A clear-eyed and consistent Budget

The Budget this time presents a clear vision, with which it is aligned. The aim is to restructure government so as to work towards the constitutional goal of equal access to public services and, therefore, to opportunity. The diversion towards planning took attention away from general public services for the average citizen. The preference again is to teach people to fish, rather than giving them fish, while also reducing the cost of fishing.

In order to do this, public expenditure is to be switched towards areas with greater externality, while leaving production proper, except in strategic areas, to the private sector. Apart from changing the composition of spending, another tool to do this is asset monetisation. This is much broader than privatisation, since it releases value locked in poorly utilised and performing assets of which the government has many. Multiple means can be used to achieve best values. Privatisation is only a narrow subset of these. Post Budget debate focussing on the latter misses the broader point. It follows it is not the most profitable public sector banks (PSBs) that need to be sold, but those that need better management. Governance and systems must continue to be strengthened for the remaining.

There is an intelligent leveraging of the global situation that gives time for fiscal consolidation. Spending is increased cautiously to stimulate the Covid-19-battered economy, raising the share of investment in order to develop the supply-side and raise potential growth. The literature finds while spending multipliers are unity or less, they can rise in slumps when monetary policy is supportive, with cumulative investment multipliers reaching four.

In our estimation ( https://doi.org/10.1007/s40953-018-0122-y ) for India, while the short run impact multiplier is highest for revenue expenditure, the capital expenditure peak multiplier in the second quarter is 1.6-1.9 times larger. The cumulative multiplier is 2.4-6.5 times larger. It is highest under monetary accommodation, which is more likely with spending on investment that reduces inflation over the long-term, since it raises supply as well as demand. Thus monetary-fiscal cooperation becomes more feasible when deficits are used to spend on investment. It follows, after one quarter, even the poor may get more from spending on investment than they would from transfers.

What was the fiscal stimulus?

The dominant view is the government spent too little in Covid-19 times. But a fiscal deficit (FD) of 9.5 per cent of GDP for 2020-21 is not small for a government that borrows at high and possibly variable interest rates. Interest payment is the largest component of expenditure and must be reduced.

The Budget figures allow us to find the sources of the difference between the budget estimate (BE) FD of 3.5 per cent and the realised estimate of 9.5 per cent (6 percentage points). This is explained by a rise in expenditure (in percentage points) of 2.1, a fall in revenue receipts of 2.4 and in capital receipts of 0.9. The balance 0.6 comes from the lower GDP.

How to reconcile this with estimates that the government will only spend 1 per cent more over the BE? How much of the FD constituted a fiscal stimulus?

The greater transparency in the Budget has been widely welcomed. Expenses of public sector enterprises for government work have been brought on to the Budget. While more worldwide indulgence towards FDs is an opportunity to do so, it does show more clearly just how much the government spends to support different sectors. The largest part of this is huge expenses of the Food Corporation of India (FCI), towards food price support, storage and consumer food subsidy. Payment of FCI’s past dues of ₹1.5 trillion comes to 0.8 per cent.

Subtracting this, the additional interest payments of 0.3 per cent and the 0.6 per cent from fall in GDP, gives 4.7 per cent as the fiscal stimulus coming from spending rising despite the fall in revenues. This is much higher than the fiscal impulse of 1.3 per cent calculated as rise in expenditure on BE adjusted for payment to FCI’s past dues.

Moreover, an additional 0.5 per cent (total 2.3) over the BE was spent on capital account, thus improving the quality of expenditure. The timing and spacing of spending was also good.

Subsidies were 3.1 per cent, and even subtracting the 0.8 per cent on account of FCI gives 2.3 per cent mostly on food. Adding health and social welfare takes it to 2.9 per cent. Percentages spent on agriculture including food subsidy (minus FCI past dues) (1.4), fertiliser subsidy (0.7) agricultural development and allied activities (0.7) and rural development (1.1) comes to 3.9, the largest share of an exceptionally high total expenditure of 17.7, much higher than the expenditure on capital of 2.3.

Like others, in my Budget wish list I had wanted more to be spent on the poor since they suffered the most and had higher propensities to consume. But the ratios show that more was spent on them. Countries that had large transfer programme do not have the type of expenditures India has on in kind transfers of various kinds. And given our huge population, having both is fiscally unsustainable. If we want more transfers, and these would be more efficient and reduce price distortions, the in-kind support has to reduce. We have crossed per capita incomes after which the WTO can question our use of price-distorting interventions.

In the BE for next year the share of capital rises to 2.5 from 2.3 per cent of GDP, broad agriculture support remains higher at 3 per cent, and in-kind transfers at still at a reasonable 1.9 per cent, although food will no longer be provided free. So the small tilt towards capital is not at the expense of the poor. Moreover, improvement in public services and infrastructure benefits the poor more since they cannot afford private substitutes for these the way the rich can. Much of the capital expenditure, such as on low cost housing and wellness centres is also labour intensive.

Could redistribution have been attempted — that is, further taxing the rich to finance more transfers to the poor? But this would discourage growth and be inconsistent with the corporate tax cuts and production linked incentives being used to attract global companies and spur labour intensive employment. High growth in the 2000s reduced poverty much more effectively than low growth and high marginal tax ratios had been able to for many years after Independence.

The best way to increase tax ratios in India is to increase the tax base while simplifying taxes and keeping rates low. The Budget continues to leverage new technology towards this.

Fiscal consolidation

Another item on my pre-Budget wish list was to use high growth and low interest rates rather than sharp cuts in the fiscal deficit to achieve fiscal consolidation. I had shown that periods with this combination had been much more successful in the past. The Budget does cut deficits towards consolidation but not sharply and uses better quality of expenditure to encourage growth.

Already the recovery outpaces expectations partly because fiscal stimulus, as well as reform and resilience in the financial sector, and its use to deliver stimulus had been underestimated. The Budget continues the shoring up and use of the financial sector. Barring unforeseen shocks, prospects are encouraging.

The writer is member of the RBI’s MPC. The views are personal

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