16 Feb Union Budget 2019: Cynically giving back a fraction of what has been taken
The Union Budget 2019-20 is a full Budget in spite of the title of Interim Budget. The convention is that it should have been a Vote on Account to carry on the business of government for a few months till the full Budget is presented by the new government in July. However, nothing stops a government from using the occasion to make announcements that may help the ruling party to win the coming elections. The present dispensation is in need of a please-all Budget since its recent showing at the hustings has not been good. So, the Budget has been carefully crafted to please all the big sections of society.
The Budget speech starts off with the claim that the Indian economy is doing well with a high growth rate, with the best growth coming in the year of demonetisation. This has two implications: one, there was no impact of demonetisation on the economy while other data shows that this is not true; two, the revenue shown in the Budget may not turn out to be correct so that the fiscal deficit will be larger if all the promised expenditures are made next year. Thus, either ‘fiscal prudence’ will be sacrificed or the expenditures curtailed.
The implication also is that any new government that comes to power in May-end will be tied to the proposals made in this Budget. It would be difficult for the new government to not implement these proposals lest it becomes unpopular as soon as it starts its life. This is another reason that the Interim Budget is a vote on account so that the hands of the new government do not get tied up. But times have changed and niceties are not being observed.
The Budgetary Calculus
The overall expenditures in the Budget are at Rs 27.84 lakh crores, larger than last year’s figure by 13 per cent. These are to be financed by revenue receipts at Rs 19.78 lakh crores which is higher than last year’s figures by 14.5 per cent. Of this figure, tax revenue would be 17.05 lakh crores, higher by 15 per cent than last year’s figure. Non-tax revenue would be Rs 2.73 lakh crores showing an increase of 11.4 per cent. Disinvestment is targeted at Rs 90,000 crores showing an increase of 12.5 per cent over last year. Borrowing would be Rs 7.04 lakh crores, higher by 11 per cent. Thus, a large chunk of the increase in expenditures would be financed by tax revenue. Would this materialise or will the deficit be higher than shown in the Budget or would there be cut back in some of the schemes announced?
The fiscal deficit for the current year is shown to be 3.4 per cent and that is also the target for the coming year. The remarkable thing is that for the current year, all the budgetary targets seem to have been met. The revised figures are more or less the same as the budgeted figures. Usually this is not the case. Is there some creative accounting to achieve this degree of achievement of targets? For instance, revenue receipts were estimated to be Rs 17.26 lakh crores and they are given as Rs 17.3 lakh crores.
It is well known that creative accounting is used to achieve the fiscal deficit target. For instance, the deficit is pushed to the States and the public sector. They are forced to borrow more and the budgetary support from the Centre is correspondingly shown to be less. Thus, the Internal and Extra Budgetary Resources (IEBR) have been rising. If various levels of governments and public sector are added up, the fiscal deficit is not less than six per cent of the GDP. Hence the target of holding the Fiscal Deficit at three per cent seems to be irrelevant.
Receipts on Target!
Tax revenue was targeted at Rs 14.81 lakh crores and it is now given as Rs 14.84 lakh crores. Corporation tax was supposed to be at Rs 6.21 lakh crores and it turns out to be Rs 6.71 lakh crores. Strangely, Income tax was targeted at Rs 5.29 lakh crores and exactly this figure is reached. Union Excise duties were targeted at Rs 2.6 lakh crores and exactly that figure is expected to be attained. Non-tax revenue was targeted to be at Rs 2.45 lakh crores and that figure is what is expected to be achieved.
The GST, as expected, is short by Rs 1 lakh crore. This shortfall is made up by the Corporation tax being higher by Rs 50,000 crores, Customs higher by Rs 18,000 crores, service tax higher by Rs 9000 crore and reduction in share of the States at Rs 27,000 crores. The figures are not usually so well rounded and that is what suggests that these figures are not actual but carefully crafted to show that the fiscal targets are being met.
For the coming year (2019-20), Corporation tax is expected to rise by 13.3 per cent and income tax by 17.2 per cent. Excise duty is to remain unchanged but Customs is to rise by 11.5 per cent. The GST is to rise by a whopping 18.2 per cent. The States’ share of taxes is to rise by only 10.9 per cent. Capital receipts are to rise by 10 per cent and the total receipts to rise by 12.9 per cent. Would this be enough to finance the existing commitments and provide for the announcements already made? This is where doubts arise.
Another strange feature is that the increase in Corporation tax and Income tax is almost the same which has mostly not happened in the last two decades. Usually Income tax increases much less than the Corporation tax. Further, many of the figures are all neatly rounded which implies that exact figures have not been calculated and only some last-minute figures have been put. Consider, Corporation tax is placed at Rs 7,60,000 crores, Income tax at Rs 6,20,000 crores, Union Excise duties at Rs 2,59,600 crores, CGST at Rs 6,10,000 crores and IGST at Rs 50,000 crores. So, are these figures pulled out of a hat to show higher revenue?
Claim of Better Compliance
The government claims that the structural changes introduced in the last few years—demonetisation, GST and digitisation—are yielding dividend in the shape of better compliance. So, it has argued that more can be given back to the poor. On this basis, it is promising Rs 6000 to each small and marginal farmer—numbering 12 crores. It promises that those who file a return of less than Rs 5 lakhs will not have to pay an Income tax. It has also suggested a scheme for pension for workers in the unorganised sector earning up to Rs 15,000 per month.
The implication of all these and other schemes would be more than Rs 1 lakh crore. In the current year, the increase in expenditures over the previous year was Rs 3.1 lakh crores or 14.5 per cent. So, if this is the regular increase in expenditures, this should also be the case for next year over this year. If Rs 1 lakh crore is added to this normal increase, the increase should have been by 18.5 per cent or Rs 29.15 lakh crores instead of the allotted Rs 27.84 lakh crores.
But there are no new taxes to fund this much of extra expenditure. The government is claiming that the additional resource will come from better compliance. Whether that happens or not remains to be seen but in the meanwhile the government will claim that it has given back to the sections who have been suffering as a result of demonetisation and GST.
It is claimed that direct tax collection has risen from Rs 6.38 lakh crores in 2013-14 to Rs 12 lakh crores in 2018-19—a doubling in five years. This gives a compound growth rate of 15 per cent. Earlier even higher growth rates were achieved; so this is nothing unusual. It is said that the number of returns being filed has increased in this period from 3.79 crores to 6.85 crores—again a near doubling of the number. But, in 2012-13, there were 5.2 crore individuals in the tax net either as filers of tax return or as payers of TDS but who did not file a return. Compared to this, the number has not increased so sharply. Many with low incomes have entered the tax net after the Seventh Pay Commission revised salaries upward. This has boosted the numbers but the average tax paid by these people is negligible. Effectively, about 20 million individuals pay income taxes and the rest file either nil return or show very low taxable incomes.
The government has been talking of widening the tax net by bringing in more people in the tax net. However, as argued above, most of those in the tax net pay little or no tax. Now, with the concession in income tax to those filing a return of up to Rs 5 lakhs, a large number will no more be in the tax net. Thus, those earning up to five times the per capita income will be out of the net leaving very few in the tax net. Actually, as the Minister mentioned, one need not pay any tax on a much higher income due to the various tax concessions available.
A calculation shows that up to Rs 10 lakhs of income one need not pay a tax. Such provisions will be used mostly by businessmen who sub-divide their income among all the family members. Salaried employees do not save so much as to be able to avail of the various deductions and concessions. Thus, those who generate black incomes are the ones who will escape using the concessions and deductions.
Higher compliance should show up as an increase in the tax/GDP ratio. It is slated to rise marginally only from 5.9 in 2017-18 to 6.57 in 2019-20, provided that the tax realisation is as per the projections in the Budget. Demonetisation is not the real reason behind the increase in direct tax collections. In 2011-12 income tax increased by 18.3 per cent, in 2012-13 it rose by 19.5 per cent and in 2013-14 by 21.01 per cent. All these are pre-demonetisation years. In 2016-17, the increase was by 21.5 per cent largely due to the two Income Declaration Schemes and not demonetisation which brought down the rate of growth of the GDP.
The government has been putting special effort at collection of income tax to justify demonetisation. It has set targets for the Income Tax Officers who have squeezed the businessmen and promised them a refund later on. However, refund of excess tax payment has been delayed and so on. Thus, if compliance has improved marginally it is due to the effort of the Income Tax Department.
In fact, the department lacks the manpower to audit in detail 64 million tax returns. According to the Budget speech, last year 99.54 per cent of the returns were accepted as they were filed, that is, automatically accepted. That is only about three lakh returns are scrutinised. This is roughly the number also audited in 2012-13. Thus, many can simply escape the scrutiny and continue to evade taxes. In brief, how much compliance has increased is not clear.
Expenditures: Too Little too Late?
Total expenditures are planned to increase by about 13 per cent. Of this, the revenue account, which implies all the expenditures on which no return is expected, is expected to rise by 14.5 per cent and interest payments by 14 per cent. These two squeeze out the entire increase in expenditures so that nothing is left for increase in capital expenditures. This has long-term implications for the growth of the economy and is expected when a lot of resources have been allotted to the new schemes without raising any new taxes.
The PM Kisan Yojana for farmers caters to the landed but not the landless who are the really poor in rural areas. Further, the scheme may compensate the farmers but compared to what the farmers have lost in the last few years it would be paltry. That is why publicly many farmers’ bodies have expressed unhappiness with the scheme as being too little too late. The government will attempt to give Rs 2000 per farmer by the end of this financial year so as to convince them that it is not just lip-service but a serious scheme which will give them some money.
But how is this scheme to be implemented so quickly? Farmers need to be identified. The Telangana scheme was rolled out only after identification of the farmers was done. It is likely that, as has happened with so many schemes, they do not get implemented properly and a lot of corruption seeps in. The scheme also leaves out the landless or it may not be able to identify the share croppers and other such tenant farmers who also need support. Thus, it may not be able to help the really poor in rural areas and may lead to a lot of discontent. If that happens, the scheme may end up resulting in a lot of discontent.
The pension scheme seems to be under-funded. Each worker is supposed to contribute Rs 100 or Rs 55 per month and the government is to also match this figure. This scheme is to benefit 10 crore people, so at a minimum the budgetary implication is Rs 6600 crores per annum; but only Rs 500 crores is allotted. The benefit of this scheme will come into play only at retirement; in the meanwhile, the savings in the economy will increase. Will the unorganised sector workers be enthused by this scheme if they get nothing immediately?
The MGNREGS is also under-funded. It has been allotted Rs 60,000 crores. Its allocation this year was Rs 55,000 crores but with a supplementary demand of Rs 6500 crores and possible additional demand of Rs 4000 crores, the total would be Rs 65,500 crores. Even then there have been reports from the field that many are unable to get the work they need. In other words, more needs to be allotted. Instead less is being allocated.
The high demand for work under the MGNREGS is due to the persisting crisis in the unorganised sectors where many units in urban areas closed down during demonetisation so that workers had to return to rural areas where they sought work under this scheme. The GST added to the problems for this sector. That is why demand for work under this scheme has been rising and budgetary allocations for it have had to be increased.
Under-funding of expenditures is being resorted to so as to maintain the fiscal deficit figure at the level of 3.4 per cent. Some core schemes like the Umbrella Scheme for SCs and STs had a revised allocation of Rs 11.1 thousand crores and next year will have Rs 9.1 thousand crores. The Umbrella Scheme for the minorities had an allocation of Rs 3948 crores last year but next year will have Rs 1551 crores, almost half. Other vulnerable groups had an allocation of Rs 2287 crores this year but next year will have only Rs 1227 crores. Thus, all the schemes for the vulnerable sections have to face cuts.
The Green Revolution, White revolution, Blue revolution, PMAY and Swachch Bharat Mission have lower allocations than this year. Allocations for Sichai Yojana and Awas Yojana are almost the same as this year. Some schemes have a sharp rise in expenditures like for the Education Mission, Swasthya Bima Yojana and Ajeevika. The transport sector has received big increases and so has the food subsidy to the Food Corporation of India. These are the schemes that find mention in the Budget speech. The point is that when some big schemes are announced with large allocations then other running schemes of the government are allowed to decline or stagnate. The priorities are altered.
It is also possible that as the deficit rises due to expenditures on under-funded schemes, some other schemes may be curtailed. In that case, would some of the schemes announced turn out to be mere promises? Take the example of the Swachch Bharat Mission which is supposed to lead to a cleaner nation. A laudable goal but its achievements are patchy with many villages, declared Open Defecation Free (ODF), are so only on paper and not in reality. Further, if it had really been working why are most of the rivers so polluted with sewage and industrial effluents flowing into them? Similarly, electricity to every village under the Gram Jyoti Yojana has in many cases only meant a pole in a village but not the energising of the connections to homes.
The Real Rate of Growth and Losses to the Marginalised
How much of a benefit would accrue to the sections who are being favoured in this Budget? Actually, the loss of incomes for the unorganised sectors, of which the biggest component is farmers, is much larger than the promised amount now sought to be given to them.
Currently the rate of growth of the economy is not seven-eight per cent as claimed by the government but one per cent as repeatedly shown by this author. Thus, if the economy has lost about six-seven per cent of growth in the last two years, the economy as a whole would have lost about Rs 20 lakh crores and a bulk of this would be in the unorganised sectors. The government hopes to appease these sections by offering them Rs 1 lakh crore. This is highly cynical but the moot point is: electorally would this work? Further, if the rate of growth is one per cent, the GDP assumed is higher and the fiscal deficit as a ratio of this GDP would be higher.
This low rate of growth is the bane of employment generation which, according to reports based on the leaked NSSO Report, has led to the highest level of unemployment in the country at 6.1 per cent. The CMIE report showing loss of 11 million jobs in 2018 corroborates this kind of figure. Further, the AIMO data also shows large scale loss of jobs in the small sectors. It is the unorganised sector which has an overwhelming number of jobs and it was the one hit by the two big shocks to the economy and loss of jobs. This has resulted in an increase in underemployment. Those in the unorganised sector cannot afford to be unemployed. Loss of jobs has occurred in the non-agriculture sectors and workers have migrated back to the villages. That is why, as pointed out earlier, the demand for the MGNREGS has shot up.
The government has now started to say that no reliable data is available on employment. It is argued that neither has it the data nor anyone else in the economy. This is very damaging to policy-making since it means that the policy is being drawn up in thin air. It also implies that the GDP data too is incorrect since to calculate the contribution of the unorganised sector to the GDP, the employment data is needed. The implication further is that the Budget data is also incorrect since that is projected on the basis of the expected GDP growth.
The government is repeatedly arguing that the EPFO data is showing an increase of 7.5 million jobs in the organised sector. As pointed out by this author, this increase is only registration but not necessarily creation of new jobs. The official spokespersons then point to Mudra loans and claim that about 15 crore loans have been given and that would have created at least three crore jobs. This argument is also weak since the average loan is Rs 50,000 and this is over three years. Very few loans are of more than Rs 2 lakhs which is needed to create a job. Thus, most of these loans would have simply provided the means to buy raw material and continue activity or substitute the loan taken from the local money lender.
Next, it is pointed out that taxi aggregators and e-commerce firms have employed a lot of drivers and delivery people. It is also pointed out that so many people have become chartered accountants, doctors, dentists, etc. and each would, provide so many jobs. In other words the implication is that there is no dearth of jobs and the hue and cry over employment is made up.
What is forgotten is that this is a natural process of growth of an economy where some jobs are always created by those becoming doctors, chartered accountants, transporters and so on. If taxi aggregators are employing more people, then the number of private chauffeurs and taxi-stand drivers are declining. If the e-commerce companies are employing more, then the regular shop-hands are becoming fewer. We have to see how many jobs are being created in the net.
Finally, the real test is the job market. If 23 million apply for less skilled 90,000 Railways jobs or 2.3 million young apply for 360 jobs of peons, then that points to a crisis of jobs. For these kind of jobs Ph.D., M.Tech., MBA, etc. are applying. They are applying for jobs not commensurate with the skill they have acquired and they would be frustrated in these jobs if selected. This shows the desperation of the young to get any job and if possible a government job.
In brief, the Budget is based on data which is of doubtful value but the aim of the ruling dispensation is not budgetary propriety. It is to win elections by pretending to give to every important section of the population. Especially, to the sections it hurt the most due to demonetisation and then the GST. However, as pointed out, the losses of the unorganised sectors are far greater than what is on offer to them. Inequity will continue to rise.
This article points to under-funding of various expenditures and higher projection of revenue. Some of the revenue figures are round figures which implies that these are approximate ones hurriedly put down. Thus, the fiscal deficit is likely to be higher if all the schemes are adequately funded. It is also pointed out that the real rate of growth is one per cent and not seven per cent as claimed by the government. This implies that fiscal deficit as a per cent of GDP is higher. Given all this, there is likely to be greater cuts in expenditures on continuing schemes, like what has happened in some core sector schemes. Allocations to capital formation have not been increased; so they will decline in real terms. This is likely to impact future growth. Especially, because private investment is sluggish. There may be some increase in demand due to the additional transfers to farmers and tax concessions to the lower middle classes— about 0.5 per cent of the GDP. But this would be inadequate to revive growth hit by demoneti-sation and the GST.
Farmers have lost heavily because the farm prices are ruling at a low level given the decline in demand for their produce. Surpluses are a result of decline in demand consequent to loss of incomes and not due to high production. Persisting high levels of malnourishment points to the inability to purchase enough foodgrains. Low rates of inflation are a result of low farm price rise and that is the cause of farmers’ crisis. This is likely to continue so that farmers may continue to agitate. They are not being offered the 50 per cent above full cost, as recommended by the Swaminathan Committee Report.
Youth is facing unemployment with the collapse of the unorganised sectors. Mudra loans etc. are inadequate to compensate for the loss of employment. Continuing high demand for work under the MGNREGS points to that. Traders and other small businesses have also suffered.
The schemes announced for farmers, MSME and for employment are inadequate and unlikely to yield immediate dividends. These are also being funded at the expense of other schemes started earlier. Thus, there is likely to be confused signals. Clearly, the BJP is not confident of victory; so it has sought to placate the various sections unhappy with it but what it is seeking to do via the budget may prove to be inadequate to what is needed.
The author, a well-known economist who retired from professorship at the Jawaharlal Nehru University, New Delhi in the recent past, is currently the Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi