Budget 2019: Nirmala Sitharaman’s speech did not evaluate extant overall macroeconomic environment

Budget 2019 India: Finance minister Nirmala Sitharaman’s Budget speech did not evaluate the extant overall macroeconomic environment, but the Budget numbers only confirm data from other sources that economic growth has slowed down

Budget 2019: Nirmala Sitharaman’s speech did not evaluate extant overall macroeconomic environment
Budget 2019-20: The fiscal deficit for 2018-19 works out to 3.3% of GDP, as against 3.4% in the Budget document, on account of the lower GDP base in the Budget document

Union Budget 2019: The Union Budget is the annual financial statement of receipts and expenditure of the central government. The numbers for the year gone by are for the information of parliament. Estimates made for the year ahead are for its approval. This should ordinarily be a boring exercise, of little interest to anybody besides subject experts and economists, and market participants looking to the deficits numbers that can move financial markets. The Indian budget has however attracted wider interest on account of the outsized public sector, wide fluctuations in tax rates from year to year that affect both the middle-class and corporates, and the practice of announcing policy intent which strictly speaking is not part of the budgeting exercise.

The budget numbers nevertheless throw light on the priorities of the government, and also on the state of the wider macroeconomy, since the fiscal policy is one of the two well established policy tools for stabilising the economy. Growth below trend tends to worsen the fiscal deficit on account of first revenue compression arising out of lower growth, and second, expenditure growth arising from the need to stimulate the economy by substituting for the decline in private demand and crowding in private investment. Governments also tend to window dress the numbers, leaving it to subject experts to go beyond the colorful window display to the shelves inside.

What do the numbers over the two-year period between FY18 (actual) and the forward looking budget proposals for FY20 reveal?

To begin with, corrections in two critical macro-aggregates contained in the Budget document are warranted.

First, while the government’s Economy Survey of 2018-19 has taken the GDP estimates from the CSO’s Press Note of 31.5.2019. The budget document has however worked with an earlier estimate of GDP at current prices for FY19 (Rs 18,840,731 crore), instead of the CSO’s latest Provisional Estimate of Rs 19,010,164 crore.

Second, the Budget has worked with the higher revised revenue estimates for FY19 contained in the Interim Budget for FY20 presented in Parliament prior to the elections, and not the latest and more accurate, but lower, Provisional Actuals of the Controller General of Accounts, contained in the Economic Survey. Although past practice has been to use the interim budget figures, since the CGA’s figures were available they could have been used. The difference is non-trivial, as the budget figure has overestimated revenues by Rs 1,66,512 crore.

Such a shortfall in revenue collection is indicative of a weakening economy. Consequently, the revenue projected for FY20 is taken at Rs 17,73,811 crore, in lieu of the budget figure of Rs 19,62,761 crore. The calculations in the accompanying graphic use the CSO’s Press Note of May 31 for the GDP numbers, and the CGA’s revenue estimates for FY19 contained in the Economic Survey FY19, as the base for the calculations, as these approximate closest to reality. The revenue projection for FY20 assumes a growth rate of 13.48% over FY19, the same rate as projected in the budget. The forward-looking GDP estimate used for FY20 is what is used in the budget document.

Ten features stand out from the Budget document:

One, there is a continuing decline in the outlays on health and education (soft infrastructure), both in relation to overall expenditure (from 6.2% to 5.7%), as well as in proportion to the national income (from 0.8% to 0.7%).

Two, the outlays on the hard infrastructure comprising IT, telecom, transport and urban development, have increased marginally from 0.9% of GDP and 7.9% of total expenditure, to 1% and 8.2%, respectively.

Three, the outlay on agriculture has more than doubled from 0.3% of GDP, and 2.5% of total expenditure, to 0.7% and 5.4%, respectively, mostly for the Pradhan Mantri Kisan Samman Nidhi Yojana. During this period, the outlay on rural development, however, declined from 0.8% of GDP and 6.3% of total expenditure to 0.7% and 5.1%, respectively.

Four, the transfer of funds to the states for centrally-sponsored schemes has declined from 13.3% of the Centre’s budgetary expenditure to 11.9%. On the other hand, the Centre’s own outlay under central sector schemes has risen from 27.4% to 31.3%.

Five, the outlay on major subsidies comprising food, fertilizers and petroleum has increased from 1.1% of GDP to 1.5%, and from 8.9% of total expenditure to 10.8%. The increase is mostly on account of food subsidy.

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Six, capital expenditure, including grants-in-aid by the Union Government for creation of capital assets, has remained constant at 2.6% of GDP. It, however, declined from 21.2% of total expenditure to 19.6%.

Seven, the decline in the outlay on defence is both palpable and surprising. This has declined from 1.6% of GDP to 1.4%, and from 12.9% of total expenditure to 11%. The outlays on armament acquisitions for the three services have also not kept pace with GDP growth.

Eight, total central government expenditure as a percentage of GDP has climbed from 12.5% to 13.2%. Read with seven above, it can be deduced that the entire increase is on the revenue rather than capital side.

Nine, the fiscal deficit for FY19 works out to 3.3% of GDP, as against 3.4% in the Budget document, on account of the lower GDP base in the budget document. However, the fiscal deficit for FY20 works out to 4.3%, since the revenue estimates have been revised downward, as indicated above, while the expenditure estimates remain unchanged.

Ten, while central government expenditure grew at 14.7% in FY19, it is projected to grow at a lower rate of 13.4% in FY20. If the economy is indeed in retreat, this is indicative of a cyclical, rather than counter-cyclical fiscal policy. The sharp increase in the fiscal deficit projected, despite the lower expenditure growth rate, is on account of the revenue compression arising out of lower growth. The finance minister’s budget speech did not evaluate the existing overall macroeconomic environment, but the budget numbers only confirm data from other sources that economic growth has slowed down. It would appear that the government expects monetary policy to do all the heavy pushing to get the economy back on track.

The author is RBI Chair Professor, ICRIER. Views are personal.

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