An effort to balance fiscal prudence and populism

In the lead up to the presentation of the interim budget for 2019-20 by a ‘substitute’ finance minister, there were enough indications that it wouldn’t be a dull ‘vote-on-account’ show. Some even expected that the government would come up with a kind of full budget, which caused a last-minute clarification by the government that they didn’t intend to make any departure from the convention of presenting an interim budget in an election year.

But a well-publicised view of the regular finance minister that the interim budget can very well address the pressing issues being faced by the Indian economy confirmed that a handful of major policy initiatives are in the offing. But very few expected it to be a more or less full budget, with even some tweaking of the income tax rates. But as it turned out, a section of the market analysts who expected that the budget would contain major announcements on providing relief to the MSME and farm sectors, on the one hand, and the middle class, on the other, have been proved correct. They are also ‘dot on’ as regards their forecast that the budget speech will contain a congratulatory self-assessment of the government’s major economic and social policies for the last five years.

But again, few expected the budget to include a vision statement of the government for the next decade. Quite obviously, the budget proposals and the vision will make sense if the government returns to power. It is not clear if the present Parliament has the mandate, legal or political, to approve budget outlays for a period beyond its current term. Be that as it may, the ruling party has set the agenda for the forthcoming electoral debate.         

The fiscal deficit target has now been missed for two years in a row. The financial markets seem to feel an unease as a consequence. A target of 3.4% (to GDP) in 2019-20 against an expectation of 3.1% has increased this unease. As acknowledged in the budget speech, the slippage in 2018-19 and the higher deficit target in 2019-20 are the result of the scheme for providing income support of Rs. 6000 per year to the small and marginal farmer families. The borrowing requirement for the remaining two months of the current year has gone up by about Rs. 35,000 crore. This has happened on the back of the State governments borrowing large amounts from the market in the recent weeks. The yield on the benchmark 10-year government security, which has been exhibiting a rising trend since the end of 2018, went up further by about 12 basis points during the post-budget trading. A sub 3% fiscal deficit is now quite a distance away. To the credit of the government, and contrary to the flurry of speculations in this regard, the RBI has not been called upon to boost the government’s revenue by way of any untimely or special dividend payment. The government has done well to await the recommendations of the committee that has been set up recently to comprehensively examine all the relevant issues.    

The budget’s proposals to ensure a minimum monthly income of Rs. 15,000 for persons working in the unorganised sectors and to bring them under some modest social security coverage are welcome steps. Given the fact that India’s past and current high-growth phases have not been employment-generating, particularly in the organised sectors, a fiscal push in this regard targeting the large expanses of the various unorganised sectors seems to be a practical and pragmatic solution. Realistically, this and the consolidation of the MSME sector, which includes start-ups hold the promise of significant employment expansion in future. The controversy engendered by an alleged delay in the publication of a rather dismal unemployment report for 2016-17 just one day before the budget confirms the widespread social distress and concern in this regard.      

On the issue of its report card, the government can genuinely claim credit for the remarkable reform of the income tax system in India. Not only has the share of direct tax to GDP increased handsomely in the recent years, the number of persons filing income tax returns has increased from 3.79 crores to 6.85 crores, which is a significant achievement. The proposal to complete the assessment of returns in 24 hours involving an anonymous interface between the assessing official and the assessee is a truly path-breaking initiative. The resulting improvement in the efficiency and the governance standard of the income tax department would have been impossible to visualise even a few years back.  Despite its many valid criticisms, the demonetisation of 2016 led, in a causal sense, to a quantum jump in income tax collection and number of returns filed.

In India, the union budget is expected to fulfil the wish lists of all and sundry. This aspect has acquired a cultural dimension which is perhaps rooted in the ‘rent-seeking’ proclivities of Indian society. The political classes now seem to have a good understanding of this phenomenon which means that the budget exercise entails not only a fiscal balancing act but also an intricate act of managing the expectations and perceptions of the electorate. This budget follows this line to boot with some sops aimed at electorally important sections of the population, on the one hand, and to showcase some of its policy achievements during the last five years, on the other. The presentation of a vision statement is a logical extension of this approach, especially in an election year. These are fully legitimate actions in a functioning and highly competitive democracy like India. The budget indeed makes few populist promises, but refrains from having any frivolous or extravagant expenditure outlay. Even if the government does not get re-elected, it will be difficult for the new government to completely reverse the proposals.       

(Himadri Bhattacharya is a former central banker and consultant to the IMF)