The Union budget to be presented by the Finance Minister on 1st February is crucial for at least three reasons. Firstly, the budget comes at a time when the growth rate of the economy is projected to be at 6.5% for the current financial year, the lowest since the Modi government assumed office. Secondly, the budget comes in the backdrop of a major economic policy change of introducing Goods and Services Tax (GST) that the government initiated last year. Thirdly, this is perhaps the last full budget that the government will be placing before the Lok Sabha elections, due in 2019. Let us look at these issues seriatim.
The growth rate of Gross Value Added (GVA) is projected to be 6.1% in 2017-18, as against 6.6% in 2016-17 and 7.9% in 2015-16. This growth slowdown is a manifestation of the fact that investment is simply not picking up in the economy. As a share of GDP, the investment declined from 31.3% in 2013-14 to 29% in 2017-18 (projected). The Centre for Monitoring the Indian Economy (CMIE) has reported that new project announcements by the Indian corporate sector reached a 13 year low in December 2017.
The investment and growth slowdown in the country is a result of a complex set of factors. Firstly, it is now clear, even to die-hard supporters of the government, that the policy of demonetisation had a very serious adverse impact on the economy, particularly the informal sector, while unearthing precious little worth of black money. The uncertainty created because of this hard-headed measure and the concomitant contraction of economic activity has resulted in an economic slowdown in the country.
Secondly, the problem of corporate debt overhang in the economy and the resulting bad loans in the banking sector are primarily responsible for the investment slowdown. The Reserve Bank of India reports that gross non-performing advances ratio increased from 9.6% to 10.2% between March and September 2017. Burdened with these NPAs, the credit growth rate of the banks is much below what it was a few years back. The government has not been able to solve the problem of NPAs in the Indian banking sector.
In fact, when Mr. Jaitley became the Finance Minister, the gross non-performing assets of the scheduled commercial banks was around Rs. 2.6 trillion. This had reached around Rs. 8 trillion by March 2017, even after the government writing off a significant amount of the NPAs. Rather than take stringent action against the defaulters and recover the money, the government has brought a new Financial Resolution and Deposit Insurance (FRDI) bill, with the clause of bail-in which can jeopardise the stability of the public banking sector in India. This twin problem of NPAs and investment slowdown has to be tackled by the government.
One of the ways in which the government can deal with the problem of the investment slowdown is to step up public investment. However, as a result of its adherence to the FRBM Act, the government is committed to maintaining a fiscal deficit which is 3.2% of GDP for the current fiscal. But as per the Controller General of Accounts data, the fiscal deficit has overshot the target (112% of the target set last year) by the end of November 2017. During the same period, last year, the fiscal deficit was 85% of the target in November 2016. Additionally, if the GDP projection does not meet target (which is possible given a downward revision of GDP growth projection), then clearly the fiscal deficit ratio is going to increase. The government, therefore, will have to cut back on expenditures in the remaining months of the fiscal to try and remain within the fiscal deficit target.
This problem is basically a result of the inability of the government to meet revenue targets. It has been reported that tax collections under GST have been declining since its inception. In July, Rs 92283 crore was collected which declined to Rs 80808 crore in November 2017. Moreover, data shows that non-tax revenue has suffered a hit this fiscal. This is because the dividend from RBI has decreased by Rs 30000 crore and spectrum sales target have not been met. The shortfall in the RBI dividend, by the way, is a direct result of the policy of demonetisation. With the huge deposits in the banks, the interest paid to customers as well as banks to hold the deposit, plus the costs of new note printing drastically reduced the profitability of RBI, which resulted in a decline in its dividend paid to the government.
This stressed fiscal situation is further aggravated by another crucial development. When Modi assumed office in 2014, the price of a barrel of crude oil in the international market was more than $100 which subsequently halved its value. Taking advantage of this low oil price, the government increased the excise duty on petroleum products, such that while crude oil prices declined, retail prices did not. Through this imposition of excise duties, the government collected 1.8% of GDP as revenue. The total excise duty collection from the oil sector doubled. Now, however, crude oil prices are rising up. As a result, retail prices of petrol and diesel are also increasing. For example, within 6 months, the price of petrol in Kolkata increased by more than Rs 6/litre. Rising oil prices have cascading effects on inflation, and they are politically sensitive. Therefore, the government is faced with a situation where they may have to reduce excise duty on oil, like they did in October last year. This will only aggravate government’s revenue mobilisation problem.
There has been a lot of discussion in the media regarding the rural and agriculture sector with speculation that the government would be announcing some relief for this sector. It is true that agriculture sector is in crisis. The political manifestations of this have been in terms of farmers’ agitations in Maharastra, Madhya Pradesh, Rajasthan and other states. Even in Gujarat, the BJP’s support base was dented in the rural areas. The root cause of this crisis is non-remunerative prices for agricultural products, the problem of agricultural loans and government’s refusal to write off farmers’ debts.
The government also had promised to double the income of the farmers. Far from doubling, what has happened is that the agricultural growth rate has slowed down in the country. In such a situation and given the election year, the buzz around rural sector spending increasing is natural. However, the macroeconomics of the budget with shortfalls in revenue generation will tie up the government’s hands. Either the government has to impose a new set of taxes to generate resources to be spent in the rural areas. Or else, the expenditure will be nominally increased in rural areas, at the cost of expenditures in other sectors.
The other major challenge of the government is job creation. While the PM has now turned around from digital economy towards designating pakoda making as gainful employment, the fact of the matter is that there is a slowdown in the job-generating capacity of the economy. The annual survey of Labour Bureau shows the real picture where there has been a decline in employment between 2013-14 and 2015-16. What the government will do in terms of providing jobs to the youth remain to be seen.
What is, however, binding the government to raise resources in a progressive manner and go for large-scale fiscal stimulus is not economics but its own politics and a warped notion of economic policy. In a situation where there are growth and investment slow down, agrarian crisis, growing joblessness, undergraduate economics teaches us that a fiscal stimulus will surely help in improving the situation. This stimulus can be funded by simply taxing the rich and super-rich in the country.
It has been reported by Oxfam that the top 1% of India’s population amassed 73% of the total wealth created in the country last year. The super-rich in our country are truly having ache din. If these wealth earners are taxed, such expansionary policies can be undertaken. The tax-GDP ratio in India is one of the lowest in the world. This is so at a time when India is having a record number of dollar billionaires. It is however unlikely that a government which goes ecstatic with an improvement in ranking in the faulty ‘ease of doing business’ will try to impose burdens on the rich for spending on aam admi.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)