The Indian economy is currently going through a bumpy phase with a slowdown in GDP growth, a higher trajectory of retail inflation, risky current account deficit and instability in the banking sector. The difficult economic situation coupled with the ensuing State elections and the forthcoming general election has some political compulsions for the finance minister. In these circumstances, the likelihood of what might be called a “bold” budget becomes a distant reality.

More on the radar will be a budget keeping in mind all the stakeholders. Pleasing all is a near-impossibility. But all will benefit if the priority is given to fiscal prudence with an emphasis on fiscal consolidation, budget integrity and fiscal transparency.

Therefore, the budget should focus on continuation of the fiscal deficit and debt targets according to the FRBM Act, in letter and in spirit.

Three-pronged approach

The Union Budget 2018-19 should focus on achieving qualitative fiscal sustainability, that is, attaining a fiscal consolidation target under FRBM without cutbacks in non-defence capital outlay and developmental expenditure, particularly economic and social services.

In order to ensure this, a three-pronged strategy is important: (a) fiscal empowerment (maximise revenue to budget to create fiscal space); (b) expenditure benchmarking in respect of non-defence capital outlay and social sector expenditure; and (c) strengthening cooperative fiscal federalism.

The integrity of the budget exercise critically hinges on credible fiscal arithmetic.

The budget has an inherent bias towards overestimating the non-defence capital expenditure to show that it is growth inducing, underestimating the deficit targets showing a lower deficit level to show it is on the firm path of fiscal consolidation, and overestimating tax revenue, disinvestment receipts and also overestimating non-tax receipts to show a lower deficit target. This is a game with numbers that all sides play, and a temptation best resisted at this critical time.

The lag factor

It may be mentioned the budget-making process has lags and public memory is short. For example, the Budget will set out the estimates for 2018-19, revised estimates for 2017-18 (a lag of one year) and accounts for 2016-17 (a lag of two years). Because of the time lag, public discussions do not centre around the fiscal marksmanship (deviation of the revised estimates/accounts from the original budget estimates). But this is an important aspect as it throws light on budget integrity and fiscal transparency.

Consider the outcome of budget estimates for 2017-18 when translated into revised estimates and accounts: the first eight months’ data (April-November, 2017) as presented by the Controller General of Accounts (CGA) presents a dismal picture of the key deficit indicators, suggesting that the three deficit indicators would exceed the budgeted targets for 2017-18.

For example, during April-November 2017, the revenue deficit, fiscal deficit and primary deficit accounted for 112 per cent (as against 86 per cent in the corresponding period of the previous year), 152 per cent (as against 98 per cent in the corresponding period of the previous year) and 1289 per cent (as against 464 per cent in the corresponding period of the previous year), respectively.

We also see higher revenue expenditure (71 per cent of the budget estimates as against 66 per cent), lower non-tax revenue (37 per cent as against 54 per cent) due to lower dividend receipts from PSUs (33 per cent as against 70 per cent), and also lower tax revenue.

The disinvestment proceeds have shown an improvement but this was on account of higher receipts from disinvestment of insurance companies (₹17,318 crore compared with the budget estimate of ₹11,000 crore).

Higher revenue deficit has resulted in higher fiscal and primary deficit and thus has translated to higher borrowings not only from market sources but also from non-market sources such as small savings and provident funds.

Besides, there has been a substantial draw-down from the built-up cash surplus to the extent of ₹84,194 crore, as reported by the CGA. Otherwise, borrowings would have been more, adding to the interest payments and creating a vicious cycle of deficit and debt.

From previous experience and also from the developments in 2017-18, one major lesson for monitoring the budget outcome is that the focus on fiscal deficit reduction without looking at the source of financing is an error of omission and commission. The budget should provide forward guidance to the cash balance position of the Government. During the year when budget operation starts, there should not be any enduring surplus nor deficit as has been happening for quite some time. Enduring surplus or deficit is against the spirit of efficient cash management and is a cog in the wheel for effective monetary and debt management.

Need for fiscal space

The budget has been recognising cooperative and not competitive fiscal federalism. It will thus lay emphasis on GST, the Seventh Pay Commission award and the loans waiver scheme. While the Fifteenth Finance Commission will provide forward guidance on this aspect, the budget through its expenditure allocation and giving guidance on timely sharing of tax and grants with the State government should make an attempt to further strengthen cooperative federalism, which essentially means the Government recognising the varying fiscal capacity and budgetary pressures of various State governments.

For the last two decades, the budget has been struggling with fiscal correction and consolidation. It is high time the budget considered creating fiscal space. Achieving fiscal sustainability with zero revenue deficits is a desirable option.

The budget should focus on prioritisation of expenditure and allocate more non-defence capital expenditure which should eventually be self-financing and self-limiting. The buoyancy of gross tax revenue (the number which explains the growth in tax vis-à-vis growth in GDP) was budgeted to decline to 1.17 in 2017-18 from 1.48 in 2016-17. One important issue therefore is to increase tax buoyancy through better tax compliance.

In the interest of qualitative fiscal reform, Budget 2018-19 should consider improving fiscal governance by setting up an autonomous fiscal council with a well-defined escape and buoyancy clause, clearly stating the conditions under which these can be invoked as recommended by the NK Singh Committee.

The big picture is that the year-end fiscal number will well exceed budgetary targets (if April-November is any guide). This indicates there is no fiscal governance, which is actually the fountainhead of all governance. Big bang reforms are okay but as long as the basics are not right, this train is going nowhere, however loudly the driver may blow the whistle.

Pattnaik is a former central banker, Rattanani is a senior journalist. Both are faculty members at SPJIMR. Via The Billion Press