Designed for a pre-election year

While the last year’s budget could be described as a ‘post demonetisation pre-introduction of GST’ budget, this year’s is clearly a pre-election year budget. It has something for everybody: agriculture, health, education, housing, employment, salaried classes, pensioners, the small and medium sectors and infrastructure. The only segment of society that may have been a bit unhappy are those sitting on a pot of money on their investments in the equity market especially those who would have wanted to exit.

How has the FM managed to make everybody happy while keeping the overall fiscal balance not too much off the glide path?

Fiscal position 2017-18

Table 1 (all figures in percentages here)

The table above clearly shows the extent of fiscal consolidation achieved in the last three years since the current government took over in 2014. The budget presented by the FM shows a slippage in the fiscal position in 2017-18 especially in revenue deficit from 1.9 per cent of GDP (BE) to 2.6 (RE) of GDP – slippage of 0.7 per cent. This has occurred despite a healthy increase in tax revenue of Rs 42440 crore beyond what was budgeted. Even the bonanza in capital receipt of Rs 100000 crore(against projection of Rs 72500 crore)could not contain the fiscal deficit to the budgeted figure of 3.2 per cent. Furthermore, it is presumed that ONGC’s acquisition of HPCL for Rs 30000 crore will have been taken into the capital receipts in the budget. ONGC, it is understood, will approach the debt market for funding the acquisition. The fiscal slippage was primarily on account of the non tax revenue being lower by Rs 52783 compared to what was projected. Slippage on the expenditure side is largely on account of general services, that includes administration, defence, pension etc. In fact the “good “ expenditures viz social services showed an overshooting of only Rs 4000 crore and economic services showed an undershooting of the budgeted expenditure, by Rs 24000 crore.

Hence the slippage cannot be justified by saying that the distinction between revenue and capital is not significant or that investment in education and health is as “good” as building roads and bridges. The data shows clearly that the slippage happened despite tax buoyancy and bonanza in disinvestment proceeds and that the expenditure slippage was not in the social and economic services sectors.

This leads us to examine the budget estimates for 2018-19.

Eye on actual revenues

Tax revenue is projected to increase by 16.6 per cent against the nominal GDP increase of 11.5 per cent, reflecting the FM’s optimism in the tax collections. The projection for non-tax revenue at four per cent does not seem to assume any significant change in transfer of dividend from RBI or expectation of improved PSU’s dividend transfer. Also, the projection for capital receipts at Rs 80000 crore against Rs 100000 crore in 2017-18, seems reasonable, in the light of tightening liquidity conditions likely to emerge globally and domestically. On the expenditure side, overall growth at 10.1 per cent is lower than the overall nominal GDP growth and in real terms does not seem to reflect the impressive promises in the FM’s speech. Social sector expenditure is projected to grow at 16 per cent and this is very welcome. In case, however, the buoyancy in tax revenue is not maintained, the curbs may unfortunately fall on the social sector.

The budget speech made all the right noises. Ultimately it will be the actual revenues and expenditures that will trigger the expected outcomes and this depends on the key risks the budget faces.

Key risks the budget faces

The first risk is clearly oil prices. Just as when oil prices went down, there was a positive impact on growth and government revenues, when oil prices go up, there is a negative effect on both growth and government revenues. If government resorts to reduction in taxes, it will impinge on the tax revenue and the fiscal deficit. As per reports, in 2016-17 the Union government earned Rs 2.43 lakh crore from excise duty on oil – this was 2.45 times the amount it earned in 2014-15. The total revenue the government earned from oil companies in 2016-17, which includes dividends and taxes from oil marketing companies, was also nearly double the amount earned in 2014-15. At the same time, higher oil process will add to inflationary pressures.

This brings one to the second risk viz. food prices. The proposed intention to keep the Minimum Support Price (MSP) for both rabi and kharif crops at one and half times the cost of production will put pressure on the fiscal deficit as subsidies may have to be increased beyond the budgeted figures.

Increased oil and food prices would put pressure on inflation and the third risk is clearly the risk of inflation. Inflation will increase the cost of government’s borrowing. Tightening monetary policy would also imply that banks will face losses on their investment portfolio and their appetite for fresh government bonds may not be as it was in the least few years. Banks are already holding excess government securities and as credit picks up, government may find it challenging to put through the borrowing program without pressure on yields. Increase in government bond yields would mean overall increase in lending rates just when the economy is beginning to pick up and needs affordable credit.

All in all, we are in for difficult times.  The positive factors faced on account of low oil prices, low inflation, global liquidity, huge capital inflows are giving way to headwinds. Tackling the real sector by determined action to complete the implementation of stalled projects, push on infrastructure and further reforms in the power sector are the need of the hour, rather than tweaking fiscal or monetary policy to stimulate growth and employment.

(Usha Thorat is a former Deputy Governor of the Reserve Bank of India)