BackOpinion | Budget: managing the fisc while enlarging the growth deficit
Government borrowing is sustainable as long as the rate of return on investment is greater than the interest rate payable
PremiumThe Union budget for 2019-20, presented by the finance minister in Parliament last week, is the annual financial statement of the government under Article 112 of the Constitution of India. But the budget speech turned out to be a quinquennial political statement of the government. It showcased the achievements of the past five years and outlined the good intentions for the next five years. In doing so, it reached out to a wide range of constituencies—villages, farmers, women, youth, taxpayers, industry, foreign investors—with political messaging, particularly for the poor. Politics—deft and populist—was in command.
Alas, the problems confronting the economy did not receive sufficient recognition or attention. Gross domestic product (GDP) growth in the fourth quarter of 2018-19 was the lowest in twenty quarters. The investment rate dropped to 29% of GDP during 2014-15 to 2018-19, from 33% during 2011-12 to 2013-14, and 35% in preceding financial years. Exports have stagnated at around $300 billion in current prices for five years. The unemployment rate is the highest in decades. The budget has done little to revive growth, or investment and exports, both of which are important drivers of economic growth and employment creation.
The irony is that the National Democratic Alliance government walked the supposedly virtuous path of macroeconomic stability between 2014-15 and 2018-19. Fiscal deficits were reduced. Inflation rates were moderate. Ease of doing business was pursued as a priority objective. Commodity prices, particularly crude oil, also remained low. However, the virtuosity did nothing to stimulate private investment or foster growth.
Given this experience, in such an economic slowdown, it would have been logical for the budget to revive growth from the demand side by increasing government expenditure, particularly on public investment. In 2019-20, as compared with 2018-19, total government expenditure as a proportion of GDP remains almost unchanged at 13%, while capital expenditure as a proportion of total expenditure at 12% is lower than the 13% in the previous financial year. Thus, there is no attempt to use government spending or public investment to revive growth.
The basic underlying reason is the objective of keeping the fiscal deficit at 3.3% of GDP. But the magic number of 3% is not sacrosanct. There is nothing in macroeconomics that stipulates an optimum level to which the fiscal deficit must be reduced as a percentage of GDP. Government borrowing is always sustainable if it is used to finance investment and if the rate of return on such investment is greater than the rate of interest payable. The obsessive concern of the ministry of finance, mirrored in the media, with the gross fiscal deficit of the central government—as if fiscal deficits of state governments or borrowing by public sector enterprises are irrelevant—is even more baffling.
There is, as always, creative arithmetic in the budget, which underestimates expenditure and overestimates revenue. The outlays provided for sectors or programmes, infrastructure or welfare, simply do not match the ambitious outcomes envisaged in the budget. The revised estimates of revenue receipts for 2018-19, reproduced from the interim budget, significantly exceed the actuals reported by the Controller General of Accounts, which were made public before the budget was presented.
In fact, the shortfall in collection of taxes in 2018-19 was a massive ₹1.67 trillion. Consequently, the 2019-20 budget estimates for gross tax revenue can be realized only if these are almost 20% higher than the actuals in 2018-19, compared with just 8% in 2018-19. That is not all. Non-tax revenue is estimated to rise from ₹2.45 trillion to ₹3.13 trillion, including a whopping 38% increase in dividends and profits from ₹1.19 trillion to ₹1.64 trillion. That is a tall order for dividends from public sector enterprises, unless the Reserve Bank of India pays a very large dividend.
The sale of government shares in public sector enterprises, described as strategic disinvestment, is expected to fetch ₹1.05 trillion. This is portrayed as a reform. In effect, it finances the fiscal deficit, which is defined as the difference between revenue receipts plus non-debt capital receipts (of which 88% are disinvestment receipts) and expenditure. It is clearly not fiscal adjustment, because it uses asset sales that provide one-time receipts rather than revenue receipts that recur year after year. Given that total budgetary support for capital expenditure is ₹3.38 trillion, disinvestment receipts should be dedicated to retiring pubic debt or augmenting public investment.
At this juncture, stepping up public investment and government expenditure could have kick-started growth. Through multiplier effects, it could also have provided a stimulus to private investment and private consumption. Allowing the fiscal deficit to widen by 0.5% of GDP would have
provided the government with ₹1.06 trillion of additional resources. Given a supporting milieu of macroeconomic stability and low inflation, this could have provided the impetus for driving growth. For a government with a decisive electoral mandate from the people, this first budget was a missed opportunity.
The government has stressed its desire to make India a $5 trillion economy by 2024. It is a catchy slogan that sounds good. It would feel good only when it improves the well-being of our people. But it is essentially about the arithmetic of compound growth rates. If GDP growth in current prices is 12% per annum (say real GDP growth at 7% and inflation at 5% per annum), and the rupee does not depreciate, India’s GDP would rise from $2.7 trillion to $5 trillion in just over five years.
A bolder expansionary budget, which raised public investment and allowed the fiscal deficit to be wider by just 0.5% of GDP, would have made this objective easier to attain by fostering growth. Instead, obsessive concerns about the fiscal deficit might now lead to a growth deficit.
Deepak Nayyar is emeritus professor of economics, Jawaharlal Nehru University
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