Union budget’s false dilemma

In budgets over the years, there has been a decline in the share of capital expenditure to total expenditure

Finance minister Arun Jaitley. It is unlikely that the share of capital expenditure will increase substantially in Budget 2017. Photo: Vipin Kumar/HT
Finance minister Arun Jaitley. It is unlikely that the share of capital expenditure will increase substantially in Budget 2017. Photo: Vipin Kumar/HT

The tears that politicians of different hues shed for the poor and the underprivileged make an average citizen extremely cynical. At the risk of caricaturing, after every budget the plethora of opinion that one tends to hear could perhaps be segmented into two corner positions: (a) this budget is a populist budget catering to vote-bank politics; and/or (b) this budget looks into the needs of long-term investment and is a growth-oriented budget. Is such branding the result of a false dichotomy? Are there fiscal measures that could be populist but still capable of generating long-term investment? Such questions often remain unanswered.

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What do we mean by populist measures? Underneath the term “populist” perhaps there is an implicit idea that such policies essentially are income-transfer/tax-cuts schemes that tend to trigger immediate/very short-term consumption and, therefore, give immediate gratification to the people/electorate. From this angle, will a “debt relief scheme for the population with loans below a certain income threshold” qualify to be a populist measure? Are subsidies by their very nature populist? At the same time, the promise of huge infrastructure expenditure before any election may technically qualify as a long-term investment, but still may turn out to be populist. Thus, a priori it might be difficult to adopt a straightjacketed taxonomy of “populist” versus “long-term investment”.

Since the devil often lies in the detail, it may be useful to look at the budgetary trends. Instead of the absolute numbers, let us look at the share of revenue expenditure vis-à-vis capital expenditure in total expenditure. First, over the years there has been a secular decline in the share of “capital expenditure” to total expenditure. While the share of capital expenditure in total expenditure used to hover around 40% during the 1970s and 1980s, it came down to around 30% during the 1990s; the share became as low as 12% since 2011-12 till last year’s budget estimate (BE). Second, pari passu the share of revenue expenditure has gone up from 60% during the 1990s to over 85% in recent years. Illustratively, as per the budget estimates of 2016-17, of the Rs100 spent by the Central government, Rs88 went to revenue expenditure and Rs12 went to capital expenditure. Third, as far as the constituents of revenue expenditure are concerned, three major items are: (a) interest payments (around 25% of total expenditure as per BE 2016-17); (b) defence revenue expenditure (around 8% of total expenditure); and (c) subsidies (around 13% of total expenditure).

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Besides, pay, allowances and pensions would account for a major share of total expenditure. Fourth, thus, faced with the compulsions of reducing the fiscal deficit (partially by the Fiscal Responsibility and Budget Management Act), various governments took the easy option of cutting down capital expenditure.

Thus, if one measures the extent of “populism” by the share of revenue expenditure in total expenditure, then it will not be an exaggeration to say that over the years, there has been an ever-increasing trend of populism in Indian budgets. Governments of various hues, despite different rhetoric, have all conformed to this stereotype. The question is: Will we see a departure from this trend this year?

My own take is that despite an opportunity, it is unlikely to be so. Several pointers may be flagged. Admittedly, one could expect that there are possibilities of a rise in government revenue this year from non-tax revenue sources, coming from the demonetisation-driven additional surplus of the Reserve Bank of India (from the amount of high-value notes that have not come back to the system).

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Besides, there could be additional tax revenue from the non-white part of money that has been deposited in the banking system after the demonetisation announcement, and also out of the possible disinvestment plans of the government. However, despite the claims of medium- and long-term gains from demonetization, there is now ample evidence of short-term pains that an average citizen had to bear post-demonetization. In this case, the government has to show some demonstrable good effects of demonetization. An ideal way to do it is either to spend on specific schemes of revenue expenditure for specific lower-income groups or to give some tax sops (maybe raising the exemption limits for income tax) to middle-class Indians. Interestingly, such populist measures could essentially turn out to be in the nature of fiscal stimulus. At the current juncture, when the International Monetary Fund has revised the Indian gross domestic product growth estimate for 2016-17 from 7.6% to 6.6%, there may be ample economic justification for such fiscal stimulus.

Of course, the government could take the other two routes: (a) a reduction in fiscal deficit; and (b) an increase in capital expenditure. Given the possible revenue buoyancy this year, while the amount of money going to capital expenditure is going to increase, in view of the current temporary loss of growth momentum and associated political compulsions, it is unlikely that its share would increase substantially. Thus, in all likelihood, the dilemma between populist policies and long-term investment, however false, does not appear to be leaving us for the time being.

Partha Ray is a professor of economics at the Indian Institute of Management, Calcutta.

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