wages in this sector have been stagnant for quite some time. Unemployment is also widespread, the present rate of unemployment being the highest in 45 years. All indicators point to a slowdown in the economy as the Ministry of Finance itself admitted in its Monthly Economic Report for March.

The Budget does not address any of these issues. The conditions warrant an injection of demand into the system which could have been done by increasing public investment and more expenditure on welfare programmes, even at the cost of a little increase in the fiscal deficit. Instead, the Finance Minister chose to stick to the deficit targets.

To be sure, there is no dearth of grand announcements in the Finance Minister’s speech. The government plans to increase the GDP from $ 2.7 trillion at present to $ 3 trillion this year and $ 5 trillion by the end of its term. It also plans to ‘invest widely in agricultural infrastructure’. In the case of education, a new programme ‘Study in India’ has been introduced to attract foreign students to our higher educational institutions and make India a hub of higher education.

One would find many such grandiose assertions in the speech but the actual allocations do not inspire confidence. A government, aspiring to accelerate the rate of growth of the economy to eight per cent from the present 6.8 per cent and to take it to the $ 5 trillion club in five years, has increased its capital expenditure by only about seven per cent over the revised estimates of 2018-19. The government seems to be banking on the reduction in corporate tax rate to lift private investment and a couple of tax sops for the middle class to increase private expenditure.

The promise to invest widely in the agricultural sector is also likely to be belied. The allocation for capital expenditure to the Ministry of Agriculture and Farmers’ Welfare has come down in nominal terms from Rs 35.02 crores in 2018-19 (Revised Estimate) to Rs 34.70 crores in 2019-20!

Similar is the case with the plan to make India a hub of higher education. The total allocation to the Department of Higher Education has gone up by about 14 per cent but the allocation for capital expenditure has come down from Rs 2751 crores last year to Rs 2120 crores in 2019-20. What is interesting is that almost the entire money, Rs 2100 crores, is for the Higher Education Financing Agency (HEFA), an agency that is likely to come up for providing ‘loans’ to higher educational institutions. Anyone with even a passing acquaintance with our higher education sector would know that, at present, it is grossly incapable of accommodating our own students, let alone foreign students. Many of them have been forced to increase the fees charged from the students for their survival, as funds to this sector have been drastically reduced.

Not only is the budgeted expenditure inadequate, but even that amount is not fully utilised. The revised estimate of the total expenditure of the Department of Higher Education in 2018-19 is lower than the budgeted figure by about Rs 1500 crores. Ironically, faculty positions have been lying vacant in most universities for many years and funds for library, laboratories and research have been cut drastically.

As a result, students from the well-off sections of the population are gradually moving to private institutions and universities abroad and those from the not-so-well-off sections are being increasingly crowded out of the regular higher education institutions. Now the government wants these institutions to borrow from the HEFA for their capacity expansion and repay the loan by charging higher fees from the students. Does ‘Study in India’ actually mean study in Indian private educational institutions?

Health has also got a raw deal in the Budget. According to the National Health Profile 2018, India has one of the lowest public expenditures on the health to GDP ratio in the world—1.3 per cent in India as against a world average of six per cent. The report also points to the inadequate health infrastructure and the severe shortage of doctors and other medical staff in the country. The budgetary allocations for health have to be examined in this background. The budgeted figure for 2019-20 for the Department of Health and Family Welfare is more than the revised estimate of 2018-19 by about 15 per cent. But the capital expenditure has been brought down. The revised estimate of the capital expenditure for 2018-19 is lower than the Budget estimate by about Rs 255 crores. In the Budget 2019-20 the allocation has been reduced further by about Rs 714 crores. Given this trend, the goal of achieving ‘universal access to good quality health care services without anyone having to face financial hardship as a consequence’, as laid out in the National Health Policy, 2017, would remain unachievable. With such neglect of education and health, the demographic dividend for India would remain a pipedream.

For resource mobilisation, there is the proposal, among others, to levy surcharge on personal income tax of three per cent for those with income between Rs 2 crores and Rs 5 crores and seven per cent on those with income of Rs 5 crores and above. It has also been proposed to increase the Special Additional Excise Duty and Road and Infrastructure Cess of Re 1 each on petrol and diesel. By resorting to such measures to raise revenue the Central Government is short-changing the States as the revenue from these are not shareable with them. In the interest of cooperative federalism, the Finance Minister should have refrained from such measures.

The Budget’s deficit figures are also suspect. According to the Interim Budget, the revised estimate of tax revenue (net to Centre) for 2018-19 was Rs 14,84,406 crores. As per the data released by the Controller General of Accounts (CGA) in early June, the tax revenue figure for the year was Rs 13,16,951 crores. That is a shortfall of Rs 1,67,455 crores. It would have breached the deficit targets by a wide margin. But the final Budget does not mention this shortfall at all. It merely reproduces the revenue figures for 2018-19 given in the Interim Budget. It is not clear how the shortfall was made up in a month’s time.

But this has put the entire budgetary arithmetic under a shadow of doubt. If one goes by the numbers put out by the CGA, the government would not have been able to achieve these deficit figures without cutting expenditures. But, as per the data in the Budget, the revised estimate of expenditure is slightly higher than the Budget estimate. So either the deficit figures are understated or the expenditure figures are overstated.

The budgeted figures for 2019-20 also seem to be unrealistic because the Budget assumes a nominal GDP growth rate of 12 per cent for a year of slowdown when there is no serious effort to jumpstart the economy. Here again, the deficit targets are unlikely to be met or can be met with expenditure compression only.

On the whole, this Budget is neither growth-promoting nor welfare-improving. The Finance Minister seems to have taken the nudge theory a little too seriously. But a nudge won’t suffice when a push is required. Moreover, the incorrect fiscal arithmetic has called into question the sanctity of the entire budgetary exercise.

A. Sunil Dharan is an Assistant Professor of Economics, Motilal Nehru College, University of Delhi.

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