Between investors and voters

Print edition : April 01, 2016

A petrol pump in Haryana, a 2015 photograph. Enhanced indirect taxes on petroleum products have deprived the general public of the benefits of a sharp decline in international oil prices. Photo: Manoj Kumar

The stark divergence between rhetoric and intent in the Budget exposes the regime’s inability to push for growth and welfare, which stems from its obsession with appeasing domestic and foreign investors.

When the numbers underlying Budget 2016-17 are unpacked, the unavoidable conclusion is that any claim of direction in the Budget, let alone redirection of policy, is just empty rhetoric. The government had clearly failed to put any money where its mouth was. This was especially true of Finance Minister Arun Jaitley’s claim that his Budget provided “additional resources for vulnerable sections, rural areas and social and physical infrastructure”.

As part of this new thrust, the Budget speech reiterated Prime Minister Narendra Modi’s recent promise that his government would double farmers’ income by 2022. In pursuit of that goal, the Finance Minister has provided a total allocation of Rs.35,984 crore for Agriculture, Cooperation and Farmers’ Welfare (ACFW) for 2016-17. On the surface this seems to be a huge increase for this sector when compared with the Revised Estimate of Rs.15,809.54 crore for 2015-16. But it emerges that this increase is the result of a change in classification. The Budget Estimate for 2016-17 includes Rs.15,000 crore under the head “interest subsidy for short-term credit to farmers”. This head earlier appeared as part of the demand for grants of the Finance Ministry, and its inclusion hugely inflates the ACFW figure for 2016-17. Adjusting for that, the nominal increase in allocation to “farmers”, even if realised, is far smaller than the impressive 128 per cent implied by the Finance Minster’s claim.

This dichotomy between rhetoric and intent as reflected in even budgeted allocations is visible in other areas that impact on India’s precariat (the social class that does not enjoy any employment security). One is the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which the National Demoratic Alliance (NDA) government led by the Bharatiya Janata Party (BJP) has had to reluctantly declare as being a “flagship” programme for the poor, despite its origin and expansion under the previous United Progressive Alliance (UPA) regime.

Even before Budget 2016-17, it was clear that in practice the NDA government was starving this programme of funds, though it was legally a demand-driven programme with the government committed to providing employment claimed irrespective of the allocation required. This neglect had resulted in a fall in the average number of mandays of work provided to households under the programme to 40, as opposed to the promised 100. The Finance Minister’s Budget speech declared that the allocation for the programme has been set at Rs.38,500 crore and attempts have been made to portray this as substantial. As the activist Nikhil Dey has pointed out, the fact is that even by the time the Budget was presented, actual spending on the programme in 2015-16 had touched Rs.37,000 crore and there were arrears to the tune of Rs.6,000 crore that needed to be cleared. By the end of March, this total amount of Rs.43,000 crore is likely to have risen even more. So, the allocation proposed in the Budget is a huge decline even in nominal terms, without accounting for inflation.

Several such examples can be mentioned, as has been done by different commentators on the Budget. The relevant question is why there is this divergence between the rhetoric of the NDA and its actual allocations. Numerically, the explanation is obvious. The Finance Minister has chosen not to increase government expenditure when measured as a ratio of the gross domestic product (GDP). The ratio of total expenditure to GDP is, in fact, projected to fall marginally from 13.2 per cent in 2015-16 to 13.1 per cent in 2016-17. This in a year when the government has to make substantially increased allocations for its wage and salary bill, given its obligation to implement the award of the 7th Pay Commission.

This impasse with respect to spending has its roots in two tendencies that have come to characterise the fiscal stance adopted by successive governments since the mid-1990s, and strengthened under the current NDA regime. The first is conscious forbearance when it comes to imposing corporate, wealth and capital gains taxes in the name of strengthening private initiative.

The second is an increased emphasis on realising the revised fiscal and revenue deficit targets, which are expected to be brought down to 3 per cent and zero per cent respectively even if with a lag relative to dates set in the Fiscal Responsibility and Budget Management Act. This pursuit of self-imposed targets with renewed vigour has meant that the fiscal deficit for 2015-16 has been brought down to 3.9 per cent of the GDP, with 3.5 per cent as the target for 2016-17. With the government having decided to restrict itself on both the direct tax and borrowing fronts, what happens to expenditure depends on what happens to any residual direct tax initiative, indirect taxes, non-tax revenues and what are called “non-debt capital receipts”, which really is the sale of assets to finance current expenditures. Budget 2016-17 makes an effort to push the boundaries on all of these. It chose to tax the retirement savings of middle-class and lower-middle class households by making 60 per cent of the withdrawals from provident funds of those under the older pre-National Pension Scheme (NPS) system taxable, but decided later to reconsider the proposal.

A regressive step

Also, the government has chosen to impose a variety of surcharges and cesses, which are in the nature of inflationary indirect taxes, the revenues from which need not be shared with the States. This strategy has yielded the government sizeable revenues even in 2015-16 in the area of petroleum and petroleum products. Enhanced indirect taxes on them have been used to skim off much of the benefits of the sharp decline in international oil prices that would have otherwise accrued to the consumer.

Against the budgeted figure of Rs.1,86,787 crore from duties on petroleum and products, the government actually collected Rs.2,63,172 crore in 2015-16. Assuming that oil prices continue to remain low and this practice continues, the government is expected to mobilise an additional Rs.2,80,464 crore from this source in 2016-17, depriving the population of the benefits of this windfall gain. Given the fact that oil products are universal intermediates, all sections will have to share this burden, making it regressive.

The government has chosen to flog to the very end the benefits to be derived from the use of spectrum, which is a limited resource. According to the Budget, receipts from “other communication services” rose from Rs.30,624 crore in 2014-15 to Rs.56,034.35 crore in 2015-16, and are estimated to reach Rs.98,995 crore in the Budget for 2016-17. According to the detailed receipts Budget, these resources are derived from one-time spectrum charges, auction of 1800 MHz and 900 MHz spectrums and receipts from the 800 MHz spectrum.

PSU privatisation

And finally, despite repeated disappointments, the government is hoping to sell large volumes of equity in public sector corporations and undertake strategic sales of some units to garner substantial receipts from privatisation. Given the state of the market for asset sales, this is not a fail-free source. In the Budget for 2015-16, for example, receipts from disinvestment and strategic sale were set at at Rs.69,500 crore. The Revised Estimate indicates that the government managed to mobilise only Rs.25,312 crore. Yet, the receipts from this source in 2016-17 have been set at an even more ambitious Rs.56,500 crore.

Even if they are odd and regressive, this set of interventions to mobilise additional resources should give the Finance Minister some space for manoeuvre. Surprisingly, it does not seem to have done so. As opposed to expectations that the Budget would raise expenditure to give the slowing economy a much-needed stimulus, projected spending in 2016-17 will just about keep pace with nominal GDP growth. What the government has chosen to do is to reorient expenditures a bit so that it can devote more to spending on infrastructure, especially on roads and the Railways. But even this may not materialise since revenues may fall short of the optimistic projections in the Budget, as happened in 2015-16. In any case, with aggregate expenditure not buoyant, the marginal infrastructure thrust has meant that the Finance Minister has had to make tall claims of what he intends to do for farmers and the poor, without allocating the resources needed to realise them. In sum, despite the pressures created by impending elections in a number of States, which possibly explains the Finance Minister’s rhetoric, the ruling party has not been able to use the fiscal lever to push for growth and some improvement in welfare. The source of this impasse is the adherence to direct tax forbearance and fiscal deficit reduction, clearly meant to appease domestic and foreign investors, especially the latter. But they are unlikely to enthuse a majority of voters. That possibly explains why a party and government wooing foreign capital are trying to create a new discourse on nationalism to build a vote bank.

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