The Borrowings Behind Narendra Modi's Interim and Election Budget

The increase in the interest burden on the Centre's borrowings for the coming year has been budgeted at Rs 90,000 crore, against an increase of Rs 52,000 crore last year.

This year’s interim budget by the Narendra Modi government has seen dole-outs, with one eye on the election. While this makes for good political messaging, it is crucial to examine where the funds for these crowd-pleasers are coming from.

Consider this. Two years ago, the 2017-18 budget estimates (BE) for interest payments on borrowings of the government was Rs 5,23,000 crore. Last year, 2018-19, it was Rs 5,75,000 crore (a 9.94% increase).

This year, 2019-20, the figure is Rs 6,65,000 crore (a 15.65% increase).

Also read: India’s Defence Budget is Nearly Five Times the Health Budget

So, the increase in the interest burden on borrowings of the Union government for the ensuing year has been budgeted at Rs 90,000 crore, as against an increase of Rs 52,000 crore last year. In the next one year alone, the additional interest burden would be Rs 38,000 crore. This means about Rs 5,50,000 crore will be additional borrowings, assuming the interest rate to be 7% per annum. This excludes the existing borrowings.

Is it ethical for the government to announce massive dole outs on borrowed funds on the eve of elections? While it is child’s play to plan out additional borrowings and distribute the funds so borrowed, it’s more difficult to chart out the impact of this on the fiscal situation.

So, how does the Centre plan on garnering additional revenue? It’s a little tricky because the Goods and Services Tax hasn’t performed as expected. The consequences of this speak volumes. The 2019-20 budget estimates of GST is Rs 7,61,000 crore – a bare 2.28% increase from 2018-19 budget estimates of Rs 7,44,000 crore.

On corporate tax collections on the other hand, the picture is different. 2019-20 budget estimates are almost the same of GST (Rs 7,60,000 crore). The 2018-19 budget estimates was Rs 6,21,00 crore.

This means corporate tax collection is expected to shoot up by 22.38 % (Rs 1,39,000 crore in absolute terms) next year.  

When GST collection is still struggling, the corporate sector has been targeted to make up for the shortfall through direct taxes. This is paradoxical. Will India’s corporates, still facing GST teething problems, be able to pay Rs 1,39,000 crore in additional tax next year? Is this figure realistic?  

Also read: Budget 2019 Is About Winning Over Hearts, Even if the Math Doesn’t Add Up

Similarly, pegging the 2019-20 budget estimates of personal income tax at Rs 6,20,000 crore, as compared to 2018-19 budget estimates of Rs 5,29,000 crore, seems optimistic considering the dole-outs given.       

It appears increasingly uncertain that a consequence of this is that India’s fiscal situation will worsen next year. This is not to suggest that that all the dole-outs are per se undesirable. What is concerning, though, is the unrealistic revenue projections, to keep the fiscal deficit at Rs 7,04,000 crore, just to work out its figure at 3.35% of GDP (Rs 210 trillion). Whether the GDP will actually become Rs 210 trillion or fall short is another question. Either way, the fiscal deficit will swell, and the Indian government in May 2019 will have a tough time to adhere to the fiscal discipline.

One possible solution is to curb costs and investments in long-term development. But on the expenditure side, under some heads, there is hardly any scope to slash and burn. The 2019-20 budget estimates on defence expenditure of Rs 3,05,000 crore is pretty modest (an increase of 8.1%). Similarly, subsidy (Rs 2,97,000 crore), pension (Rs 1,74,000 crore), grants (Rs 1,66,000 crore) cannot possibly be reduced. 

There is considerable scope to reduce interest payments (Rs 6,65,000 crore) and establishment expenditure (Rs 5,41,000 crore). These massive expenses  leave barely Rs 6,36,000 crore for development expenditure. If Rs 21,48,000 crore (665+541+305+297+174+166 = 2148) constitutes non-development expenditure, and if the total revenue collection is Rs 20,80,000 crore, there is hardly option but to borrow for dole-outs and developmental activities.

The interim budget therefore is premised on borrowings, which ought not to have been the situation for a pre-election endeavour.

Bishwajit Bhattacharyya is Ex-Additional Solicitor General of India, and Senior Advocate, Supreme Court of India