Despite the distress signals, Arun Jaitley has chosen to strictly adhere to a conservative fiscal stance in his successive budgets, prioritising deficit reduction over everything else.
Going by official statistics, the Indian economy appears to have already achieved what is globally considered an enviable position – a virtuous combination of high growth and dwindling inflation. According to estimates by the Central Statistical Office, GDP growth has accelerated from 5.6% in 2012-13 to 7.2% in 2014-15 and further to 7.6% in the current financial year, 2015-16. The average annual inflation rate as measured by the WPI has fallen from 7.4% in 2012-13 to 2% in 2014-15 and further to -2.8% in 2015-16 (up to January 2016). If this is the true state of affairs, Finance Minister Arun Jaitley had precious little to do in the Budget beside ensure that nothing upsets the applecart.
However, question arises if the current growth story, as revealed by official data, is too good to be true. Indicators from the latest economic survey (see table 1) show that gross fixed capital formation (investment) has fallen from 33.4% of GDP in 2012-13 to 30.8% in 2014-15 and further to 29.4% in 2015-16. Agriculture has grown by merely 1.1% this year after -0.2% growth last year, with foodgrain production stagnating at around 250 million tonnes for the past two years. Exports and imports have fallen by 17.6% and 15.5% respectively during this year. Despite crude oil prices (Indian basket) dropping to around $30 per barrel now from an average of $84 per barrel last year, annual inflation as measured by the CPI has remained around 5%.
Growth in bank credit has ranged between 9% to 11% in the last two years in contrast with an average annual growth of over 20% in the last decade. Banks are unwilling to lend owing to a pile up of bad debts, with ‘stressed advances’ accounting for over 8.5 crore rupees by March 2015, which is over 6.7% of GDP. The debt distress afflicting the private corporate sector is acting as a drag on fresh investments. These are certainly not the signs of a booming economy.
Modi regime: fiscal conservatism
Despite such distress signals, Jaitley has chosen to strictly adhere to a conservative fiscal stance in his successive budgets, prioritising deficit reduction over everything else (see table 2). The total expenditure under the UPA-II government averaged around 14.8% of GDP, with plan expenditure averaging at 4.5% of GDP and fiscal deficit at 5.31% of GDP. By 2015-16, the Modi government had squeezed total expenditure in real terms to 13.2% of GDP, with plan expenditure falling to 3.5% and the fiscal deficit to 3.9% of GDP. The estimates for 2016-17 provided in this year’s Budget promise to adhere to the same contractionary roadmap, by restricting total expenditure to 13.1% of GDP, plan expenditure to 3.6% of GDP and the fiscal deficit to 3.5% of GDP.
The much-advertised improvement in the ‘quality’ of public spending under the present regime, in terms of a spike in capital expenditure, has also got reversed in the Budget – after rising from 1.6% of GDP in 2014-15 to 1.8% of GDP in 2015-16, it is estimated to fall again to 1.6% of GDP in 2016-17. The average annual capital expenditure under UPA-II was 1.8% of GDP. The revenue expenditure estimate in 2016-17 is likely to overshoot because of the implementation of the Seventh Pay Commission recommendations and the OROP.
The resource mobilisation strategy of the present government is based on increasing indirect taxes, especially excise duties (see table 3). Gross tax revenues as a proportion of GDP, which was 10.1% on average under UPA-II, has risen to 10.76% in 2015-16 and is projected to increase further to 10.83% in 2016-17. The entire increase, however, is on account of indirect taxes, with union excise duties jumping from 1.5% of GDP in 2014-15 to over 2% of GDP in 2015-16. There has been a shortfall of over 45,000 crore rupees in direct tax collections in 2015-16 vis-a-vis last year’s budget estimates. But this shortfall has been more than made up with indirect tax collections overshooting budget estimates by over 55,000 crore rupees, mainly on account of the hikes in excise duties on petroleum products. Despite crude oil prices coming down by over 54% since April 2015, the reduction of the retail price of diesel in Delhi is merely 8%.
The Budget intends to take this regressive trend further, with Jaitley proposing to mobilise additional revenue worth 20,670 crore rupees through indirect taxes. The direct tax proposals would entail a revenue loss of 1,060 crore rupees, owing to the reduction in the corporate tax rate and other exemptions. Such reliance on indirect taxes for revenue mobilisation, especially excise duties on petro products, is fraught with risks. While it will soak up demand from the economy on the one hand, it can also start an inflationary spiral on the other if international oil prices start rising again.
Robbing Peter to pay Paul
The outlays on agriculture, rural development and social sectors have been showcased in the Budget as the government’s commitment to farmers and the poor. The fact is that there was a cut in the nominal outlays for agriculture and irrigation in last year’s budget by almost 5,500 crore rupees. Given the widespread agrarian distress, the government has been forced to increase the outlay for agriculture and irrigation from 0.19% of GDP in 2015-16 to 0.32% of GDP in 2016-17, to reverse the damage (see table 4).
The allocations for the social sectors (health and education), rural development (including MNREGA) and energy infrastructure have remained at the same level in real terms as in the last two years – 1% of GDP, 0.7% of GDP and 1.5% of GDP respectively. The subsidy bill has been reduced from 2.1% of GDP in 2014-15 to 1.9% of GDP in 2015-16 and is projected to decline further to 1.7% of GDP in 2016-17. It is notable that not only have petroleum subsidies been cut considerably, which is understandable in the backdrop of the sharp fall in crude oil prices, but the allocations for food and fertiliser subsidies have also been cut in nominal terms for 2016-17. Cutting subsidies on food and fertilisers to increase allocations on agriculture and irrigation is like robbing Peter to pay Paul. Such wobbly policies would fail to ameliorate rural distress, forget about meeting the hyperbolic target of doubling farm incomes in five years. It is also somewhat surprising that even defence spending in real terms is being progressively squeezed by this government.
While implementing the Fourteenth Finance Commission’s crucial recommendation for devolving 42% of union taxes to the states since last year, the government also decided to cut down on plan expenditure citing the shrinking fiscal space of the centre. Last year’s budget had wound up eight central schemes, including the Backward Regions Grant Funds and changed the funding pattern for 24 more welfare schemes, including ICDS, National Health Mission and Rural Housing, increasing the burden of the states. Net transfer of resources to the states have increased substantially since last year because of higher tax devolution, but central assistance to state plans have also been cut down significantly (see table 5). The increase in states’ share of taxes from 2.71% of GDP in 2014-15 to 3.73% of GDP in 2015-16, has been accompanied by a decline in total grants and loans extended by the centre to the states from 2.79% of GDP to 2.39% of GDP.
Moreover, the government has also failed to fully meet its expenditure commitments on crucial heads. Last year’s budget had estimated a net transfer of 8.42 lakh crore rupees to the states as their share of taxes and central grants and loans. Revised estimates show that net transfers to the states have fallen short by 21,443 crore rupees. Similarly, plan spending of the railways for 2015-16 was estimated at one lakh crore rupees last year. Revised estimates suggest a shortfall of 17,800 crore rupees. Last year’s budget had estimated nominal GDP to grow by 11.5% in 2015-16, while it actually grew by only 8.6%. If the nominal GDP growth of 11% for 2016-17, estimated in this Budget, turns out to be an over-estimate yet again, revenue and expenditure targets set for 2016-17 will come under strain.
Bad loans imbroglio
In the name of addressing the bad loans problem that is threatening the stability of the banking system, the Budget has thoroughly deregulated foreign investment and ownership norms in asset reconstruction companies and also provided them with tax breaks. Jaitley did make an allocation of 25,000 crore rupees in 2015-16 for the recapitalisation of the public sector banks, but as per the notings in receipts budget (miscellaneous capital receipts), this amount would be mobilised through disinvestment.
A disinvestment target of 56,500 crore rupees has been set for 2015-16, out of which 20,500 crore rupees is to be raised through ‘strategic disinvestment’, with the Niti Ayog identifying the central public sector enterprises (CPSEs) for such sale. The 24% investment limit for the foreign portfolio investors (FPIs) in listed CPSEs other than banks has also been raised to 49%, in order to prepare the ground for this exercise. These set of measures taken together indicate that the government is seeking a solution to the problem of stressed assets by handing over those assets directly to foreign finance and also to raise resources for the stressed asset-ridden banks from outside, by selling government equity or assets to FPIs.
The problem of bad loans has emerged largely because of unscrupulous businessmen on the one hand and negligent, corrupt bankers and auditors on the other. Rather than cracking down on the delinquent big borrowers, the RBI has allowed huge amounts of debt to be restructured over the years, which has prolonged and amplified the problem. The most fair and just solution lie in bringing the large defaulters to book and expropriating their ill gotten gains. Legal and institutional changes are also required to deal with corporate bankruptcy and debt recovery in order to properly identify and criminalise wilful default. Instead of showing political will in that direction, the Budget seeks salvation in a distress sale of publicly owned assets to foreign capital. This needs to be squarely opposed.
Prasenjit Bose is an economist and political activist