While Rs 18,500 crore would be lost as tax revenue, it will be made up by higher consumption, leading to increased collections, thus making the fiscal arithmetic strong
The Interim Budget for FY20 will go down as the ‘sweetest fiscal document’ because it is truly what, in economics, is called a Pareto optimal state, where several people are better off and no one is worse off. Rarely do we have a Budget that gives and never takes. As this Budget typifies this phenomenon, it is quite remarkable. In fact, if the assumptions made here are workable in all future years, it is great times for taxpayers as well as beneficiaries because we will continue to pay the same if not less tax and still get more from the government. Just how has this alchemy been made possible?
The Budget speech has made it clear that tax collections, be it direct or GST, have been very buoyant mainly because the tax base has increased. Therefore, lower GST rates have worked wonders and brought in the goodies as we pay lower prices and the government still collects its revenue. The direct tax base has widened sharply due to two measures which the government has taken in the last two years in the form of demonetisation and GST. The revised GDP numbers show that demonetisation did not stifle growth but actually fostered higher income which is seen also in the budgetary tax collection numbers.
Therefore, the FM thought it fair to start rewarding taxpayers and the best way to do so is to start from the bottom and, while Rs 18,500 crore would be lost as tax revenue, it will be more than made up by higher consumption which would automatically increase collections thus making the fiscal arithmetic strong. Will inflation increase on this score? To a certain extent, if people spend more on consumer goods, the industry will benefit. But given excess capacity, this should not translate into inflation.
The same holds for food where prices have come down due to excess supply. If consumers spend more, then the surpluses should be consumed without any inflationary implications. To buttress this point, the government has projected growth of 11.5% in GDP which looks fair enough and reasonable as it is a combination of 7.5-8% growth in real GDP and inflation of 3.5-4%, which few can contest.
The size of the Budget has increased by 13.5% in FY20 which is lower than the 14.7% growth in last year’s. This still gives space to distribute the goodies. While earlier Budgets spoke of rechristened health, cleanliness, education, and insurance schemes, this one does plain speaking with cash transfers. If NREGA has been a success over the years, giving Rs 6,000/annum under an income support scheme to the smallest farmers is similar in scope and wider in coverage.
NREGA gives wages of Rs 170-200 a day for 100 days which is up to Rs 20,000 per annum as against the Rs 6,000 announced under the income transfer scheme. But these rates can improve over time and, hence, rather than not having a scheme, it is a good start. While critics have argued that even non-farmers should be covered, this can be considered to be a beginning which can be more inclusive in the course of time. There are higher allocations for NREGA and, if one adds the pension schemes and other central programmes like interest subvention, etc, the poor are definitely better off and these allocations cannot be grudged.
Economists always tend to play spoilsport and ask as to from where does the money come from. Here, the final deficit number remains unchanged and the net borrowing programme is higher by just Rs 50,000 crore which can be absorbed well by the system. Therefore, from the point of view of prudence, there can be no quarrel. RBI is to pay an interim dividend this year to support the FY19 Budget which will probably also increase next year. This is critical. Also the decision on how to monetise the reserves of RBI will offer a lot of comfort to the government as this can actually fund several programmes, including the farmer payouts as well as bank recapitalisation.
Interestingly, the latter has not found mention in the Budget which means it will come from outside. This will be a major source of funding for the Budget as the spectrum sale component has ceased to be of interest to players given their financial situation today. The final weapon which has been fired to ensure fiscal prudence is disinvestment. Even for FY19, the amount has not been changed and is at Rs 80,000 crore which will go up to Rs 90,000 crore next year. But disinvestment now has become a routine exercise and while economists and analysts keep analysing how it will take place, the process has been really straight forward and assuring.
Either one PSU buys another or the LIC steps in and buys shares or the existing company buys back its shares. In all these processes, surpluses with PSUs get transferred to the government. A small part goes to the government as dividend and the larger one as disinvestment. Therefore, one should actually stop debating on whether this target will or will not be met because axiomatically targets are always met as the route is well defined and institutionalised. The stock market should get used to the fact that disinvestment does not mean more stocks in the market and hence should stop guessing the quantum that will enter the fray.
The Budget is hence an ideal one which can be scaled up over time assuming the growth numbers work out right. In fact, curiously, the GDP number used for FY18 and FY19 are the first advance estimates for FY19. With the revised estimate for FY18 being upped significantly one day before the Budget was announced, if the nominal GDP growth rates for FY19 and FY20 are recalculated then the fiscal deficit ratio for FY19 would be 3.3% (as GDP would be Rs 191.98 lakh crore as against the assumed Rs 188.40 lakh crore) while that for FY20 would be 3.3% (as GDP would go up to Rs 214.05 lakh crore instead of Rs 210.07 lakh crore)!
Also, the moment it is accepted that a lot of public sector money, which includes RBI, can be used for financing the Budget, then nothing is impossible. This can be combined dexterously with deferred payments which are rollovers and off budgetary borrowings to reach the target. Meanwhile, when revised GDP growth numbers point upwards, automatically the denominator increases and the fiscal target is maintained. But as all this has been done without causing pain and there should be no complaints as such, even from the economist.