The Myth and Mystery of India's 2019-20 Budget
If numbers and percentages are getting mentioned in newsroom discussions more frequently than usual and bonny caricatures of Finance Minister have flooded the facades of national newspapers and economic journals, be certain that the budget has been tabled.
This year, in a first of its kind move, Union Finance Minister (FM) Nirmala Sitharaman chose a vivid red cloth bag to carry the Budget papers replacing the popular leather suitcase. The entire move was described as a “departure from slavery of Western Thought.”
Ironic as it may sound, the concept of Budget owes its inception to the colonial past, and is therefore, a product of the so called “Western thought” itself.
The idea of planning and budgeting can be traced back to the Mauryan times. Kautilya’s Arthashastra talks about a system similar to the modern day budget where all the sources of income have been classified under 7 heads, together called the Ayasarira whereas the body of expenditure with 15 heads has been termed as Vyayasarira. Though the Arthashastra is considered a reservoir of wisdom, it is at best a normative description of the society, and at worst, its author’s conception of how a materialistic society ought to be governed.
The Mughal era, despite having an elaborate system of revenue administration with an army of officials such as Diwan, Wazir, Diwan-i-Tan (diwan of salaries), Diwan-i-Khalsa (diwan of crown lands), Mushriff (chief accountant), Mustanfi (chief auditor) to take care of the financial affairs, was concerned largely with the collection of revenue and consolidation of empire. The element of planning and budgeting, in the traditional sense, was missing.
The administrative nomenclatures and terminologies of several fallen empires are still in vogue, but the prevailing administrative arrangement in India with all its achievements and deficiencies is deeply influenced by the legacy of the British rule. One of the most remarkable administrative innovation of the colonisers was the budget system. Financial Resolution of 7th of April, 1860 was the instrument through which it was introduced. Government’s anticipated income and proposed expenditure constituted the budget. Under this a Central Revenue Department was also set up along with an Imperial Audit Department to integrate and coordinate the revenue activities and examine the implementation of its provisions respectively. This innovation though instrumental in the evolution of free India’s financial administration should not be mistaken for a gift from the colonisers. At least not in the traditional sense of the word. The purpose of the budget at the time of its inception was primarily to concretise the British stronghold over public finances in India. The themes of social development and planned economic growth, which are the essence of the contemporary budgetary system, were negligible if not entirely absent. The ideas like that of a welfare state and citizen centricity were given a share in the budget documents only after independence.
Thus the practice of budgeting that started in that time made its way into the constitution of an Independent India as well, though only after undergoing a sea of reforms. Article 112 under Part V of the Indian Constitution (ratified after independence) talks about the ‘Annual Financial Statement’ or the Union Budget in the following manner:
“The President shall in respect of every financial year cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, in this Part referred to as the annual financial statement.”
There are a bunch of other documents that are tabled along with the ‘Annual Financial Statement’. Some due to constitutional obligations such as, Demand for Grants under Article 113, Appropriation Bill – provided for under Article 114 – and the Finance Bill, and a memorandum explaining its provisions – obligated by Article 117. Still others are mandated by an act legislated by the Parliament in the year 2003 – The Fiscal Responsibility and Budget Management Act. These include, Macro-Economic Framework Statement, Fiscal Policy Strategy Statement, Medium Term Fiscal Policy Statement and Medium Term Expenditure Framework. These are aimed at better information dissemination to ensure government accountability on fiscal consolidation and allow for enforcement of fiscal discipline.
This year’s budget environment was uniquely wobbly. Plunging GDP growth, shrinking aggregate demand, rocketing unemployment, a deficit rainfall, stagnant credit market, escalating trade tensions, and a highly unstable immediate and extended neighbourhood dominated the economic tapestry. Amidst all this, the main concern among analysts and speculators was whether the government would favour government spending driven growth over fiscal consolidation, or vice versa. Conventional wisdom dictates that reconciling these two opposite ends is an arduous – if not impossible – task for policy makers. It is further complicated in India, where tax evasion is a massive overhang and revenues do not reflect a realistic proportion of GDP.
Keeping in view the precipitous fall in growth - <fill numbers> - analysts and markets would have responded well to an unchanged fiscal fiscal deficit – fancier term for borrowings – at 3.4% of GDP, if coupled with measures to stimulate growth. True to Republican form, however, Mr. Modi’s government chose target government borrowings at a lower 3.3% of GDP. The dream of making a $5 trillion economy by 2024 – a well-crafted façade for an unambitious target staged through an accounting trick – requires atleast 7% real GDP growth with 4% inflation. The downward revision in the fiscal deficit target, therefore, seems rather ambitious.
With less than enough borrowing, the government could opt for either of these instruments to raise funds – Large scale disinvestment, higher transfers from the Reserve Bank of India, and auction of resources like coal, 5G spectrum, etc. The decision on transfers from RBI will have to wait for the recommendations of Bimal Jalan Committee. However, the finance minister has budgeted for 1.6 lac crores under this head, suggesting she expects the report to break the government’s way. The Huawei crisis, triggered by a hawkish US President, has made the industry reluctant towards adopting the technology without Chinese players to reduce costs. Large scale disinvestment therefore, remains the sole island of hope. The government estimates revenue generation worth ₹1,05,000 crore by selling its stake in several public sector undertakings. In this process, it seems determined to shed even majority stake in some PSUs – including those making profit – if the need arises.
This budget was unique in that it desperately scoured for funds from all possible sources including those that India had forsaken for the high risk involved. The government hinted – and followed it up with a plan – to raise money from foreign loans. In this regard, the FM reasoned that India’s external debt to GDP ratio is at less than 20% - among the lowest globally – and the central government’s debt to GDP ratio has also come down significantly since 2016. While all of this is true, borrowing in foreign currency – usually, US Dollars – comes with the risk of paying a lot more due to rupee depreciation. Furthermore, while the Central Government’s financial health may be sound, the same cannot be said about state governments. Given that India is a fiscal union, the ultimate backstop if a state government falls into bankruptcy is the Central Government itself.
The government has also signalled the creation of an environment conducive for foreign investment. Statutory limits for foreign portfolio investors in a company are being considered for an upgrade to bring them at par with the limits placed on the sector as a whole. The Finance Minister said that the government was considering 100% FDI for insurance intermediaries and easing local sourcing norms for FDI in single brand retail, among a number of different measures. While foreign investments are often influenced by global rather than local factors it would be interesting to see if steps, when actually brought into force, would alter investor sentiment at all.
While the income and aspirational side of the budget tell one part of the story, the expenditure side tells the other. India’s budgets are roundly criticized for mis-prioritization – where some enjoy a huge piece of the pie, others have to be content with a modest one. For convenience sake, we divide the expenditure side into the following major sub-heads – Tax Breaks, Credit Promotion, Defence, and Agriculture.
The budget came down heavily on individuals. As the Finance Minister noted,
“In view of rising income levels, those in the highest income brackets need to contribute more to the nation’s development.”
The surcharge payable by those having taxable income between ₹2 crore to ₹5 crore, and ₹5 crore and above, has been increased to 3% and 7% respectively. The move will not just irk the rich, but perhaps dissuade a good deal of incoming FPI as well. This is because most FPI is instituted through Trusts and Limited Liability Partnerships(LLPs), both of which are treated as individuals for tax purposes.
Corporate Tax, which constitutes the largest chunk of government’s tax revenue has also been revised. The uniform tax slab of 25% slab for all companies, a promise made by Arun Jaitley in 2015-16 budget, was expanded to companies having a turnover of upto ₹400 crore, from the previous ₹250 crore ceiling. However, although these companies comprise 90% of such firms, the total tax payable by them is not more than 10-15%. M Govinda Rao, Member of the Fourteenth Finance Commission, points out,
“If large investments have to be attracted, then the reduction should have been general and the scaffolding approach can only disincentive the companies to grow bigger and better.”
In a pitch to make India a global manufacturing hub for vehicles run on electricity the FM proposed an additional tax exemption of ₹1.5 lakh to buyers. Along with this the government has moved the GST Council to lower GST rates for such vehicles from 12% to 5%. In a scenario where adequate charging infrastructure is not in place the proposed benefits might have to wait for a long time to reach various stakeholders.
The much talked about Angel Tax also found a mention in the Budget document. The FM said,
“To resolve the so-called ‘angle tax’ issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subject to any kind of scrutiny in respect of valuation of share premiums.”
In the past few years the already volatile baking sector has become highly unstable and is crippling under the burden of large scale Non-Performing Assets (NPAs). The worst hit are the public sector banks. In order to clear the balance sheets of banks and ease the massive liquidity crisis various measures ranging from restructuring of assets, writing off loans, capital infusion etc have been employed in the past. The latest one comes in the form of a capital infusion worth ₹70,000 crore in public sector banks. This is certainly going to ease the liquidity situation. However, the issue needs a long term solution which might require some structural reforms. Although, the budget promises reforms but their nature is still not know. Therefore, one will have to wait.
Non Banking Financial Companies (NBFCs) crisis has the likelihood of transforming into a catastrophe for investors and halting lines of credit beyond the banking sector. In order to restore and rebuild the confidence of investors the government has decided to empower RBI with respect to the regulation of this sector. The central bank announced additional liquidity support of about ₹1.34 lakh crore through the channel of banks. The banks on the other have been incentivised by providing a time bound government guarantee to the ones that agree to acquire the assets of the crisis hit NBFCs. In addition to this, under certain circumstances in order to protest the depositors’ interest the central bank might also supersede the NBFC board, for a maximum of five years. The NBFCs will also be allowed to raise capital through FPI and Foreign Institutional Investment (FII) who will be permitted to invest in debt securities via shadow banks.
All these measures are likely to spur a positive change, but whether they’d be sufficient in solving the larger issue is yet to be tested.
The allocation for other important sectors like Defence and Agriculture remained unchanged. The Defence sector though, received ₹3.19 lakh (the highest till date) might not be adequate considering the military modernisation drive the centre has claimed to be on and the fact that about ₹1.12 lakh crore is earmarked for military pensions. Talking about Agriculture the FM in the budget speech highlighted schemes like online national agriculture market e-NAM, farmer producer organisations and pushed for ‘Zero Budget Farming.’ The points though important in isolation have failed to fit well and find relevance with the drought hit farmer community. The ₹75,000 crore worth PM-KISAN scheme has not been extended to all the farmers, against the poll promise, and greater chunk of intended beneficiaries are yet to receive even their first ₹2000 installment. Despite, all the above mentioned merits and deficiencies the government still has time to fix all the loopholes. One fact that spurs disappointment amongst speculators and doubt amongst opponents is that despite having such an enviable mandate the incumbent decided to play safe on various fronts, especially on the issue of fiscal consolidation.
Deliberation is the warrant of democracy. Keeping in mind the democratic principles of our nation one must expect the government to take into account the perspective of various stakeholders during the preparation as well as the implementation of any policy measure. Even though the document under scrutiny is expected to present a rigid, quantifiable and highly predictable picture of the future economic events one might also think of it as a living document that breathes through its lifetime (of one financial year) on various stages of implementation, adjusting its breath across varying temperatures and pressure points and taking the required medicine of constructive criticism during those nauseating episodes to save itself and the fiscal health from ailing. The practice has evolved over the years, and mostly for good, it’s time the document does the same.
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