Union Budget 2020: When a former finance secretary details how Budget’s big numbers were fudged, you realise why most don’t trust the government.
Budget 2020: No one reading former finance secretary Subhash Garg’s blog can be anything but impressed. Garg has, over several posts, dissected the budget to reveal the actual deficit and debt numbers. In the case of the deficit, he catalogues four ways in which expenditure is often disguised; indeed, Garg adds that some of these (like the oil bonds) will not even show up in the debt numbers. He points out that, in FY18, as opposed to the headline fiscal deficit of 3.5% of GDP, the real number was 4.4%; it was 4.7% in FY19 versus the headline 3.4%, and for FY20, the real fiscal deficit is likely to be in the 4.5-5% range as compared to the 3.3% budgeted.
While most justify breaching the fiscal deficit to increase infrastructure investment, less than a fourth of the deficit, Garg points out, is “meant for productive economic investment in manufacturing, services or infrastructure capital investment”. Indeed, for all the junk-the-deficit types, Garg points out that while the financial savings of households are just around 6.6% of GDP, a centre-state deficit of 6-7% means “it leaves little for the private sector or for productive investment in the economy”.
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There is just one problem: Garg was the finance secretary when this was being done, and in that capacity, he was defending government policy! The FY20 budget used the FY19 tax projections even though, by then, the actual tax collections for FY19 (see graphic) were out. Using the FY19 tax collection estimates—made in the February 2018 budget—gave a fairly reasonable 8.4% tax growth target for FY20. But, if you used the actuals, as you should, the targeted growth was a whopping 18.3%. How do you then trust the government?
In which case, the primary task of the budget later this week has to be to regain trust; not just trust in the numbers it uses, but also trust that the government will tell the truth, and that it will actually implement what it says. This is critical because, at many levels, investors have lost trust in the government’s promises. Though not strictly related to the economy, when the PM expressed surprise that people were talking about an NRC even though, he said, there had been no such discussion on this, it really stretched credulity since the home minister had, on several occasions, talked of an NRC following the CAA.
Another example of why building trust is critical relates to the banking sector; as long as credit flows remain depressed, there is little the government can do to boost economic growth. Bankers remain unwilling to lend as they worry that, should a loan turn bad, the government and its investigative agencies will come down on them like a tonne of bricks. That is why, last fortnight, the government expanded the scope of its advisory board for banking and financial frauds. Under this, it said, no action could be taken against bankers, or the staff of other financial institutions until the high-level advisory board cleared it. In other words, the message was, bankers would be protected since the advisory board would figure out which decisions were kosher and which were not—a loan going bad wasn’t enough to get bankers in trouble. But, there has been a similar advisory board in place since 1999; were all cases pertaining to bankers facing CBI charges vetted by this board first? Bankers who’ve seen their colleagues getting sucked into CBI cases aren’t going to be convinced by the government just reissuing circulars and expanding advisory bodies.
The Rs 100 lakh crore infrastructure plan that has just been drawn up is, similarly, fraught with problems, and who is going to believe the government is going to make contracts legally enforceable when its own agencies, like NHAI, or various SEBs, don’t make payments on time; or how it plans to institutionalise dispute resolution when it doesn’t respect arbitration awards that have gone against it? And, how will ministry-level committees come up with mediation mechanisms that work—this is an integral part of the plan, to boost investor confidence—when the government has failed to take so many decisions due to the fear that it would be seen as making concessions to industry—the suit-boot-ki-sarkaar fear. The government, to cite an example, didn’t raise completely uneconomic gas prices for two years due to this reason, and this caused investments to dry up; the decision to hike power prices for the Tata power plant has been stuck for years—after the Indonesians raised coal prices—though its electricity would still be cheaper than that from competing power plants even after this.
Or, take the issue of the taxman harassing people, and the government giving reassurances, from time to time, that this will not happen in future. If this is to be believable, why don’t the direct and indirect tax boards set up a mechanism to review every tax order/arrest and take corrective action immediately instead of waiting for it to snowball first? But, nothing of the sort has happened so far; and, how do you trust the taxman when, in a case where an international arbitration is going on—this is also a retrospective tax case which the BJP itself campaigned against!—the taxman seized assets worth $1.3-1.4 bn, and then sold most of them off?
And, while unleashing the CBI and the ED makes for great news, when is the last time the government looked at their track-record and took them to task for this, or set up a credible mechanism to ensure this didn’t get repeated in case after case?
The budget will be watched for what it does to revive investor sentiment, but more than the tax cuts or policy plans, it would be good enough if the government just honestly implemented what it has promised so far; a new improved Uday is planned, for instance, without much thought as to why the previous one was a failure.