The Post-Truth Budget
There are two arrows left in the finance minister’s quiver... the huge amount of black money deposited... (and) the goods and services tax
Like most post-truths, Union Budgets tend to hide more than they reveal. The 2017-18 Budget was no exception. Since its strengths and weaknesses have been debated ad nauseam over the past fortnight, I’ll stick to interesting micro-numbers that once extrapolated, can provide clues to this government’s political and economic priorities.
First, the bad news. The government spends 25 per cent of its annual Budget outlay on interest payments. In 2017-18, out of the Budget’s total size of Rs 21.47 lakh crore (up from last year’s Rs 19.78 lakh crore), Rs 5.23 lakh crore will be eaten up by servicing India’s domestic and external debt.
Defence, meanwhile, gets Rs 2.62 lakh crore, a little more than last year. This though, is still barely two per cent of India’s GDP (Rs 150 lakh crore). But the bigger worry is that a major chunk of the defence budget goes into salaries and overheads, leaving little for modernising weapons systems across the Army, Navy and Air Force.
Health and family welfare fare worse. They have been allocated Rs 0.49 lakh crore. Subsidies continue to receive nearly 12 per cent of the Budget at
Rs 2.40 lakh crore.
Agriculture gets Rs 0.57 lakh crore, while rural development receives Rs 1.29 lakh crore. The Rs 48,000 crore allocation for MGNREGA too, in real inflation-adjusted terms, is only a smidgen above allocations made in 2008-09.
On the receipt side, there is a welcome surge in personal income tax revenue (Rs 4.41 lakh crore), a rise of 25 per cent over last year’s revenue of Rs 3.53 lakh crore. Corporation tax though, has only edged up by nine per cent from Rs 4.93 lakh crore to Rs 5.39 lakh crore, indicating a slow pick-up in corporate earnings — a worrying sign for the government. Service tax has risen more smartly — by 20 per cent — from Rs 2.31 lakh crore to Rs 2.75 lakh crore, while customs and excise revenue have ticked along at a growth of nearly 18 per cent.
Beyond numbers though, lies a fundamental question: what is the broad economic philosophy of this government? We have already had four Budgets from Finance Minister Arun Jaitley, including the interim Budget in July 2014, two months after the BJP-led NDA government took office.
Several clues have since emerged. First, Jaitley is a cautious finance minister who believes in incremental, not big-bang, reforms. The only big-bang fiscal event in the past 33 months of the government’s tenure has been demonetisation — a move spearheaded by the Prime Minister, not the Finance Minister.
The second clue is that Jaitley has a lawyerly approach to economic and tax policy. He has not yet repealed former finance minister, Pranab Mukherjee’s noxious retrospective tax because there are ongoing legal arbitrations which, he says, must wind their way through the judicial process. Such a tortuous, counterfactual defence of retrospective tax will please few except its author, President Mukherjee.
Even the UPA’s former finance minister, P. Chidambaram (Mukherjee’s predecessor and successor as finance minister) has called for the abolition of retrospective taxation. This piece of draconian legislation only helps lawyers as cases wind their way interminably through the rusted legal machinery. Meanwhile, the retro tax greatly damages India’s global reputation as an investment destination with coherent tax laws.
The third clue the 2017-18 Union Budget has thrown up is that many ministries are poorly administered. The defence ministry hasn’t spent its entire budget designated for weapons acquisitions, leading to a Rs 7,000 crore unspent corpus. Shockingly, too, the small Rs 1,000 crore Nirbhaya fund for women’s safety, remains largely unspent.
The good news is that pilferage in the public distribution system (PDS) has reduced with the widespread use of Aadhaar’s biometrics technology. The government has meanwhile, kept the fiscal deficit to 3.2 per cent, balancing increased public expenditure with fiscal prudence. The current account deficit (CAD) is down to 1.9 per cent, largely on account of soft oil prices (though they are on the rise again) and lower gold imports.
Since the Railway Budget was subsumed in the Union Budget for the first time, it has received little attention. There is a 22 per cent rise in budgetary allocation, much of it devoted to building new railway infrastructure and enhancing safety, given the recent spate of train accidents.
The construction of bio-toilets sits well with the government’s Swachh Bharat initiative. The proposed listing of IRCTC, IRFC and IRCON will unlock further resources to fund Indian Railways’ shambolic infrastructure.
The damage done to economic growth by demonetisation has been largely contained, though industrial production has declined and FMCG and retail sales have been hit. This negatively impacts tax revenue, but there are two arrows left in the Finance Minister’s quiver.
The first is the huge amount of black money deposited between November 9 and December 30 last year. In the Budget, Jaitley put the amount at Rs 10.38 lakh crore out of demonetised notes valued at Rs 15.44 lakh crore, a fact that was under-reported in the media. It is estimated that around Rs 5 lakh crore of these cash deposits represent unaccounted income.
If Rs 5 lakh crore comes into the formal economy on a recurring basis, India’s abysmally low tax base will grow significantly. Personal income tax revenue in 2017-18 could well beat estimates by Rs 1 lakh crore, shaving up to 0.5 per cent of the targeted fiscal deficit.
The second arrow in Jaitley’s quiver is the Goods and Services Tax (GST). If GST is implemented as expected in July 2017, there will be a rise in overall indirect tax collections after a short time lag.
Jaitley though has only one more Budget (in February 2018) left. In February 2019, with the Lok Sabha election due in April-May 2019, there will be a vote-on-account Budget rather than a full Budget.
Jaitley needs to use his last opportunity next February to put GST on an even keel and reduce corporation tax for all companies to 25 per cent as he had pledged two years ago.
If promises once made are broken, the credibility of the government can erode quickly even in a post-truth world.