Budget 2020: An absence of vision
The Budget 2020-21 has projected that the ratio of total expenditure to GDP will be at 13.5 per cent, compared to 13.6 per cent in the previous fiscal year. This indicates that the centre has frozen the rate of government spending, and has not taken on itself the role of pump-priming the economy to ensure revival.
The most remarkable feature of Budget 2020 is that, despite the claims made by the Finance Minister of working to send India on the road to a $5 trillion economy, it has frozen the rate of central government spending. The ratio of total expenditure to GDP, which was projected at 13.6 per cent in the Budget for 2019-20, is estimated to be lower at 13.2 per cent. That calls for a sharp step up. But Budget 2020-21 places that figure at 13.5 per cent.
That fiscal stance implies that the government has not taken on itself the role of pump-priming the economy to ensure revival. At one level this could be because the government expects its revenue receipts to remain at the 9 per cent realised in 2019-20 in 2020-21 as well. But this is surprising given the fact that non-tax revenues are expected to get a boost because of the dues to be paid up by telecom companies consequent to the Supreme Court judgment on the claim made by the Department of Telecommunications on grounds of underpayment of dues. This is expected to give the government around Rs. 74,000 crore extra from that head in 2020-21 as compared with 2019-20.
Moreover, the government has decided to stretch itself on the disinvestment front to the maximum to mobilise a projected Rs. 2,10,000 crore. Of this Rs. 1,20,000 crore is to come from the sale of equity in non-financial public sector enterprises, and an additional Rs. 90,000 from a worrying decision to sell government equity in public sector banks and financial institutions like the Life Insurance Corporation. The magnitude of the disinvestment drive can be gauged from the fact that the target for 2019-20 was Rs.1,05,000 crore and the actual mobilisation thus far in that year is estimated at around Rs. 20,000 crore. While the wisdom of the decision to go in for this across the board and rapid privatisation is highly questionable, the fact of the matter is that in its desperation to mobilise resources the government has provided for this option.
If the Finance Minister had access to all these sources of additional revenue, why is spending assumed to remain stagnant? One explanation is that the government has frittered away many of these advantages. To start with, on the grounds that it was responding to a severe growth slowdown and was working to stimulate the economy, it announced a major tax reduction for the corporates in September last year. This would have entailed a significant loss of revenue and is reflected in the fact that the revised estimates for corporate tax revenue which had been placed at Rs. 7,66,000 crore in Budget 2019-20, is estimated to have fallen to Rs. 6,15,000 crore in the revised estimate and the budget for 2020-21 projects it at just Rs. 6,81,000 crore.
Meanwhile, having set itself on the tax concession trajectory as the instrument for revival, the government has found it necessary to compensate middle-class taxpayers as well. The Finance Minister has announced tax concessions to a middle class for which much of annual income falls in Rs.5 lakh to Rs. 15 lakh range. And given the desire to be seen as business-friendly, she has also abolished the dividend distribution tax currently levied on corporates and left dividend income to be taxed as income of the recipient. According to estimates reported in the budget speech, these together would entail a revenue loss of Rs. 65,000 crore. All this points to another loss of revenue set off by a policy of using tax concessions as a means to stimulate a recovery.
Questionable fiscal deficit claims
The revenue losses from these concessions, even if underestimated, have created a situation where a stimulus, if any, has to be debt-financed. But here the BJP government’s obsession with presenting itself as the most successful fiscal reformer has intervened. According to the Finance Minister, despite significant shortfalls in revenue in 2019-20, the fiscal deficit rose only to 3.8 per cent of GDP rather than the targeted 3.3 per cent, and that the deficit in 2020-21 is projected at 3.5 per cent of GDP as compared with the medium-term target of 3.0 per cent. So, deviations from target are marginal despite the circumstances.
While this claim is questionable, and the actual deficits are likely to be much larger, once the “adjustments” are taken account of, it does mean that the level of spending is constrained. An example of such adjustment is the food subsidy. Fiscal 2019-20 was a year when the Food Corporation of India was saddled with huge stocks. Though these stocks were not released fast enough through the public distribution system, where offtake was in any case constrained by increases in prices that made available supplies unaffordable for some, the Food Corporation of India would have had to meet the costs of procurement at higher procurement prices as well as the costs of transporting and storing this food and would have had to be compensated for the difference between the economic cost and price at which the grain is sold through the public distribution system. This should have raised subsidy payments in a year when procurement and stocks were at record levels. But as against a provision of Rs. 1,84,220 crore in the budget for 2019-20, the revised estimate for food subsidy is placed at Rs. 1,08,688 crore or 40 per cent lower than the budget estimate. Clearly, some of these costs have been transferred off-budget, even though the Finance Minister claimed that they have not been.
But such adjustments have not been adequate to stall the projected freeze in expenditure. This also affects the government’s claim of being concerned with creating an inclusive and “caring” environment. To provide one example, the Mahatma Gandhi National Rural Employment Guarantee Programme on which Rs. 61,815 crore were spent in 20018-19 and Rs. 71,002 crore in 2019-20 (RE), is allocated only Rs. 61,500 crore in 2020-21. But it is not only welfare that is the casualty. What is affected is the ability of the government to manage economic performance.
This explains the new fascination with incentivising wealth creation. If the State cannot lead development, it must coax the private sector to drive the system. But so long as the State does not find ways to stimulate demand that can induce investment, tax concessions will just fatten profits while leaving the economy stuck in a traverse that may spell recession.