A bagful of fiscal trouble

Subir Roy
Senior economic analyst

Every Budget has a political context and the 2019 interim one is no exception. The ruling NDA is looking at the prospect of failing to get an absolute majority in the parliamentary elections due in a few months, a sharp reversal from the large majority it had secured in 2014. The Opposition is in a resurgent mood, regional parties (SP and BSP) have tied up for crucial UP and no one can call a reborn Rahul Gandhi ‘Pappu’ anymore.

In this scenario, Narendra Modi could be expected to go the full political hog and has lived up to that expectation. First, the Budget seems to have breached convention by proposing major changes in tax laws, which an interim Budget does not. Second, it has done two things in one go — offered goodies to virtually every section of the electorate and simultaneously appearing to retain fiscal prudence.

The goodies come in the form of income support for farmers with small landholdings, a pension scheme for the workers in the unorganised sector with low incomes, and several measures to benefit the middle class — increase in the limits for rebates, standard deduction and the TDS threshold for interest income.

But this will not upset the fiscal balance. The fiscal deficit as a percentage of GDP has been projected for 2019-20 at the same 3.4 per cent as in the revised estimates for 2018-19. This key ratio, indeed, remained within the Budget estimates for three years (from 2014-15 to 2016-17), but exceeded it in 2017-18 (Budget estimate versus actuals) as also in 2018-19.

How will staying within limits in 2019-20 be achieved? Corporation tax and income tax revenue are projected to go up by far more than they are expected to do in the current year (Budget estimate versus revised estimate). The difference in the case of income tax is, in fact, huge. In 2018-19, the Budget and revised estimates for income tax collection are likely to remain the same, but in the coming year the revenue is expected to go up by a massive 17 per cent over the revised estimates for 2018-19.

There are many ways of fudging the fiscal deficit, outlined by the CAG. One of them is by not passing on to public sector enterprises what is due to them within the financial year, notably in the case of the Food Corporation of India. Take the loss-making public sector banks. Instead of recapitalising them, the government has gone in for merging loss-making ones with profitable ones and also got one particular bank in the red to be taken over by the LIC.

If this is the way the interim Budget has managed to keep the fiscal deficit in check, what is it laying up in store for the final Budget to be placed later on in the year by whichever formation comes to power? The new government, by all accounts, will have a first-class fiscal problem on its hands.

It is not as if any of the key political formations are different from the others. Just before the interim Budget, Rahul Gandhi promised an income guarantee scheme. Now the NDA has come up with its income support scheme for farmers. These are very big-ticket items, resources for which will be hard to find while keeping the fiscal deficit in check.

What is fascinating is that the NDA under Modi had over the first few years of its tenure tried to abide by the fiscal balance dharma, symbolised by the refusal to go in for farm loan waiver, and succeeded. The Congress, on the other hand, has announced farm loan waivers immediately on coming to power in the three Hindi belt states. Clearly, the Assembly election upsets have made the NDA government change its approach.

What is disappointing is that there is little in the interim Budget which addresses the root cause of the two most critical problems facing the economy — rural distress and lack of jobs. Not only is the income support scheme for farmers with small landholdings poorer than the schemes in the same genre announced by Telangana and Odisha (farmers’ organisations have described the Rs 6,000 promised as a ‘pittance’), but also there is nothing in the Budget to address the condition of tenant farmers and agricultural labourers who form the core of rural poverty. Additionally, there is no attempt to address the market inefficiencies which have led to farmers not getting a proper price. The main reason for not announcing things that really matter in addressing rural distress (income support is no substitute for adequate market prices) is that the NDA government does not have a sense of the farm crisis. It woke up to the issue once farmers’ demonstrations hit the streets.

As for the job crisis, when the issue of the missing jobs that were promised first began to surface in public debate, it was argued that the jobs were there, but the numbers that say so were hard to find. Now we know that the report of a nationwide statistical exercise, which found unemployment at a historical high, has simply not been released.

George Orwell, in his novel Nineteen Eighty-Four, depicting a dystopia fashioned in the light of the excesses of the Soviet Union under Stalin, spoke of people who disappeared being ‘unpersoned’. In India, we are seeing official statistics being ‘unnumbered’. Again, negative statistics cannot be suppressed beyond a point. When the truth is out, the government of the day, after the next elections, will have to come to terms with it and pay for the populist sins of the political class across the board.