Budget 2021

The theme this time is inclusive growth

Ashima Goyal | Updated on February 01, 2018

Everyone counts When populism takes a back seat   -  Rajesh Kumar Singh

Higher expenditure on agriculture, health and education, employment and MSME credit will all aid active inclusion

A pre-election budget was expected to be populist. On the face of it with large expenditures announced for agriculture, for employment generation, for social security, and fiscal slippage, it would seem to be a populist budget. But the nature of the expenditure increase and the slippage taken in context suggest that fiscal consolidation remains in place.

Inclusion is essential for sustainable growth. But only active inclusion is sustainable. Active inclusion is that which increases capabilities and allows more people to contribute to and participate in the benefits of growth. Expenditure on agricultural productivity, health and education, employment and MSME credit will all aid active inclusion.

As the last budget before the elections it does send a clear signal of working towards empowerment and active inclusion, where the attempt is to make working, living and doing business simpler, while better-targeted direct benefit transfers help those unable to work.

Composition of expenditure

The overall expenditure increase is at 12 per cent, very much in line with expected nominal GDP growth of 11.5 per cent.

Despite structural changes, the last year showed considerable tax buoyancy that will be enhanced in the next year. Even a modest increase in total expenditure allows a $2.5-trillion economy to spend large absolute amounts. The impact of the expenditure can be enhanced if it is well designed.

While expenditure on subsidies, for example petroleum, remains capped, there are large increases in spending for infrastructure, on reducing vulnerability (health), and increasing human capacity (education). Public expenditure that creates public assets has a higher and more persistent growth multiplier compared to the public consumption expenditure multiplier, because, apart from maintaining demand, it also reduces costs. Expenditure on non-tradeables also leaks less abroad.

Is the promised increase in minimum support prices (MSP) potentially inflationary? Large increases given by the previous government contributed to maintaining high food and general inflation. This government has kept the MSP increase low, which contributed to reducing inflation.

There are two alleviating factors today. First, a general glut in agriculture will tend to moderate overall price increase. Second, past and ongoing action on the supply-side, which is increasing productivity and lowering cost of production, will moderate price increase despite giving a higher mark-up on costs. Sensitivity of overall inflation to food inflation makes increasing agricultural productivity especially important.

Fiscal consolidation

Fiscal deficit ratio this year has come in at 3.5 per cent (target 3.2) and is projected for 3.3 next year, marginally above the agreed-to fiscal deficit reduction path, which would have taken the FD ratio to 3 per cent next year.

However, the departure is marginal and credibility is maintained for two reasons. First, the recommendations of the new FRBM (Fiscal Responsibility and Budget Management) committee have been accepted with respect to a debt reduction path to a 40 per cent debt ratio and reaching a 3 per cent FD ratio by 2021. Second, even the FRBM committee had allowed a 0.5 percentage point departure from the FD target in a year of structural change. And a year when GST is introduced is a year of major structural change when slippages in revenue targets are to be expected. The deviation is small, less than that 0.5 percentage point.

Markets were also worried about government borrowing, with rates on benchmark 10-year g-secs hardening to above 7 per cent when the repo rate is at 6 per cent. But this budget should assuage market worries. With signs of a recovery in growth and real interest rates falling, debt ratios will fall faster. The gross borrowing requirement at ₹6.3 trillion is only marginally above last year’s ₹6 trillion, and should be absorbed in a growing market. Net market borrowing is ₹4.62 trillion, only marginally above market expectations.

The tax buoyancy visible from GST and the rise in direct taxes may actually reduce borrowing requirement over the year. Moreover, in a booming equity market the Government may be able to raise more than the modest ₹80,000 crore estimated from disinvestment. This year they raised ₹1 lakh crore, exceeding their target for the first time, and by a massive ₹25,000 crore. Measures for innovative financing and selling ready assets to raise money for new investment and channeling more long-term savings, such as pension funds Indian and foreign, to infrastructure, will also help in financing expenditure without straining markets.

Incentives and governance

As they say, the way to hell is paved with good intentions. The latter do not matter unless they can be translated into actual achievements. However, there are measures that improve governance and incentives.

The budget continues and consolidates tax reform to widen the tax base and lower taxes. This improves incentives for compliance, pushing India towards a norm where all pay reasonable taxes. Corporate tax has been cut to 25 per cent for 99 per cent of firms. This will help MSMEs and job-creating entrepreneurship. There are tax incentives to increase employment.

There are measures to improve coordination across government departments to improve ease of doing business, such as the creation of a special logistics cell, and to encourage States to compete and improve the delivery of public services.

The grandfathering clause for the long-term capital gains tax on equity investment has helped markets absorb it without over-reacting. This, together with higher tax exemptions on income from fixed deposits will help even the playing field between different assets and discourage households from entering narrow markets at high price earnings ratios. This is good for financial stability.

More, however, could have been done in this critical area. Payments to farmers could be made conditional on phyto-sanitary measures that would improve the acceptability of agricultural exports. There was nothing on increasing finances available to urban local bodies. This is essential to support urbanisation.

While education was emphasised, the word ‘skills’ was barely mentioned in the budget speech. The absence of appropriate training is becoming a critical bottleneck in transferring youth out of farm jobs, which is essential to raising rural incomes.

There are problems such as certification requirements that the informal sector cannot satisfy, the absence of industry standards, or entry restrictions as in medical education that prevent government funds available for training being well used. Just increasing expenditure allocation is inadequate. These aspects need to be addressed.

The writer is a part-time member EAC-PM. The views are personal

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Published on February 01, 2018
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