Staying the course

The Union Budget 2017-18 comes across as remarkably restrained both in tone and substance, given the imperative of dealing with the effects of demonetisation and the context of five States going to the polls. It is a bits-and-pieces exercise, with attention to detail. While at its core the Budget pursues its stated goals, it has not set aside the larger idea of furthering reforms. Hence, there is an overt (and arguably overdone) commitment to fiscal consolidation; a focus on the outcomes of public spending rather than budgetary allocations per se; and an effort to channelise capital expenditure to critical areas such as transport, which will bring benefits to the economy all round. In view of the impact of demonetisation, the Budget has given tax breaks to promote digital transactions, affordable housing, and small and medium enterprises. That this is a subtly political budget cannot be denied. This is not just reflected in the farmer-friendly rhetoric (a staple of all budgets, not necessarily matched by outlays) but also in the proposal to account for all poll donations above ₹2,000. While the move may merely push anonymous donations into smaller denominations, the Government must be commended for making a start. It appears that political reasons — a perception that the Government may be seen as pro-rich — stayed the finance minister’s hand in cutting corporate tax rates to 25 per cent. While correctly observing that the burden of direct taxes is disproportionately borne by the salaried class, the Budget has done well to reward those in the lowest rung, without, however, being unduly harsh on the higher-income slabs. In doing so, it seems to have appreciated that higher rates may prove counter-productive by encouraging evasion.

It must be said to the credit of the finance minister and his drafting team that they haven’t made unrealistic revenue and GDP projections. A fiscal deficit target of 3.2 per cent of the GDP for 2017-18 (or ₹5.43 lakh crore on a national income of ₹170 lakh crore at current prices) is based on a nominal growth assumption of just over 13 per cent, against about 12 per cent this year. This amounts to a tacit admission, also made in the Economic Survey , that there is uncertainty over growth next year, and not merely because of demonetisation. Hence, gross tax revenues are projected to rise by about 12 per cent over this year’s revised estimates, implying a realistic tax buoyancy (tax growth as a ratio of nominal GDP growth) of less than one. This budget has wisely not overestimated ‘compliance’, which has been a failing of many recent budgets — this is despite the fact that demonetisation has expanded the tax base and demonstrated its effects in terms of higher tax collections. However, the revenue estimates have not accounted for compensation to States on account of GST.

The Budget is, however, unduly tight-fisted on expenditure, coinciding with the Survey ’s almost startling emphasis on fiscal consolidation. As against an expenditure increase of ₹2.23 lakh crore in 2016-17 over the previous year, the Budget allows for an increase of just ₹1.32 lakh crore in 2017-18 on a higher GDP base. Hence, public expenditure as a percentage of GDP is set to fall by over a percentage point to 12.3 per cent in 2017-18. With lending rates low, inflation stable, and private investment showing no signs of pick-up, the reluctance of the Government to pick up the tab is hard to fathom — more so with agriculture and the informal economy in a demand slump. While the bias towards capital expenditure is welcome, the merits of revenue spending in social sectors, which includes filling numerous vacant posts and paying salaries, cannot be discounted in such times. The traditional bias against social sectors remains largely unchallenged. The health sector has seen an improvement in outlays from ₹39,879 crore (revised estimates for 2016-17) to ₹48,878 crore, a rise of over 20 per cent, whereas the increase in the case of education is just about 8 per cent on ₹73,599 crore. For a government keen on reaping the demographic dividend, this is surprising. A ₹14,385-crore rise in defence outlays on this year’s spend of ₹2.5 lakh crore seems high, given competing priorities. A non-lapsable fund for the Railways for safety, with the Centre pitching in, was long overdue, but more attention needs to be paid to making it a critical growth and public service provider. The absence of details on the Railways was felt, without taking away any of the merit in merging its finances with that of the general Budget.

In sum, the Government offers a range of tax incentives to ease the conduct of business, raise accountability by promoting cashless transactions and spur specific sectors such as housing to boost employment. But a larger plan to create jobs on a sustainable basis and overcome the demand constraint is missing.

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