The backdrop to Finance Minister >Arun Jaitley’s third Budget was a domestic economy confronted with a rather adverse global environment, an agricultural sector reeling from two successive years of drought, and a manufacturing sector that has been limping along. Although the gross domestic product (GDP) growth rate has been relatively impressive at over 7 per cent (though this figure has been contested as unduly high by many who attribute the “overestimate” to the shift in the method of computing GDP), there was a universal feeling that the economy was in a vulnerable state and that even a relatively minor shock could cause a big downward slide. The believers in impending doom for the economy felt that an expansionary Budget designed to stimulate aggregate demand was the only way out. Ranged against this school were the fiscal conservatives who believed with equally strong conviction that the Budget must keep the fiscal deficit under control.
Bhaskar Dutta Economic sense seemed to suggest that the Finance Minister would have to choose one or the other option. However, Mr. Jaitley seems to have achieved the impossible. He has definitely embraced fiscal prudence. He has announced that the budgetary >deficit for the current year will not exceed 3.9 per cent of GDP, and has promised to lower the fiscal deficit for 2016-17 to 3.5 per cent of GDP. Since these are figures that were mentioned last year, the intention is clearly to ensure that there is no financial slippage in so far as the Central government is concerned. Surprisingly, fiscal prudence does not seem to have come at the cost of a cut in government expenditure. Mr. Jaitley has announced a significant increase in the allocation to agriculture and rural development, as well as infrastructure. He has also made a large budgetary provision for payments arising out of the Seventh Pay Commission awards and the modified pension scheme for the military. Moreover, the tax measures are anything but draconian. So, how has he managed to square the circle?
Banking on assumptions The government has benefited a great deal from the windfall gain arising from the steep fall in crude oil prices. The price of crude oil is less than half of what it was a year ago. However, the government has not passed on the substantial savings achieved on the import bill to consumers — the retail prices of petrol and diesel have come down by only a few rupees! Clearly, the government is hoping to continue its reliance on this source of non-tax revenue. Of course, this strategy carries with it the risk that the government estimates of revenue on this account during 2016-17 will be hit for a six if the >global economy recovers from its current slump. This would result in an increase in the demand for oil and hence a rise in crude oil prices.
Mr. Jaitley has also made some rather optimistic assumptions about the volume of resources available to finance the government’s expenditure. He is hoping for a significant increase in revenue from personal income tax. The bulk of this increase must come from better tax compliance since there has been only a modest increase in taxes for the super-rich. What is more questionable is his assumption that disinvestment and the strategic sale of public sector enterprises will fetch the exchequer the sum of Rs.56,000 crore. This is surely quite unreasonable in view of the fact that the revised estimate for 2015-16 is less than half this figure. The stock market will have to improve considerably if disinvestment proceeds are going to be anywhere close to Mr. Jaitley’s estimate.
The government also hopes to exploit non-budgetary sources of financing infrastructure projects. First, there is the hope that some infrastructure projects will be funded through public-private partnerships. Second, the National Investment and Infrastructure Fund (NIIF) has been allocated Rs.4,000 crore in the 2016-17 Budget. The government hopes that the NIIF can leverage this to raise additional funds through the bond market. Third, there are approved market borrowings of around Rs.30,000 crore for several financial intermediaries. Of course, the government cannot be completely certain that the targeted volume of resources will materialise from these sources. There is also the danger that public borrowings will crowd out private borrowing if the overall credit scenario is not satisfactory.
Also read: >Union Budget 2014-15: Highlights
Focus on the farms
As far as budgetary allocations are concerned, the emphasis has definitely been on agriculture and the rural sector in general, with a huge increase in the allocation to the sector. A key policy instrument will be a large increase in investment in irrigation, with the emphasis on completing several projects very soon. The Budget also provides for an increase in funds allocated to gram panchayats. This is part of a huge increase in outlay on rural development, including rural road construction. Somewhat surprisingly, the Budget has dramatically increased funding for one of the previous United Progressive Alliance government’s flagship programmes — Mahatma Gandhi National Rural Employment Guarantee Scheme. Other benefits to farmers include smoother credit flow, insurance against crop failures, and improved marketing facilities.
Echoing the Prime Minister’s recent promise, Mr. Jaitley too has announced the target of doubling farm incomes within five years. This can be nothing more than a pipe dream. Farm incomes would have to record an average annual growth rate of about 14 per cent in order to achieve this target. The annual growth rate of agricultural output in India during any five-year period has not even touched half this level. What magic wand does the Finance Minister have to achieve this miraculous feat? And even if this could be achieved, who will buy double the current volume of agricultural output given the low income elasticity of demand for agricultural output? Of course, there are many countries where farmers’ incomes are several times that of Indian farmers. But, in order for Indian farmers to reach these levels of income, agricultural productivity has to increase dramatically and far fewer people have to depend on agriculture for a livelihood. This in turn requires massive migration of people from the rural to the urban sector. There is no mention in the Budget speech of whether this is expected to take place.
Steady structure of taxation There has been very little change in the structure of taxation. The Finance Minister has stayed away from overt populism such as raising the income tax exemption limit. There is clearly no justification for such a move when barely 5 per cent of households pay personal income tax. >Direct tax rates for the vast majority of taxpayers remain unchanged, but those with taxable income above Rs.1 crore will pay a higher surcharge. Moreover, tax compliance is sought to be increased by levying a penal tax on undisclosed incomes. Some minor concessions have been provided to small taxpayers and new companies. Taxes on diesel cars have been increased in order to discourage their use. Diesel itself is difficult to tax since this has an adverse knock-on effect on the entire transport sector. However, it has always been a mystery why Mr. Jaitley’s predecessors have not imposed a disincentive tax on diesel cars. After all, indirect taxes are also supposed to serve an allocative purpose.
Viewed in its entirety, an admittedly simplistic characterisation of the Budget is that it is pro-poor rather than pro-rich. Certainly, there is very little in the Budget to label it as one for the “suited-booted”. It is debatable whether the quantitative targets claimed during the Budget speech will be achieved. However, the qualitative stance in the Budget is praiseworthy — increase investment in the rural sector and infrastructure, particularly road construction, hope that these relatively labour-intensive investments will have both a magnified effect on employment as well as output. The cynical will claim that this shift in emphasis from pro-business reforms to the somewhat old-fashioned strategy of stimulating agriculture has been brought about by the Bharatiya Janata Party’s electoral defeats in the Bihar and Delhi Assembly elections. But good politics is not necessarily bad economics. This Budget may well be an example of this.
(Bhaskar Dutta is a Professor at the Department of Economics, University of Warwick, U.K.)
