Taken together with the slippage in the fiscal deficit, Budget 2018 sounds a warning for monetary policy. Its effect is already seen in a jump in bond yields
Do all those schemes and programmes, announced with so much fanfare by the finance minister in Union Budget 2018, mean that government expenditure is going to shoot up next fiscal? Well, the total expenditure of the central government for 2018-19 is 13.04% of the projected gross domestic product (GDP). For the current fiscal, taking the revised estimates, total expenditure is 13.2% of GDP. So the key takeaway from the budget numbers is that government expenditure as a percentage of GDP is expected to shrink.
The government’s total expenditure for 2018-19 is projected to increase by 10.1% from the revised estimates for the current fiscal. How much did it rise in 2017-18? By 12.3%. So budgeted growth in government expenditure is lower than what it was in the current fiscal.
What is the effect of the government’s fiscal deficit coming in at 3.5% of GDP instead of the budgeted 3.2%? That means the fiscal deficit increased by Rs59,231 crore this year, compared with 2016-17. That then is the extent of the fiscal stimulus provided by the central government in the current fiscal. Next year, however, the fiscal deficit is supposed to rise by a much lower Rs29,427 crore. That means, if the government is able to stick to its target, the fiscal stimulus in 2018-19 will be well below this year’s. That is just as well, since the private sector is expected to take up the slack.
Will the targets be met? Let’s take the revenue numbers. Nominal GDP growth has been taken at 11.5%, which is all right—indeed, if inflation goes up, which is likely, it may exceed that figure. Gross tax revenue is expected to go up by 16.7%, a bit higher than the nominal GDP growth. It all depends on how GST pans out and whether it leads to more disclosure by firms that were avoiding the tax net so far. If that happens, as it’s likely to, the revenue projections are reasonable.
What about the expenditure side? Well, the total budgeted expenditure on the Department of Rural Development is projected to increase by 3.1% in 2018-19, compared with a 14.7% rise in the current fiscal. Doesn’t seem to be too much of a rural push there. What about a push to housing? Expenditure on the Pradhan Mantri Awas Yojana is projected to be lower by 5.3%, compared with the current year’s revised estimates. Indeed, the outlay on some programmes, such as the Swachh Bharat Mission, the National Health Mission, the National Rural Drinking Water Mission and the Deen Dayal Upadhyaya Gram Jyoti Yojana, has been pruned. Most of the push to rural growth is supposed to come from extra-budgetary resources. The Department of Food and Public Distribution, which will have to fund the higher minimum support prices (MSPs), has seen its expenditure budget increase by 19.4%. But in the current year, expenditure rose by 26.7%. As for the new emphasis on health, the expenditure of the Department of Health and Family Welfare is expected to increase by 2.4%, compared with a 36.8% rise this year.
With elections a year away, the question is whether the government will be able to contain this expenditure within the budgeted limits. While the need to keep the fiscal deficit in check has led to the government pruning its expenditure growth, the temptation during the course of the year will be to spend more. Further, as IndusInd Bank chief economist Gaurav Kapur pointed out, a formula-based MSP will impart a structural upward bias to inflation when input costs are going up. Taken together with the slippage in the fiscal deficit, this budget sounds a warning for monetary policy. Its effect is already seen in a jump in bond yields.
Manas Chakravarty looks at trends and issues in the financial markets.
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