February is an important month as it leads to the announcement of the Union Budget, which is often hyped as being a ‘make or break’ one. There are several expectations, with various suggestions being made on what the finance minister should and should not do. Invariably, there is a call to cut down on unnecessary expenditure and increase capital expenditure; and various sectors would ask for concessions to enable growth. The Reserve Bank of India (RBI) has also said that it will be watching carefully and, hence, everyone gets involved with these numbers, not to forget the ratings agencies which look at deficits and debt figures. The more demanding ones are looking for reforms too.
However, two things need to be understood. One, we have to separate the policy part from the Budget. Policies are announced through the year and hence all reforms that we keep harping on have been announced and implemented through the course of the year. The Budget is only a projected income and expenditure statement of the central government which provides support to the extent possible, given the fiscal space. Also, the central government Budget is less than the size of the state governments, which are more active at the root level. So, one cannot expect a major transformational Budget.
Two, the Budget should not be viewed as a corporate balance sheet, as the government has certain obligations towards the people and has to balance social development with fiscal prudence. Hence, while the private sector need not worry about spending on the poor, the government has a moral responsibility to do so. Thus, any expectation has to be practical.
The Budget for FY16 had an outlay of R17.77 lakh crore. Of this, R4.56 lakh crore went towards interest payments, R0.88 lakh crore towards pensions and R2.46 lakh crore as defence expenditure. These numbers cannot be lowered, given the fixed nature of these expenses. Hence, 45% of the Budget is committed. Add to this the subsidy bill, which came down to R2.44 lakh crore. It may be difficult to lower this any further, given that the benefits from low crude oil prices cannot push the fuel subsidy amount further down from the budgeted number of R0.30 lakh crore. If the total transfers to states through grants and allocations for centrally-sponsored schemes and state plans are added, another R3.29 lakh crore would have been dispensed with. Putting all these numbers together, there would be a slice of 76% being fixed.
There is also substantial talk of the government spending more on infrastructure. The total capital expenditure of the government in FY16, for instance, was R2.41 lakh crore (both Plan and non-Plan), which is 14% of the total expenditure. Of this, R1.35 lakh crore was for Plan (both central and state), while the balance was non-Plan comprising essentially defence. The curious bit about this capital expenditure is that this item tends to be cut whenever there is a need to lower expenditure to balance the Budget. The accompanying table provides information on the budgeted and actual capex of the government in the last three years.
The table shows that there has been a deviation of around R30,000-35,000 crore from the budgeted numbers in capex, which is around 15-17% lower. It may be justified because this is a discretionary expenditure which can be lowered in case there are problems relating to balancing the Budget. Also, as defence is the largest contributor to the non-Plan segment, where a large part could be imported, the Plan capex would be the important component. The question then really is whether a sum of, say, R1.35 lakh crore of Plan expenditure, which is, say, less than 1% of GDP at current market prices, be able to kick-start the economy? In terms of gross fixed capital formation, this would be around 3.5%. Hence, while any capex is welcome from the government, to consider it to be the engine of growth is quite far-fetched. The push has to come from the private sector.
In addition, when we speak of the R2.41 lakh crore of capex, the bulk of it goes to defence with R0.95 lakh crore, followed by the railways with R40,000 crore, roads with R33,000 crore, bank capitalisation and home ministry each with R19,000 crore, and urban development with another R10,000 crore. Therefore, these six sectors account for the bulk of capex of the government.
Hence, on the expenditure side, there is room to the extent that there are resources being generated. In the past, to justify such budgeted numbers, the disinvestment proceeds have been put at a high level which does not materialise by the end of the year, hence prompting cuts in capex. In the last three years or so, the disinvestment proceeds have fallen short by around R25,000-30,000 crore, which has forced the government to cut back on capex. In FY16, due to higher tax revenue and dividends from PSUs/RBI surplus, there could be some comfort. But, otherwise, compromises have to be made.
On the revenue side, given the GST and DTC being in abeyance with the corporate tax roadmap already laid down, not much can be expected. Sops to start-off some of the initiatives on start-ups or smart cities could get some momentum, though funding options would be limited here.
While one may argue for higher expenditure or higher fiscal deficit, the issue really is that, with GDP in a deflationary mode, which will prevail in FY17 too due to global conditions, the elbow room will be limited. The fiscal deficit ratio for FY16 could go up by 0.1% to 4% in case GDP grows at nominal terms with a slippage in nominal GDP growth from 11.5% to, say, 10%. This can be replicated in FY17 too.
To conclude, it could be said that while the Budget game is played every February with the government pepping up the sentiment as all sectors demand sops, a realistic view is there is not much that is available in the Budget. Also, asking for more reforms is quite ridiculous, given that the government has already invoked almost one major policy every month in this year. Asking the government to do everything could mean shirking the challenge. We have to revive the Keynesian animal spirits to brighten our own prospects—the Budget will be an enabler.
The author is chief economist, CARE Ratings. Views are personal