Budget 2018-19: a gulf between rhetoric and reality

There was a lot of speculation about the Union Budget as this was the last full-year budget before general elections and the first one after GST reform was unveiled. There were questions on whether the government will roll out an election budget or stick to fiscal discipline. The middle class was hoping for tax concessions. Speculation was that the government would address farm distress, particularly after the disaffection shown by farmers in the Gujarat election. More importantly, the industry was looking for measures to improve investment climate.

The Economic Survey had presented a picture of cautious optimism. Its estimate of GDP for the current fiscal and projection for the next year can be termed as aspirational. To achieve a growth rate of 6.75% this year would require the economy to grow at 7.5% in the second half of the year. Similarly, the assumption of growth of 7-7.5% for the next year is more a hope and not grounded in hard facts. The Survey went on to list recapitalisation of public sector banks along with reforms in their governance, implementation of insolvency and bankruptcy code to resolve bad debts, ensuring macro-stability, privatisation of Air India and stabilisation of GST as the major reforms agenda for the year. Not that all these have to be addressed by the budget as policy-making is done throughout the year.

The budget presented by Finance Minister Arun Jaitley once again shows a disconnect with the Economic Survey. In many ways, it is an election budget. The focus of the budget is stated to be "strengthening agriculture and rural economy, provision of good healthcare to the economically less-privileged, taking care of senior citizens, infrastructure creation, working with the states to provide more resources for improving the quality of education in the country". The finance minister devoted a considerable part of the speech to elaborate the measures to achieve them. In the case of farmers, the welfare is proposed to be improved by ensuring minimum support prices at 150% of the cost of cultivation. There are measures to upgrade the rural haats into Gramin Agricultural Markets, creation of a market infrastructure fund, creation of all-weather roads, incentive for marketing and processing, an 'Operation Greens' for storage and processing of potatoes and onions, creation of micro-irrigation fund, increasing the institutional credit allocation from Rs 10 lakh crore in 2017-18 to Rs 11 lakh crore for 2018-19. There is also a favourable tax treatment for Farmer Producers' Organisations.

About eight crore poor women are to be given free gas connections and increased allocation of free cooking gas, and four crore households are to be given free electricity connections. There is also a laudable objective of providing a roof over the heads of every poor person by 2022. There are a number of schemes to improve the quality of education, such as improving the quality of teachers, setting up of Ekalavya schools, creation of institutions of eminence, launching a Prime Minister's Research Fellows scheme.

In the healthcare sector, it is proposed to create 1.5 lakh wellness centres to bring the healthcare system closer to people, increase the coverage under the Rashtriya Swastya Bima Yojana to cover 10 crore poor families and increasing the coverage to Rs 5 lakh from Rs 30,000 currently, under what's now called National Health Protection Scheme.

There are measures to promote small and medium enterprises, through credit support capital and interest subsidy, measures have also been announced to incentivise creation of formal employment by contributing to employees' provident fund and tax concessions. There are proposals to strengthen infrastructure including the transportation system comprising of railways, suburban rail and roads. It has also chosen 14 Central Public Sector Enterprises for listing on the stock exchanges, strategic disinvestment of 24 enterprises, including Air India, and merging the public sector general insurance companies. Bank recapitalisation is to be pursued by issuing bonds amounting to Rs 80,000 crore.

Deficit credibility

A closer look at the proposals in terms of budget allocation, however, is disappointing. Most of the proposed objectives are supposed to be achieved from extra-budgetary sources and not budget allocation. Total expenditure for 2018-19 is expected to be higher than the revised estimates for 2017-18 by 10.1% and capital expenditure increase is estimated at 9.9%. In fact, capital expenditure as a ratio of GDP at 1.6% is the lowest since 2014-15. Except for food subsidy, which is estimated to increase by 19.4% over 2017-18 due to the proposed increase in minimum support prices, the outlays on all other expenditure categories show only marginal increases.

On the fiscal front, there are matters of serious concern. If the GDP estimate released by the Central Statistical Organisation on January 31 is correct, the fiscal deficit for 2016-17 works out to 3.7%, and not 3.5% as is shown in the budget. Thus, there seems to be slippage even in 2016-17. The slippages in 2017-18 are in respect of every deficit measure. The fiscal deficit is at 3.5% as compared to the 2017-18 budget estimate of 3.2%.

What is alarming is that the gains in compressing the revenue deficit since 2014-15 has been completely wiped out as the revised estimate of revenue deficit in 2017-18 at 2.6% is significantly higher than not only the budget estimate for the year (1.9%) but also that of 2015-16 (2.5%). This slippage is seen in Effective Revenue Deficit and Primary Deficit as well.

In other words, the government, while extolling the need to maintain fiscal disciple and advancing the fiscal adjustment path in the Medium Term Fiscal Plan has been continuously shifting the goalpost. This raises the question of credibility.

(The writer was a Member of the Fourteenth Finance Commission and is currently Emeritus Professor, NIPFP)