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Why the Budget numbers don’t add up -Rohit Azad
-The Hindu

The belt-tightening requires the poor to pay increased indirect taxes while the cushion of the social sector is consistently taken away from them.

There is always a hype around a Union Budget but this time around, the expectations were running sky-high in terms of it being the make-or-break Budget for the Narendra Modi-led government since it happens to be in the middle of his five-year term. I must say at the outset that the Budget speech was replete with so much detail that it sounded directionless, with too many announcements, most of which had very meagre amounts. Unfortunately, however, it’s not just the speech but even the details, or the Budget numbers as they say, which are as directionless.

The only thing which seemed clear and focussed was the beginning when Finance Minister Arun Jaitley said that the global economy is in a serious crisis and does not seem to be coming out of it any time soon. With international scope limited for exports, therefore, what was required of this Budget was a direction to the economy in terms of generating demand domestically, which in turn would generate employment for the fast-growing unemployed youth population of this country. This Budget does little or nothing on that count.

Let’s first get the record straight on one central issue. A hype has been created about the Indian economy being a bright spot in this gloomy international picture by pushing in some GDP numbers which are seen to be suspect even by the Chief Economic Adviser to the government. A simple analogy will help here. If you change the scale of measuring something from inches to centimetres, it is obvious that the year you make the change, the rate of growth might seem high whereas it actually is not. The point I am making here is that far from being an exception in the global slowdown, India is as much a part of it as China is, even though the extent might not be the same.

Addressing the slowdown

A Budget in such difficult times should address the problem of a slowdown squarely. It can do it in two ways: directly by injecting demand into the economy; and indirectly by creating opportunities for other sources of demand to pick up. Big business and the media want the government to do the latter and not the former, whereas a pro-people government will push for the first. The strange thing about this Budget is that it does neither. It’s not surprising, therefore, that the ‘markets’ have not responded too enthusiastically either to this Budget.

An economy grows based on demand for its goods and services. There are broadly five sources of demand in an economy: consumption by the poor, consumption by the rich, private investment, fiscal deficit and trade surplus. A gloomy external sector means the last source is not available. Contrary to popular belief, the indirect effects of a Budget are positively related to the direct effects of it. So, while a rise in the fiscal deficit directly increases the profits as well as wages in the economy, thereby pushing demand up, it indirectly increases private investment if ‘business sentiments’ are low otherwise. After all, if not prospective demand for their goods, what else qualifies for ‘sentiments’ for the corporations. So, let’s see how this Budget has fared on providing this impetus directly.

Fiscal consolidation quick-fixes

The Finance Minister has maintained that he will adhere to the ‘fiscal consolidation’ map, which means bringing down further the fiscal deficit as a proportion of GDP. Fiscal deficit is essentially government expenditure minus its tax revenue. So, bringing it down means a fall in government expenditure and/or a rise in tax revenue as a proportion of GDP. This problem becomes doubly difficult if the estimate of the GDP itself is inflated, which is what has happened this year. The revised estimate of the GDP for 2015-16 is less than the Budget estimate by about Rs. 5,41,753 crore. If the denominator itself is falling in a ratio, the numerator has to fall further for the ratio to decrease. The way they have managed to keep the ratio to 3.9 per cent despite such a fall in the estimated GDP is through increased collection in the indirect taxes and excise duties even as the non-plan expenditure has declined.

For 2016-17, the Finance Minister has promised to bring this ratio down to 3.5 per cent primarily through a 20 per cent increase in indirect taxes and as much as 39 per cent in excise duties, even as the corporate taxes go down. This is ominous in itself since you are tightening the screws whereas what the economy needs is its loosening. The implications of such tightening can be fully understood if we assume, like last year, that the revised estimates of GDP may fall short of the Budget estimates again in the next financial year. It would mean drastic cuts in expenditure and increase in indirect taxes even further to meet this limit set by the Finance Minister.

A rise in indirect taxes as opposed to direct taxes is a clear case of regressive taxation because both the poor and the rich pay the same tax per unit of purchase of an item. That this has been the pattern of revenue mobilisation of this and the previous government goes to show their concern for the ‘aam aadmi’. There is another problem an increase in indirect taxes brings to the table: inflation. The fact that the economy is not witnessing high inflation today is not because of any prudent monetary policy but because the oil prices are at a real low — that might not be the permanent state of affairs in the coming year. If the oil prices go up, with these hiked indirect tax rates, inflation might hit through the roof.

As far as the proposed increase in expenditure is concerned, it is important not to look at the absolute numbers but at their ratio with the estimated GDP since it is obvious that no government can afford to decrease the absolute amount of allocation. So, for example, while there is an increase in the absolute allocation under the Mahatma Gandhi National Rural Employment Guarantee Act, its proportion to the GDP has fallen from its previous figure in the revised estimate. For the food subsidy, it’s even worse, even the absolute amount allocated remains the same as last year’s revised estimate. In fact, since the current Finance Minister took office, there has been a fall in the ratio of Union government expenditure to GDP under Integrated Child Development Services, health, primary education, mid-day meals.

Such a strict belt-tightening shows that the long wait for the ‘achche din’ is not over. It requires the poor to pay through their nose through increased indirect taxes while the cushion of the social sector is consistently taken away from them, and all of this is being done in the name of creating ‘business sentiments’, which themselves are ever elusive.

(Rohit teaches Economics at Jawaharlal Nehru University. Email: rohit@jnu.ac.in)