No substantial innovative policy initiative in Budget

The Union Budget 2017-18 presented to Parliament on February 1, 2017, has followed a beaten track much against the expectation that it will break some new grounds.

At the macro level, the fiscal policy strategy and medium-term fiscal framework are just a linear extension of the past budgets. These documents do not contain any substantial innovative policy initiatives, rather, to a large extent, the analysis has a bias towards incrementalism.

At a micro level, tax proposals do not add any substantial changes in the tax administration or tax compliance. The Budget has an erroneous analytical framework which focuses on the eternal benefits of demonetisation for economic growth and tax compliance.

The perception that the predominance of cash in the economy makes it possible for the people to evade their taxes does not hold much water. There is many a slip between the cup and the lip. One may hasten to comment that the structural weaknesses of tax administration dominate the tax system.

The authorities claim that the current economic growth rate of India at more than 7% is one of the highest in India. In this context, one is reminded of former Reserve Bank of India governor Raghuram Rajan’s classic comment, “we are like one-eyed king in the kingdom of the blind”.

The Indian economy has to move to a higher growth trajectory of 8-9% in the medium-term. It is well recognised that economic growth is a function of investment limited by savings. The investment expenditure of the government is estimated at 1.2% of GDP.

The revenue deficit, which not only represents the dis-savings of the government but also pre-empts the high cost borrowed funds of the government for current consumption, at the level of 1.9% estimated for 2017-18, raises questions on how the Budget can claim that it is growth-induced.

Furthermore, the disinvestment proceeds estimated at Rs 72,500 crore apparently looks like a tall order. If the past is any guide, such level of disinvestment is certainly not achievable. This not being the case, the realisation of fiscal deficit at 3.2% of GDP is doubtful.

Another important aspect is that the Budget makes a case for fiscal space through additional tax collection and the government’s “fiscal strategy in 2017-18 is aimed at guiding the Budget to a sustainable level of deficit with fiscal consolidation at a reasonable level”.

The authorities have been repeatedly and very pointedly argued that there are inherent long-term benefits from demonetisation. If that be the case, how come the Budget justifies the argument that “any fiscal straight jacketing to meet the FRBM (Fiscal Responsibility and Budget Management) target would not be advisable. In the current context, a need for a push through higher public spending is assessed to be crucial for providing an impetus to economic growth.”

The moot question in the above context is: when revenue deficit is at 1.9% of GDP and the primary deficit is 0.1% of GDP and interest payments is 3.1% of GDP, where is the wherewithal to finance the interest payments without taking recourse to further borrowings and thereby creating a vicious cycle of deficit and debt? Thus, the fiscal space and fiscal sustainability claimed by the government in the Budget is a mirage.

The prudent fiscal management justifies the elimination of revenue deficit at the earliest so that the borrowed funds should be used for investment expenditure. However, there is no sign of elimination of revenue deficit in the medium-term road map which has been drawn up to fiscal 2019-20. It is important to note that in the Budget, the gross tax revenue has been estimated at 11.3% of GDP while the growth rate of gross tax revenue is estimated at 12%, indicating that there is hardly any tax buoyancy.

Downward rigidity

Given the downward rigidity of revenue expenditure, the burden of reducing the revenue deficit falls on the receipt side, which calls for an increase of the revenue receipt by 2% of GDP in the medium-term. Furthermore, since there is hardly any scope in the non-tax revenue enhancement except squeezing dividend and profits from the public sector enterprises and surplus from the RBI, the burden falls on the indirect and direct tax collections.

However, since the indirect tax is regressive and has the potential of cost push inflation, the burden falls on direct tax. This is a well-known fiscal policy management dilemma. It was expected that the Budget should have given a clear-cut road map for the same rather than giving the statistics of how many individuals are paying at what rate of taxation.

It is important to mention that demonetisation has become an important and invincible weapon for the government to move the economy to a higher growth trajectory, higher tax collection, digitisation and any other related issues.

The Budget argues that the “impact of demonetisation slated to translate through increase in the size of the organised sector and increase in the tax net as well as the expectation of the economy to bounce back on the back of a pent up consumption demand”.

If history is any guide, for more than 55 years, the authorities were claiming that automatic monetisation from the RBI (more printing of money/ currency to finance the government deficit) is a virtue. Similarly, now the authorities are seeing all virtues in demonetisation.

To conclude, the lack of strong fiscal consolidation road map makes the Union Budget 2017-18 a completely lacklustre one.

(Pattnaik is Professor, SPJIMR. Rattanani is Editor, SPJIMR. Views are personal)
(The Billion Press)