Budget talk at the dinner table

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The Finance Minister's job is not an enviable one, particularly having to mollify hordes of citizens incensed over demonetisation. Here's some food for thought as you try to make sense of Budget 2017-18.

Budget 2017-18 appears to have kept the FRBM target and pegged Fiscal Deficit at 3.2%. | Imaging: Mihir Balantrapu

Archana, a post-graduate economics student, was still buzzing when she got home at 9 p.m. on February 1, 2017. It had been a long but exciting day. After having caught the Finance Minister’s speech, she’d done some seminar-hopping to find out what experts were saying, before taking an Uber home.

Her family was actively engaged in budget bashing at the dinner table. "What a let-down! No cut in income tax. What’s the point in halving income tax for people who earn up to Rs.5 lakh? Who earns so little nowadays?" Krish, her software-engineer brother was grumbling, chomping on a roti.

Her dad, a brand manager at an FMCG company, was equally annoyed. "I was expecting to get that Rs.2 lakh investment limit for 80C or a bigger tax-break on my home-loan interest. We thought the FM would cut corporate tax to 25 per cent after this note-ban. But nothing! The budget is full of rural schemes."

Archana had to pipe up: "Hey guys! All my profs think this is quite a decent budget. Look at how the FM has kept to the FRBM (Fiscal Responsibility and Budget Management) target and pegged the fiscal deficit at 3.2 per cent. Even the budget math is realistic. Total central expenditure for FY18 will be just 6.5 per cent higher and total tax revenues are projected to increase 12.7 per cent."

 

"But why should all this mumbo-jumbo about deficit matter?" asked Archana’s Mom, a Math whiz. "3 per cent is nothing. If people are in trouble, it is up to the government to spend a little more and give a few tax concessions. If you or your brother are short of cash, doesn't your dad chip in?’

Deficit woes

"No Mom. The problem is that the Indian government already spends way more than it earns. Take this budget. The Central government spent an estimated Rs.20.14 lakh crore by way of capital and revenue expenditure in 2016-17, but earned only Rs 14.8 lakh crore from taxes etc. It spent 36 per cent more than it earned! That loss of Rs 5.34 lakh crore, in budget-speak, is the fiscal deficit. That 3.2 per cent is misleading — that is the deficit as a percentage of India’s GDP."

"Oh. That’s an awful way to run the country!" exclaimed Archana's grand-mom, a die-hard saver. "Imagine if your dad earned 15k and we splurged 20k every month. We would be neck deep in debt."

"Exactly, paati. You hit the nail on the head. As it always spends more than it earns, the Indian government too is neck-deep in debt," said Archana, warming up to the subject. "India's debt now amounts to 38 per cent of its GDP. Out of every Rs.100 the government earned this year, Rs.25 went to pay interest! Pensions took away Rs.6, defence and subsidies consumed Rs.12 each. The rest has to be shared with the States too.

Borrowing boom

"So who lends them that money? Is it foreign agencies like IMF?" Grand-mom asked in horror.

"No. Thankfully, 90% of government borrowings are from Indians banks, insurers, small savings, etc. Every time you deposit money in a bank, a fourth of that is invested in government securities. But that's not good either. With the government vacuuming up some Rs.4 lakh crore from the market, other borrowers are forced to pay higher interest. That's why the Budget announcement that market borrowings will be reduced this year is good. If the Centre borrows less, interest rates may come down, Dad," said Archana.

Tiny tax base

"Well, if I faced a problem like this, sis, there’s no way I will spend less. I would simply jump jobs for a 30% pay hike," said Archana's gadget-loving brother. "The government should earn more, instead of playing Scrooge."

"Yes, but that's easier said than done. Where does the government get its income from? From direct taxes like income tax and corporate tax and from indirect taxes like excise duty, customs duty and service tax, and from one-off sources called capital receipts. Now, the problem is that very few people in India voluntarily pay direct taxes. Just 3.7 crore people paid income tax last year, which is less than 6% of the working population.

 

It would be great if we Indian citizens stopped treating the budget as a wish-granting exercise and simply looked at it as the government presenting its accounts.

 

"This creates problems. The government keeps hiking excise duty, service tax and cess every year, which everyone has to pay. Despite this, total tax revenues at Rs.10.8 lakh crore met just half the expenditure."

"Where does the rest come from?" asked Archana’s mom.

Archana explained: “Well, apart from borrowing, the government sells assets that it owns. Heard of disinvestment? This year, it hopes to make Rs.72,500 crore from selling shares of public-sector units."

"But that’s like selling off the furniture or the family jewels to pay for groceries!" exclaimed Mom, quite appalled.

"Absolutely," said Dad. "In our firm, if we made a loss and sold a factory to make it up, we would be shot! But what’s the alternative?"

"Well, one solution is to expand the tax base — make more people pay income tax. Krish, that 5% tax rate for the lowest-income bracket is intended to make more people voluntarily pay taxes," Archana pointed out.

Less government

"But the government can tighten its belt too," said Grand-mom. "Look at the number of people employed in government jobs and the perks they get. In PDS and banks, there's so much corruption."

"Right again, paati. That’s why economists keep arguing for less government. They want the Indian government to reduce staff, spend less on salaries, reduce its interference in public-sector banks and enterprises, and sponsor only the most essential welfare schemes for the poor."

"Ha! But that’s not happening. I saw the business papers devoting two whole pages to pet Pradhan Mantri schemes after the budget. And whether you want to deposit money in a bank, buy petrol or even take a flight, government companies are everywhere," observed Krish.

"Yes, there’s a lot of wastage in government spending," agreed Archana. "You know what? It would be great if we Indian citizens stopped treating the budget as a wish-granting exercise and simply looked at it as the government presenting its accounts.

"Let's demand that the government live within its means. That's the best way to run a prosperous household, wouldn't you agree?" said Archana, sitting down to eat.

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