The Interim Budget 2019-20 will be presented amid what is being seen as favourable domestic macroeconomic conditions of economic growth (projected by the RBI at about 7.5 per cent), low retail inflation (4.8 per cent, as projected by the RBI). However, the external factors in terms of a possible downturn in the global economy as set out by the IMF in its latest World Economic Outlook of January 2019, are a matter of concern. Nevertheless, as past evidence suggests, the Indian economy is resilient enough to withstand global adverse conditions albeit with some disruptions.
While analysing the possible content and spirit of the Budget, it is important to mention that even though the scope for a populist Budget is limited in an interim Budget, it will still carry the flavour of an election Budget. In this context, two assessments are important. The first one pertains to fiscal consolidation during the past five years beginning 2014-15 when the first Budget of the Narendra Modi government was presented on July 10, 2014. The second is to assess the fiscal outcome of the 2018-19 Budget based on the actual data released by the Controller General of Accounts (CGA).
Fiscal deficit target
When it comes to fiscal consolidation in terms of deficit indicators, the five-year term of the government during the period 2014-19 was based on convenience, creative accounting and buying time. The fiscal consolidation measures set out in the original FRBM Act of 2003 and Fiscal Rules of 2004 were aimed at elimination of revenue deficit and bringing down the fiscal deficit to 3 per cent of GDP.
While the fiscal deficit target remains at 3 per cent of GDP even now, the focus on revenue deficit has been relegated to the background under this government. It was replaced by the concept of “effective revenue deficit” (revenue deficit minus capital grants to State governments). Subsequently, in the revised FRBM Act of 2018, the effective revenue deficit has also ceased to be the target. Now, fiscal deficit is the only target under the fiscal rule and this is set at 3 per cent of GDP by 2020 -21.
Reducing fiscal deficit is easier than reducing revenue deficit given the downward rigidities of many items of revenue expenditure such as interest payments, defence and wages, and salaries which account for a lion’s share of total revenue expenditure. According to available data, nearly two-thirds of the fiscal deficit year after year in the last five years has been used for current consumption of the government (that is, to meet revenue deficit). As a result, capital expenditure relative to GDP has remained low, within the range of 1.35 per cent and 1.65 per cent, over the last five-year period. This development questions the quality of fiscal consolidation over the entire tenure of the government. The 2018-19 Budget when translated into actuals portrays a dismal picture. According to the data disseminated by the CGA for the period April-November 2018, there is clear evidence of fiscal slippages in the key deficit indicators. Fiscal deficit and revenue deficit accounted for 114.8 per cent and 132.4 per cent, respectively, of the budgeted amount during this period. Reflecting this, the market borrowings at ₹4,29,398 crore by the government through bonds and treasury bills have overshot the budgeted target of ₹4,07,120 crore.
Fiscal slippage also was witnessed in case of disinvestment of equity shares of the government which at ₹15,810 crore accounted for 20 per cent of the budgeted amount (₹80,000 crore). Apart from these, tax revenue (net to Centre) accounted for only 49.4 per cent. One of the most disquieting features is the use of the cash surplus to the tune of ₹1,62,555 crore during the period April-November to finance the fiscal deficit. Further, the building of cash surplus, which is a result of the lack of effective and efficient cash management, has become a permanent feature of budgetary process of the government. Such surpluses coupled with large fiscal slippages have adverse implications for monetary and debt management by the RBI.
Against this drop, the ensuing Budget should ideally focus on: creating adequate fiscal space by augmenting the tax buoyancy; preventing fiscal slippage with fiscal marksmanship; borrowings in terms of fiscal deficit should be spent on capital expenditure; improvement in cash management; and expenditure rationalisation /prioritisation. According to an RBI study, the 2018-19 Budget envisaged a tax buoyancy of 1.2 and 1.6 for direct and indirect taxes. This is against buoyancy of 1.1 and 1.5 for direct and indirect taxes, respectively, during the seven-year period 2010-11 to 2017-18. The need is to achieve an even higher tax buoyancy than the current numbers given above.
GST should be a driver of change with lower tax limits and higher tax compliance. The collateral benefits of GST will certainly help expand the tax base for other taxes.
Further efforts by the government to move to higher tax buoyancy by more compliance and checking tax evasion are essential and critical. The tendency to overestimate the revenue receipts and underestimate the expenditure needs to be curtailed. The government should focus on fiscal marksmanship to avoid fiscal slippage.
To avoid fiscal slippage, it is important to adhere to the rules prescribed in the original FRBM Act 2003 and Fiscal Rule 2004 — that is, in the mid-term review, the fiscal deficit should not exceed 70 per cent of the Budget estimates and disinvestment proceeds should not be lower than 40 per cent. Appropriate action should be taken if these are not met.
While making fiscal deficit as the target, there should be an attached self-imposed pre-condition to reduce reliance on borrowed funds to be used for current consumption. Improvement in cash management, focussing on expenditure outcome, rationalisation and prioritisation should be the spirit and content of the Budget. In sum, revenue augmentation through higher tax buoyancy for quality fiscal consolidation and avoidance of fiscal slippage to ensure budget integrity should be the focus of the ensuing interim Budget. Anything else will leave us in a fiscal position weaker than we are now.
The writer is a former central banker and a faculty member at SPJIMR. (From The Billion Press)