Interim budget 2019 can be assessed from the viewpoint of purist, public and impact on country’s future.
The purist would baulk at dilution of fiscal discipline that is not uncommon in countries facing polls. The deviation in this budget from the glide path of fiscal deficit makes it that much harder to reach central govt debt to GDP ratio of 40 per cent by 2024-25, especially when we hear that programmes in this budget are only a trailer.
Composition of the deficit, from revenue deficit to effective revenue deficit numbers, suggests that the budget favours consumption over investments. With continued primary deficit, we will continue to borrow to make interest payments. Borrowing outside the budget has gone up significantly, its composition has also undergone a shift in the recent years. Even the extent of guarantees that government can give in a year against borrowings as per FRBM has taken a tectonic shift, making borrowings more costly.
Taking into account the deficits run by states, total government borrowings in the country could touch 8.2 per cent of GDP next year, crowding out private sector borrowings. The fact that fiscal deficit numbers postpone certain subsidy payments to next year, including GST compensation fund dilutes its quality.
Revenue projections made for next financial year are also questionable. With looming headwinds from external sector and structural changes so far attempted yet to show results in productivity, assumptions on direct tax revenue collections are optimistic, especially if one considers the giveaways. Buoyancy assumptions in GST collections for next year are a stretch. Numbers on dividends and profits mean a larger transfer from the RBI has been reckoned in 2019-20, assuming ceteris paribus conditions. If we start to unlock SUUTI assets gradually, we may agree with the disinvestments numbers in the budget.
With overall borrowing going up leading to larger supply of bonds, yields are likely to remain elevated, impacting the borrowing cost for others, especially as we see the strains in the incremental credit deposit ratios. With consumption most likely to go up following announcement of income support to farmers scheme and direct tax measures, inflation is likely to rear its head. With regulations slated to be benign, worries may start gathering on financial stability issues.
But, can the country be a spectator to the distress in the farm sector, MSMEs, unorganised sector and hope for growth with equity? It was widely expected that farm sector distress would be addressed in the budget by some income support scheme. The budget has brought out the PMKSN scheme attending to the small and marginal farmers. Over 12 crore landholders will be benefitted by transfer of Rs 6,000 each per year. At very marginal levels this will give them 30% of their annual income and at the upper end, this would mean 5% of their annual income. The scheme will be easy to implement and gram panchayats will ensure that the undeserving will not be beneficiaries. The biggest beneficiary states will be UP, Bihar and Maharashtra, whose poll fortunes would be critical to decide the formation that will run the next govt. A package for the MSMEs was announced in the recent past, with eTreds being the cynosure of the package. How well the package is implemented will determine its success.
What does the budget do to the country’s future? It is a fair argument that budget cannot take into account all the steps that are required to improve the productivity of the economy. But without outlay in the budget, a large number of such steps will be a non-starter. Another major issue is the creation of jobs. With youth and women unemployment at elevated levels and the continued fall in labour force participation rates, steps are required to increase the growth potential and prepare to supply quality labour to achieve the growth potential. Unless we conclude that with growth at these levels and falling employment, productivity has increased dramatically, for which enough evidence is not available.
Total capital outlay is sought to be reduced next year. At 18% of the budgeted expenditure, the trend towards reduced govt outlay on capital expenditure continues. Outlays on Highways, skill development and agriculture (without the income transfer scheme) have not seen a raise. Schemes that would ensure that the gap between cost at the production centre and at the consumer end would be reduced have not been provided for. Measures to improve exports on a sustainable basis have not been addressed. One would like to argue that in the regular budget these issues will be addressed, but will the fiscal health permit govt to do so?
The vision for the next ten years is good in principle. However budgets are about actual numbers than intentions. This interim budget only attempts to attend to immediate problems.
(The author is former secretary, Economic Affairs & Financial Services, Government of India)