Budget 2019: The budget presented on February by the stand-in finance minister on February 1 is much more than an interim budget. It has a number of new policy initiatives and schemes, changes in sectoral allocations and tax concessions. The prime minister has termed it as a trailer which means there will be more to come when the regular budget is presented after the elections. This is really an election-oriented budget as it attempts to appease various electoral constituencies through a number of initiatives.
The election orientation in the budget can be clearly seen from the statements on stock taking of achievements of the government during the last four years and projecting the vision of the future. The notable achievements of the government, which few will dispute, are the implementation of GST, passing of the Insolvency and Bankruptcy Code (IBC) and attempts to solve the bad loan problem of the banking system. There is also a major push of financial inclusion through the Jan Dhan, Aadhaar, and mobile (JAM) initiative. Of course, most of them are works in progress as many of the reforms have to be calibrated carefully. The government must also be given credit for bringing in transparency in the auctioning of natural resources. In some cases, the initiatives are worthy, but there are implementation blues. This is partly because many of the areas assigned to the states are Constitutional and this includes the Swatch Bharat Mission or Ayushman Bharat. Unfortunately, while the responsibility of these are entrusted to the states, the dissatisfaction in the provision of these services falls on the Centre! A part of the blame for this must be borne by the Centre itself for, over the years, it got engaged in the activities that are in the states’ domains through centrally sponsored schemes.
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This year’s budget has a number of initiatives which seems to impact varied sections. There are initiatives for the farmers, those involved in animal husbandry and fisheries, and a pension for unorganised workers, government employees, and middle-income taxpayers. Of these, two important initiatives stand out and these are: (i) income support for farmers (Pradhan Mantri Kisan Samman Nidhi or PM-KISAN) and (ii) tax rebate for taxpayers earning up to Rs 5 lakh in income.
The income support to farmers was very much on the cards, particularly after the electoral reverses in Madhya Pradesh, Chhattisgarh and Rajasthan. However, it must go to the credit of the government that, despite the temptation to have a generous rollout, the scheme that is unveiled is conservative and the additional expenditure of Rs 20,000 crore in the current fiscal and Rs 75,000 crore budgeted for the next and this cannot be considered excessive. The speculations on these were wild and the government must be given the credit for limiting the give-away to Rs 6,000 per year to a farmer having less than 2 hectares of land. Of course, this will leave out cultivators who are not the owners of land and the vast array of farm labourers who are much more vulnerable. It must also be stated that this is the beginning of the cash transfer scheme and there will be pressures to increase it in the regular budget after the elections.
Similarly, the tax rebate given to the taxpayers with income up to Rs 5 lakh is expected to cost the exchequer Rs 20,000 crore. The upper-middle class will be disappointed that the exemption limit itself has not been indexed for inflation. The increase in the standard deduction, spread of capital gains to two houses and an increase in the ceiling for tax deduction at source are not likely to cost the exchequer much.
Another area where the market expectations ran high was the hope of the small and medium industry getting some sops. Apart from the scheme of sanctioning loans up to Rs 1 crore within 59 minutes which was announced by the PM earlier, 2% interest rate rebate in incremental loans, increase in the priority sourcing of SMEs to 25% by public enterprises with 3% reserved for women entrepreneurs, there is not much to appease the sector which has borne the brunt of the demonetisation misadventure and sub-optimal GST implementation.
The most disappointing is the slippage in fiscal consolidation. The government hopes to contain the fiscal deficit in 2018-19 to 3.4% of GDP and has projected an identical number for 2019-20 as against the MTFP target of 3.1%. Interestingly, lower than the budgeted collection of GST in 2018-19 is estimated, at Rs 1 lakh crore, and this is supposed to be covered by higher collections via the corporation tax (Rs 50,000 crore) and customs duty (Rs 17,500 crore), leaving a shortfall in tax revenues of just about Rs 23,000 crore. On the non-tax side, there has been a significant increase in the dividend from RBI from the budgeted amount of Rs 54,817 crore to Rs 74,140 crore in the current fiscal and this is supposed to increase further to 82,912 crore next year.
There are also questions about the realism in the projections for 2019-20. Prima facie, the tax revenue projections look optimistic. The individual income tax in 2019-20 is assumed to increase by 17.2% over the revised estimate of 2018-19 and the increase in GST is estimated at a staggering 22%! On the expenditure side, the total expenditure increase is projected at 13.3% with revenue expenditure increasing by 14.4% and capital expenditure budgeted to increase by just 6.2%.
Thus, the fiscal deficit is proposed to be capped at 3.4% of GDP in 2019-20 with the assumption of very high buoyancy of GST and personal income taxes and by compressing capital expenditures. Of course, there is a larger question of credibility in the numbers itself if we consider the report of the CAG on the FRBM Compliance Review presented last month, to the Parliament. In 2016-17, for example, the carryover liability on fertiliser subsidies was Rs 39,057 crore and on food subsidy, rS 81,303 crore. There are many ways through which off-budget financing is used to show that fiscal consolidation is done.
This raises a serious question as to whether we should be quibbling about a few decimal points of fiscal deficit. Although this is a time-honoured convention, it has been increasing over the years. It is time that the government, which keeps reform agendas as a priority, should try to make the system more transparent and at least begin initiating measures to embrace the accrual accounting system and create a Fiscal Council to evaluate the forecasts, scientifically cost the various proposals and monitor the progress in conducting a rule-based fiscal policy.
The author is Counsellor, Takshashila Institution Former member of the 14th Finance Commission
