Budget 2018 marks a key departure from old ways
I want to begin with a plea to the National Informatics Centre’s portal to correctly convey the year to which the latest Union budget relates as 2018-19, rather than calling it Union Budget 2017-18. I spent some time hunting for the latest budget on the ministry of finance website before discovering the error.
When the fiscal deficit for the year just concluding (2017-18) is assessed for adherence to the budgeted target, it should be done in terms of absolute figures for now, because the GDP (gross domestic product) denominator used in the budget (Rs167.85 trillion) is not consistent with the first advance estimate issued by the Central Statistical Office (CSO) as recently as 5 January (Rs166.3 trillion). At the lower CSO figure, the deficit for the current year stands closer to 3.6% than to 3.5%. A second CSO advance estimate is due at the end of February, so maybe the ministry of finance had privileged access to that.
Staying with absolutes, the revised fiscal deficit for the current year stands at Rs5.95 trillion, as against a budgeted figure of Rs5.46 trillion. So yes, there has been fiscal slippage of the order of Rs50,000 crore. Next year, the fiscal deficit is budgeted to be higher by a further Rs30,000 crore.
There is a perpetual rolling discussion, enough to make the heads of non-economists swim, about whether fiscal slippage should be tolerated or not, with prominent support for both points of view. The way to evaluate these positions is really to focus not immediately on the deficit itself, nor even the stock of public debt it is adding to, but where the annual interest bill on that debt stands. This was budgeted at Rs5.23 trillion for 2017-18, and stands revised at Rs5.31 trillion. Next year, it goes up to Rs5.76 trillion. Think about it—it swallows up almost all of the net new borrowing for the year.
Is this a debt trap? Not quite. Things are all right as long as what the government plans to spend on everything else, including on infrastructure and salary hikes, is fully covered by revenue flows. Moody’s Investors Service gave India a sovereign upgrade not because it approved of the numbers as they stand, but because it was persuaded of the commitment of the central government to fiscal consolidation over the medium-term, what with the enhanced tax effort, and reforms directed at releasing the brakes on credit flow for growth, through the new insolvency and bankruptcy code and recapitalisation of public sector banks.
The recapitalisation bonds to be issued this year for Rs80,000 crore to fund bank restructuring do not add to the fiscal deficit the way it is being configured, but do add to public debt, and to the interest bill. There is also the Ujwal Discom Assurance Yojana in play at the state level, whereby state governments have similarly ramped up their public debt, by assuming the debt of bankrupt power sector entities. In and of itself, the rise in public debt and, with that, the interest bill at the levels of both the Centre and states, is not a happy development. Admittedly, public sector banks had to be given a leg-up, and the power sector needed restructuring, but the Centre has to keep a close watch on new lending by banks, and the internal restructuring of power sector units, respectively. The financial sector is most critical for all, including the poor, who engage actively at the informal end of the spectrum.
In terms of policy, I saw several indications of a key departure from past ways, in terms of recognition of the need for convergence across schemes with different departmental points of origin, toward a solution of sectoral problems. Prominent among these was the package of measures to improve price realization by farmers, in particular the scheme to develop 22,000 gramin agricultural markets, complete with all-weather road connectivity from habitations to these markets, to be funded by folding in pre-existing schemes for rural roads (the Pradhan Mantri Gram Sadak Yojana) and the rural employment scheme (Mahatma Gandhi National Rural Employment Guarantee Scheme).
Another such promising departure from old ways is the proposal to develop horticulture clusters in partnerships, drawing in the ministries for agriculture, food processing and commerce. If this intent to break down ministerial silos is actually acted upon, the targeted outcomes might actually be achieved. What gives these initiatives credibility is that fund flow from a scheme in place becomes immediately available, in a way that a new scheme, calling for new departmental architecture, does not.
But there was also regrettable persistence of old ways of doing things, without attention to implementation failures. The new National Health Protection Scheme is patterned on the old Rashtriya Swasthya Bima Yojana (RSBY), with a massive increase in the funding cap, but there was not even passing mention of the monitoring failure that bedevilled RSBY. Without design reform, this new scheme could get distorted in the same way, with no benefit to the people it is ostensibly made to serve. Likewise, the Smart Cities and Atal Mission for Rejuvenation and Urban Transformation schemes for improving urban network infrastructure and water supply, although very essential, are plagued by glacial progress on the ground and idle funds lying with states.
We finally have, for the first time I believe, a number for the effective taxpayer base, aggregating across filers and those getting deducted at source but not filing, at 82.7 million. The enhanced turnover limit for companies entitled to pay corporate income tax at a lower rate of 25% was a good move, affecting as it does the subsector where the promise of jobs is greatest. Finally, the calibrated removal of tax-free treatment of long-term capital gains was a good move, and long overdue. However, the cess culture is regrettably back, at an enhanced rate of 4% on income tax. The new social welfare surcharge on customs duty (with some exceptions) also reverses the downward trend in protection, which is unfortunate.
Indira Rajaraman is an economist.
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