BackThe budget’s fine print in numbers
Finance minister Arun Jaitley disappointed some by not dismantling the subsidy regime but tried to provide 'immediate happiness for all' through income tax relief
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Finance minister Arun Jaitley, in his first budget, may have disappointed some by not dismantling the all-pervasive subsidy regime in one fell swoop. Or by not promising a timeline for rapidly overhauling the land and labour laws. But he has also not stirred up a hornet’s nest in the process.
The spectacular victory for the Bharatiya Janata Party (BJP) in the Lok Sabha election came with the promise of achhe din (good days). Admittedly, Jaitley had a difficult job in presenting his first budget within about six weeks after assuming office.
Treading the waters very, very carefully, and couching his messages with great nuance, Jaitley has tried to provide “immediate happiness for all" through universal personal income tax relief. The exemption limit has been raised from ₹ 2.5 lakh to ₹ 3 lakh for senior citizens, and from ₹ 2 lakh to ₹ 2.5 lakh for others. In an economy with a per capita annual income of about ₹ 75,000 and unemployed young people, the logic of allowing old people to enjoy as much as four times the average income tax-free may be debated. But given the—albeit somewhat irrational—clamour for achhe din now and here, such a palliative makes sense only if there are planned steps ahead to secure achhe din on a secure and sustained basis.
Many commentators, often quite justifiably, dismiss the numerous schemes with inadequate funding mentioned in the Budget speech as little more than pure rhetoric. So, now that the initial dust raised by the budget has settled, it’s time to have an initial look at what the numbers buried in the voluminous documents indicate about the nuanced signals. What are these signals in the finance minister’s first Budget in terms of departures from the interim budget of his predecessor P. Chidambaram?
First is a commitment to fiscal consolidation. No difference here. Commendably, Jaitley has stuck to Chidambaram’s fiscal deficit target of 4.1% of gross domestic product (GDP). Indeed, his fiscal deficit is ₹ 25 billion higher than in Chidambaram’s interim budget. So, how is it still 4.1% of GDP? For the current year, he has stuck to the same GDP growth estimate of 13.2% as his predecessor. Fortunately for him, the Central Statistical Office’s provisional estimate of GDP at current market prices ( ₹ 113.551 trillion) for 2013-14 released on 30 May is ₹ 346 billion ( ₹ 34,600 crore) higher than the corresponding 7 February advance estimate used by his predecessor. As a result, with the same 13.2% growth projection, Jaitley has a higher GDP for 2014-15, and his higher fiscal deficit is still an unchanged 4.1% of GDP.
Second, Jaitley has hiked total expenditure by ₹ 31,700 crore from the interim budget. On the non-Plan side, the main increases are on account of capital expenditure in defence and subsidy for indigenous fertilizer ( ₹ 5,000 crore). While the emphasis on defence is self-explanatory, the increased outlay on fertilizer subsidy may be an exercise towards ‘truth in budget making’. On the Plan side, vis-á-vis the interim budget, outlays have been enhanced on roads and highways ( ₹ 3,100 crore), national clean energy fund ( ₹ 2,200 crore), rural development ( ₹ 1,600 crore), human resource development ( ₹ 1,300 crore), agriculture and railways ( ₹ 1,100 crore each), civil aviation, agriculture and external affairs ( ₹ 1,000 crore each), water resources ( ₹ 700 crore), tourism development, and communication and information technology ( ₹ 600 crore each), and youth affairs and sports ( ₹ 500 crore). The nuanced emphasis on infrastructure, agriculture, human resource development and on defence and external affairs—two main functions of the central government in the Indian Republic—are clear.
Third is the question, with this added expenditure, and tax concessions costing the central government a net ₹ 9,200 crore, how does Jaitley contain the deficit to within ₹ 2,500 crore of that in the interim budget?
The answer is in non-tax revenue and higher disinvestment receipts. Under non-tax revenue from miscellaneous general services and from social security and welfare, Jaitley has provided for an extra ₹ 1,500 crore each. Proposed utilization of money collected and not used under schemes such as National Clean Energy Fund and Central Road Fund, is reflected in the increase in revenue from miscellaneous general services and is welcome.
Under non-tax revenues from economic services, he provides for an extra ₹ 6,500 crore from three sets of spectrum frequencies and related charges, ₹ 4,800 crore from roads and bridges and ₹ 2,000 crore from other general economic services. These higher revenues from economic services may indicate a more rational and vigorous approach to reforming the user charges. He has also increased the disinvestment receipts by ₹ 6,500 crore signalling the resolve of the Narendra Modi government to move aggressively on this front.
Furthermore, there is an extra ₹ 13,000 crore as dividends from the Reserve Bank of India (RBI). It is indeed equivalent of monetising the deficit. A large part of RBI’s income is from interest on government securities that it accumulates by lending to the government. When the government appropriates the surplus, in effect, it makes some of the past RBI loans interest-free. A monetary expansion takes place as a portion of RBI’s networth, which is a non-monetary liability, is replaced by an equivalent amount of monetary liability. Given the choice between having a higher fiscal deficit in the Budget and sticking to the target of his predecessor, Jaitley may have chosen this somewhat cosmetic way of preferring the latter. In his nuanced budget, signalling has played a major role.
Change management needs adroit handling in a boisterous democracy. Only time will tell how good Jaitley’s skills are in implementing a decisive change in the approach of policies from populist subsidies to robust and sustainable policies for unleashing the full potential of the Indian people and the Indian economy.
The author is an economist.
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