Union Budget 2020-21 comes against the backdrop of a massive slowdown of economic growth and escalating inflation. It was expected that the budget would put in place forward guidance to revive growth.
However, the proposals in terms of expenditure provisions and tax estimates reveal that there is a big question mark on the revival of growth even to 6.0-6.5% as set out in the Economic Survey 2019-20. In addition, the credibility of budget estimates, in terms of budget integrity, fiscal slippage and fiscal consolidation is lost.
When budget estimates for 2019-20 were translated to revised estimates, substantial slippages were recorded in fiscal deficit as a proportion of the GDP. Fiscal deficit, which was budgeted to be 3.3% of the GDP, has come in at 3.8% in the revised estimate.
This was mainly due to a decline in tax revenue by 8.8% and lower disinvestment proceeds which recorded a decline of 61.5%. Total expenditure showed a decline due to the drop in Central sector schemes/projects by 12.7% for Central government expenditure and transfer to state governments under the Centrally sponsored schemes by 4.4%.
These expenditure heads are welfare and growth-oriented expenditure and therefore, such a decline in expenditure puts a break on the revival of growth.
As set out in the current 2020-21 presentation, this Budget is woven around three prominent themes: Aspirational India, Economic Development and a Caring Society. As the budget claims, these three broad themes are the flowers in a bouquet that has been called “Ease of Living”.
The above statements are appealing but lack operational significance in the context of the revival of growth to a higher trajectory.
To analyse this further, let us now shift to expenditure provisions. As per the provisions in the budget estimates, expenditure under the heads: pension (Rs 2,10,682 crore), defence (Rs 3,23,053 crore), subsidies including fertiliser, food and petroleum (Rs 2,27,794 crore) besides interest payments (Rs 7,08,203 crore), together account for 48.3% of the total budgeted expenditure.
This expenditure is broadly non-developmental in nature. Expenditure under the head transfer to states at Rs 2,00,447 crore accounts for 28.9% of the total expenditure. Thus, in this context, it is important that for the revival of growth, the expenditure management by the states is critical.
The budget has assumed a nominal growth of 10% in 2020-21. In some of the growth-oriented expenditure, like education (4.5%), health (5.7%), rural development (0.98%) and transport (6.7%), these are budgeted lower than 10%, implying expenditure elasticity is less than unity. In other words, this developmental expenditure will not be growth supportive.
It is pertinent to mention that not only does the budget have expenditure provisions which are not growth supportive but also that the budgetary arithmetic in terms of the receipt side is such that the budget integrity and credibility are in question.
For example, the gross tax revenue against the backdrop of negative growth of 12% in the revised estimates for 2019-20 has been budgeted to grow at 12%. Similarly, most of the tax revenues, for example, corporate tax, personal income tax, customs, Union excise and GST, which recorded a negative growth in the range of 1.7% (personal income tax) and 20.3% (corporate tax), are in the coming year budgeted to record increases in the range of 7.7% (Union excise duty) to 14% (personal income tax).
Thus, tax buoyancy in most of the tax receipts is greater than unity, implying if the economy grows at 1 percentage point, the tax revenue growth will be higher than 1%. However, in a slowdown phase, tax buoyancy greater than unity is practically infeasible.
In addition, the disinvestment proceeds at Rs 2,10,000 crore estimated in the budget as against a decline of 62% in revised estimates of 2019-20 looks highly optimistic.
Critically dependent
Economic growth is critically dependent on the investment rate (change in capital stock relative to GDP) and investment rate emanates from savings rate (savings as percentage of GDP). As the National Statistical Office (NSO) data reveals, for 2018-19 (for which latest data are available) both investment rate and savings rate have slowed down.
For example, the savings rate was lower at 29.7% in 2018-19 than that of 32% in 2017-18. Similarly, the investment rate was lower at 32.2% than that of 34.2% in the same period. The savings rate was lower because of negative savings of the government sector, particularly the Central government.
The negative savings of the Central government is akin to revenue deficit (revenue expenditure minus revenue receipt) which is budgeted at 2.7% of the GDP. At this level, not only does the revenue deficit work as a drag for the total savings but also pre-empts 77% of the borrowed funds (fiscal deficit) of the government.
Thus, the continuation of revenue deficit at such a high level is against moving towards a higher growth trajectory. Therefore, the elimination of revenue deficit is critical. However, it is important to mention that in the medium-term fiscal policy-cum-fiscal policy strategy statement, there is no effort by the government in this direction.
As far as debt level is concerned, as per the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, the Central government debt should come down to 40% of GDP but in the medium-term document, it is still estimated at 45.5% in 2022-23.
Revenue deficit fuelling fiscal deficit creates a vicious cycle of deficit and debt and thus makes the debt position unsustainable. Since the Union budget has not made any announcement in this regard, all other announcements in the budget speech running into 45 pages become redundant in the revival of growth.
(The writer is a former central banker and a faculty member at SPJIMR) (The Billion Press)