Old direction, no new intentions

A Budget is a statement of intentions. It’s no different from a household budget. We prioritise expenditures and plan to provide for them by incomes and from savings. Budgeting often implies sets of trade-offs. It’s like a parent kicking the smoking habit to provide for more milk for the growing children. When you want to provide for additional space or need to repair a leaking roof, you need to make a capital expenditure, which you provide for by making other cuts, trade-offs or borrowings. The only difference between the budgets of a national government and a household is that the nation state has a printing press where it can run-off more money when it falls short. This is the fiscal deficit.

In normal times, Budgets are mostly reaffirmation of ongoing expenditures. Most of the Budget is pretty much made up of past commitments, existing structures and ongoing programmes. Thus, more than 95 per cent of a Budget is already set. Long-term fiscal planning and tax policies also serve to stabilise budgetary regimes.

Budgets deviate from the normal when there is a crisis or when a major directional change is called for. For the past two years, many parts of the country, estimated to be as much as half of the rainfed areas, which account for almost 60 per cent of the cultivated areas, have been gripped by a severe drought. The impact of this has been only too visible.

Since 2011-12, food grains production has been grounded at about 260 million tonne. In 2014-15, it was down to 253 million tonne and last year it grew by less than a million tonne.

The effect of this is seen in the abrupt fall in rural consumption of tractors, motorcycles, white goods and fast-moving consumer goods. The economic manifestation of a drought is in the huge fall in purchasing power. The media has been highlighting the increased incidence of farmer suicides. Clearly there is an emergency. We are yet to see any major job creation works being undertaken in the affected states. One would have thought the finance minister would have been sensitive to this and addressed this situation more directly.

The other big trend, which should cause us concern, is the fall in the savings/gross domestic product ratio. That has fallen from 38 per cent in 2008 to around 31 per cent in 2015. This has had an impact on the investment/GDP ratio, which in turn has fallen from 39 per cent to 31 per cent this year. When investment begins to fall, GDP growth and job creation slows down. That too is now very apparent. The government had forecast a nominal GDP growth of over 12.5 per cent last year, but what was achieved was less than half that, of about 5.1 per cent. Mercifully for the official statisticians, we had a wholesale price index deflation of 2.5 per cent, which is how they show the “real” GDP as growing at 7.6 per cent. But revenues and taxes accumulate at nominal rates and that too has had an impact on government expenditure. In 2012-13, the expenditure/GDP ratio was 14.1 per cent and last year it was down to 13.1 per cent. All these are worrisome trends. The question then is whether the government is providing to reverse these trends

The Prime Minister made a rather dramatic statement, that he will ensure that farmer incomes will double in the next five years. The finance minister echoed this in his Budget speech on Monday. There are only two ways this can happen. One, if food production stagnates at the current level, as it has done in these past few years, increased demand will drive up prices. Surely the government doesn’t mean this The other way of doing this is to substantially increase farm productivity and to convert to more paying horticulture and vegetable farming. Such conversions are also capital-intensive, and while land use is being changed there are sustenance issues. Does one see any provisioning for this in the Budget Sadly no.

The finance minister on the other hand is guilty of a bit of chicanery. He announced that the allocation for agriculture has been raised from Rs 15,809 crore in 2015-16 to Rs 35,983 crore in 2016-17, a huge jump of 127 per cent. He has achieved this by transferring the subsidy on farm loans from the accounting books of the department of financial services to that of the department of agriculture. So instead of providing new money he has moved it across columns by giving it a new label. Very sharp indeed!

There is a small something for rural employment however. He has resisted the incitement to cut MGNREGA. He has also provided an additional amount of almost Rs 4,000 crore to provide Rs 19,000 crore for the Pradhan Mantri Gram Sadak Yojana. This will create jobs, as smaller rural loads tend to be more manpower intensive.

The finance minister said much about the Budget’s supposed focus on irrigation, but the sad reality is that he has not changed by very much the outlay for the Pradhan Mantri Krishi Sinchai Yojana, which just went up from Rs 7,392 crore to Rs 7,589 crore. Thus, to claim that the Budget is farmer-oriented is a bit exaggerated. The government has not put the money where its mouth is.

We have been told by the chief economic adviser, Arvind Subramanian, about how subsidies are given mostly to the undeserving. This was also highlighted in the Economic Survey 2015-16. Last year the government earmarked Rs 257,801 crore for subsidies, of which Rs 140,000 crore was for food and Rs 72,000 crore for fertilisers. The total for subsidies has been hovering around this level for the past few years not due to any restraint, but because the petroleum subsidy has come down from Rs 85,378 crore in 2013-14 to Rs 26,947 crore this year due to the fall in oil prices. So this has been a windfall rather than any display of political will or new thinking.

Another saving I was hoping for was that the revenue foregone by way of deductions, exemptions and write-offs would have come down somewhat. This has remained almost steady during the last two years at about Rs 5.7 lakh crore. Out of a total tax collection of about Rs 13.5 lakh crore. This is a big chunk.

The finance minister has ignored the usual blandishments for a bigger tax cut and we must be grateful for small mercies. This is a Budget in the old direction and with no new intentions.

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.