FM’s Budget options are severely limited

The presentation of the Union Budget is more of a media event than a realistic statement of objectives and goals, and ways and means. The Budget is the basic blueprint that specifies what the government intends to do in the financial year to come, and how it intends to spend and raise the resources to do that. It doesn’t use the occasion to tell us what it did with the announced Budget the previous year.

Quite clearly a Budget is an imperative; otherwise a government will drift along aimlessly, though it often seems to be the case even with the most minutely-specified Budget. Having said that, one must wonder why there is such a fuss each year when India’s finance minister is about to present the Budget.

If one analyses each of the 65-odd Budgets that finance ministers have presented over the years, little seems to be changing in how they propose to raise and spend each year. This is not to say that the first Budget raised and spent revenues in the same way as this week’s Budget will. The first Budget presented by R.K. Shanmukham in 1947 was one that stayed within the means that were available, and did not rely very much on borrowings. The pattern of taxing and borrowing changed hugely over the years. The incidence of taxes has come down and the extent of borrowing has risen. So much so that the national debt has burgeoned and the interest burden become heavier. Let it not be forgotten that at the time of Independence India was debt-free and was owed a mountain of money by Britain.

India’s national debt now is a gargantuan and burdensome Rs 70,450,136,500,510 — or Rs 70 lakh crores. The interest burden each year now is Rs 4,577,329,694,115, and growing. Consequently, the debt per citizen is Rs 58,954. Debt as a percentage of GDP is 49.02 per cent. So, one thing is for sure, interest has to be provided for. This is the second-biggest provision, accounting for 18 per cent of the Budget. Transfers to the states account for about 24 per cent. This now determined by GST collections, and the element of discretion or flexibility too has gone with it.

Next come the items labelled Other Expenditures, Central Sector Schemes and Centrally-sponsored Schemes, that draw away 13 per cent, 11 per cent and 10 per cent respectively. Hidden in them are Central government salaries and pensions, that account for almost Rs 3 lakh crores. This doesn’t include military and railway salaries and pensions. In fact, salaries at the Centre and states account for 10.4 per cent of the GDP of about Rs 150 lakh crores, or about Rs 16 lakh crores. Two big items follow — subsidies and defence take 10 per cent and nine per cent respectively. They are untouchables. With an election year looming, subsidies will only increase, and considering the combined challenges posed by China and Pakistan, the provision for defence and security will increase not just in absolute terms but in proportion too.

Effectively, this Budget too will have around 11 per cent to allocate for development and capital expenditures. Which simply means that the government, from every Rs 100, has Rs 11 to give to the people in terms of benefits, and it consumes Rs 89 by itself. Usually, this figure too drops as historically the revenue and other collections are far below target. This year GST collections are showing a declining trend from its inception and indirect taxes collections, as of November 30, are Rs 7.35 crores, out a target of Rs 9.27 crores. As of December 19, direct tax collections were only Rs 6.49 crores, out of a target of Rs 9.8 lakh crores.

So much so, it is really the extent of the government’s borrowings to pay for what is beyond its means that will be the most important aspect of this week’s Budget. This year the fiscal deficit can be expected to be well over the budgeted 3.2 per cent, as like all other addictions going for a cold turkey is not the most palatable of options. Therefore, the interest provision will at best retain the same share of expenditure. Salaries are sacrosanct, and it will retain its prime place as the nation’s single largest expenditure. Given the current regional environment, defence is a sacred cow and will brook no change. And when it comes to subsidies, deserved and undeserved, open and hidden, and especially in a pre-election year, it is the government that is the sacred cow. Plan expenditures brook little change and have to be provided for.

Direct and indirect taxes also offer scope for little change, specially when you see how beholden the government is to the members of CII, Ficci and Assocham, particularly in a pre-election year. A back of the envelope calculation shows that over 95 per cent of the Budget is chiselled on stone. Besides, most of the tax increases and revenue enhancement steps like raising or reducing oil subsidies and prices are taken well before the Budget announcements. Then what’s all the hoopla over the Budget about?

The challenges India needs to cope up with starting now was made explicit by the World Economic Forum in its Inclusive Development Index. It makes sad reading. India, with a score of only 3.38, ranks 62nd among 79 developing economies on the IDI, despite the fact that its growth in GDP per capita is among the top 10 and labour productivity growth has been strong. Poverty has also been falling, albeit from a high level. On the other hand, its debt-to-GDP ratio is high, raising some questions about the sustainability of government spending.

The WEF IDI also states that “framework indicators such as educational enrolment rates are relatively low across all levels, and quality varies greatly, leading to notable differences in performance among students from different socioeconomic backgrounds. While unemployment is not as high as in some other countries, the labour force participation rate is low, the informal economy is large, and many workers are in vulnerable employment situations with little room for social mobility”.

More than budgetary announcements, which are quite full of empty promises, the Budget presentation gives the government a rare opportunity to announce policy changes. Dr Manmohan Singh, as finance minister in his first term, was persuaded by the then Prime Minister to announce the junking of the pernicious Industrial Licensing Policy and its prime rent collecting agency, the Directorate-General of Technical Development (DGTD). This earned him lasting glory as a reformer, though he never really showed any interest in liberating society from the straitjacket of government regulation. He even rested on this laurel for 10 long years as Prime Minister. What then can Arun Jaitley do? Will Prime Minister Narendra Modi direct him to announce a universal basic income (UBI)? Or the transfer of a basic income in place of the many misdirected subsidies, most of which gets stolen on the way down?