<p>There is a keen interest in the Union Budget to be presented on February 1 for a number of reasons. First, Finance Minister Nirmala Sitharaman has to walk a tight rope to balance the considerations of fiscal consolidation and providing a stimulus to the economy at a time it is slowing down and inflation is on the rise. There is considerable pressure on her to loosen the purse strings and relax the fiscal responsibility and budget management targets to revive consumption and investment demand. Second, the budget this year will incorporate the first report of the Fifteenth Finance Commission which decides the volume of resource transfers to the states and thus their fiscal fortunes. Third, in the prevailing poor investment climate, there is considerable demand for rationalisation of direct taxes by removing dividend distribution tax and aligning individual income tax with the reduced rate of corporate tax. </p>.<p>Even in normal times, finance ministers have the unenviable task of balancing the books. In the present economic environment, the challenge is formidable. The growth rate of 4.5% recorded in the second quarter is the slowest in 26 quarters and the 5% growth estimated for the whole year is the slowest in six years. In fact, if the growth recorded on account of public administration and defence is excluded, the real economy is estimated to be recording just 3% growth in the current year.</p>.<p>The core sector has been shrinking since August and exports have been stagnant. While monetary policy has traversed considerable distance with its accommodating stance, the lurking fears of inflation do not provide further scope for rate cuts. The twin balance-sheet problem has continued, the private sector is not taking the initiative to invest, and the burden of revival has been placed at the door of fiscal policy. Although the recapitalisation of banks has helped, governance issues remain unaddressed and the bankers are not willing to lend, the corporates are unwilling to borrow. In addition, there is the NBFC crisis after the collapse of IL&FS, which has led to the drying up of credit for the small and medium sector.</p>.<p>Not surprisingly, the chorus of opinion is to shun fiscal conservatism and go for massive expenditure expansion to revive the economy. In any case, this fiscal is likely to see substantial slippage due to a shortfall in revenue collection from the budgeted figure, firstly due to unrealistically optimistic revenue projections in the Budget and, second, due to the much lower growth of nominal GDP at 7.5% as compared to the assumed 12%. The assumed growth of taxes in the budget estimate over the actual collection in the previous year is a staggering 18.3%. The shortfall is estimated at about Rs 2.5 lakh crore, of which the central share would be Rs 1.7 lakh crore. Thus, despite the additional contribution by the RBI of Rs 86,000 crore over and above the budgeted Rs 1.76 lakh crore, there could be slippage in the fiscal deficit numbers by about 0.5% of GDP.</p>.<p> Counter-cyclical fiscal policy warrants fiscal expansion, but do we really have the fiscal space? With the household sector’s net financial savings at 6.2% and when the government and public sector enterprises borrow over 8.5% of the GDP, there is hardly any fiscal space for increased government borrowing. Thus, even as the repo rate has been reduced by over 135 basis points since January 2019, this has not seen transmission in the lending rates. The RBI had to repeatedly come up with open market operations to ensure liquidity in the economy which, in effect, meant monetising the deficit, a practice that had been formally stopped after the agreement between the RBI Governor and the Finance Secretary in 1996.</p>.<p>Thus, increased spending by the government will have to be achieved mainly by speeding up disinvestment and privatisation. This is necessary not only to augment the much-needed revenue but also to ensure the right role of the government. Should the government be running airlines, steel mills, travel agencies, hotels or telecom companies? There is a massive increase in the fees of telecom companies after the Supreme Court judgement on the AGR (adjusted gross revenue) issue. Although there are serious questions on the appropriateness of the judgement and viability of telecom companies, if it is finally implemented, additional revenue will accrue to the government in the next few years. </p>.<p>Even if it is decided to miss the fiscal targets, it is important to ensure the credibility of the numbers. In fact, it does not make much sense to fix the fiscal deficit target at 3.3% and finance expenditures through off-Budget mechanisms. The CAG has repeatedly drawn attention to various off-Budget liabilities and financing of deficit through non-transparent ways. The IMF Article IV report released in December, too, draws attention to the need to make the Budget comprehensive and transparent. The government should come clean and declare the correct numbers, record the extent of slippage and lay down the path of consolidation. Will they do it? I doubt it.</p>.<p>In the prevailing poor investment climate, substantial increase in infrastructure spending is necessary not only to augment the investment demand but also to enhance productivity. The finance minister has announced that there will be an investment of Rs 102 lakh crore in the next five years. According to the announcement, 43% is already under implementation and 33% is at the conceptualisation stage. The share of the government in this is estimated at 78%, equally shared between the Centre and states, and the remaining 22% will be spent by the private sector. The major infrastructure sectors for investment include energy (24.5%), transport (25.7%) and urban and rural development (24%). The capital outlay of the Centre itself is supposed to increase from Rs 3.5 lakh crore in 2018-19 to Rs 10 lakh crore in 2024-25. This implies virtually doubling the capital expenditure – from 1.5% of GDP to more than 3%. If only wishes were horses!</p>.<p>Much of the increase in capital expenditure will depend on how much we are willing to rationalise by phasing out subsidies and transfers and how much additional borrowing is resorted to. The amendment to the FRBM Act done last year did away with the revenue deficit target, which implies that there is no targeted reduction in revenue expenditures. Will this also remain yet another announcement without action? The real test of promise of augmenting investment expenditure will come in the Budget. </p>.<p><span class="italic"><em>(The writer is former Director, NIPFP, and was Member, Fourteenth Finance Commission)</em></span></p>
<p>There is a keen interest in the Union Budget to be presented on February 1 for a number of reasons. First, Finance Minister Nirmala Sitharaman has to walk a tight rope to balance the considerations of fiscal consolidation and providing a stimulus to the economy at a time it is slowing down and inflation is on the rise. There is considerable pressure on her to loosen the purse strings and relax the fiscal responsibility and budget management targets to revive consumption and investment demand. Second, the budget this year will incorporate the first report of the Fifteenth Finance Commission which decides the volume of resource transfers to the states and thus their fiscal fortunes. Third, in the prevailing poor investment climate, there is considerable demand for rationalisation of direct taxes by removing dividend distribution tax and aligning individual income tax with the reduced rate of corporate tax. </p>.<p>Even in normal times, finance ministers have the unenviable task of balancing the books. In the present economic environment, the challenge is formidable. The growth rate of 4.5% recorded in the second quarter is the slowest in 26 quarters and the 5% growth estimated for the whole year is the slowest in six years. In fact, if the growth recorded on account of public administration and defence is excluded, the real economy is estimated to be recording just 3% growth in the current year.</p>.<p>The core sector has been shrinking since August and exports have been stagnant. While monetary policy has traversed considerable distance with its accommodating stance, the lurking fears of inflation do not provide further scope for rate cuts. The twin balance-sheet problem has continued, the private sector is not taking the initiative to invest, and the burden of revival has been placed at the door of fiscal policy. Although the recapitalisation of banks has helped, governance issues remain unaddressed and the bankers are not willing to lend, the corporates are unwilling to borrow. In addition, there is the NBFC crisis after the collapse of IL&FS, which has led to the drying up of credit for the small and medium sector.</p>.<p>Not surprisingly, the chorus of opinion is to shun fiscal conservatism and go for massive expenditure expansion to revive the economy. In any case, this fiscal is likely to see substantial slippage due to a shortfall in revenue collection from the budgeted figure, firstly due to unrealistically optimistic revenue projections in the Budget and, second, due to the much lower growth of nominal GDP at 7.5% as compared to the assumed 12%. The assumed growth of taxes in the budget estimate over the actual collection in the previous year is a staggering 18.3%. The shortfall is estimated at about Rs 2.5 lakh crore, of which the central share would be Rs 1.7 lakh crore. Thus, despite the additional contribution by the RBI of Rs 86,000 crore over and above the budgeted Rs 1.76 lakh crore, there could be slippage in the fiscal deficit numbers by about 0.5% of GDP.</p>.<p> Counter-cyclical fiscal policy warrants fiscal expansion, but do we really have the fiscal space? With the household sector’s net financial savings at 6.2% and when the government and public sector enterprises borrow over 8.5% of the GDP, there is hardly any fiscal space for increased government borrowing. Thus, even as the repo rate has been reduced by over 135 basis points since January 2019, this has not seen transmission in the lending rates. The RBI had to repeatedly come up with open market operations to ensure liquidity in the economy which, in effect, meant monetising the deficit, a practice that had been formally stopped after the agreement between the RBI Governor and the Finance Secretary in 1996.</p>.<p>Thus, increased spending by the government will have to be achieved mainly by speeding up disinvestment and privatisation. This is necessary not only to augment the much-needed revenue but also to ensure the right role of the government. Should the government be running airlines, steel mills, travel agencies, hotels or telecom companies? There is a massive increase in the fees of telecom companies after the Supreme Court judgement on the AGR (adjusted gross revenue) issue. Although there are serious questions on the appropriateness of the judgement and viability of telecom companies, if it is finally implemented, additional revenue will accrue to the government in the next few years. </p>.<p>Even if it is decided to miss the fiscal targets, it is important to ensure the credibility of the numbers. In fact, it does not make much sense to fix the fiscal deficit target at 3.3% and finance expenditures through off-Budget mechanisms. The CAG has repeatedly drawn attention to various off-Budget liabilities and financing of deficit through non-transparent ways. The IMF Article IV report released in December, too, draws attention to the need to make the Budget comprehensive and transparent. The government should come clean and declare the correct numbers, record the extent of slippage and lay down the path of consolidation. Will they do it? I doubt it.</p>.<p>In the prevailing poor investment climate, substantial increase in infrastructure spending is necessary not only to augment the investment demand but also to enhance productivity. The finance minister has announced that there will be an investment of Rs 102 lakh crore in the next five years. According to the announcement, 43% is already under implementation and 33% is at the conceptualisation stage. The share of the government in this is estimated at 78%, equally shared between the Centre and states, and the remaining 22% will be spent by the private sector. The major infrastructure sectors for investment include energy (24.5%), transport (25.7%) and urban and rural development (24%). The capital outlay of the Centre itself is supposed to increase from Rs 3.5 lakh crore in 2018-19 to Rs 10 lakh crore in 2024-25. This implies virtually doubling the capital expenditure – from 1.5% of GDP to more than 3%. If only wishes were horses!</p>.<p>Much of the increase in capital expenditure will depend on how much we are willing to rationalise by phasing out subsidies and transfers and how much additional borrowing is resorted to. The amendment to the FRBM Act done last year did away with the revenue deficit target, which implies that there is no targeted reduction in revenue expenditures. Will this also remain yet another announcement without action? The real test of promise of augmenting investment expenditure will come in the Budget. </p>.<p><span class="italic"><em>(The writer is former Director, NIPFP, and was Member, Fourteenth Finance Commission)</em></span></p>