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Posted by: Deepa Vasudevan on Mon, Feb 4th, 2019

Interim Budget 2019-20: Assessing the Fiscal Math

The Interim Budget for 2019-20 has been described as pro-poor, pro-farmer and pro-middle class. Depending on one’s political leanings, it could be considered as an effort to ease agrarian distress and make tax payments easier for the salaried class; or as a populist budget that gives sops to gain votes. Whichever way one looks at it, the key questions to ask should be: what does the government plan to spend on, and where is the money going to come from?

On the expenditure side, the items that have shown the greatest increase are transfers to states for GST compensation (which nearly doubled), expenditure on the agricultural sector (up by a whopping 73%), and LPG subsidy (over 60% increase, mainly due to provisioning for higher crude prices). Other beneficiary sectors include health, education, and urban development. The attention-grabbing schemes announced in the budget- pension for unorganized sector workers, direct income support for small and marginal farmers and interest subvention for farmers impacted by dire natural calamities- have either been under-provided for or are not expected to cost much in FY20. For example, the unorganized sector workers’ pension is expected to pay Rs.36000 per year to about 10 crore workers, but only Rs.500 crore has been provided for it. PM-KISAN- the direct income support program is expected to pay out Rs.6000 annually for about 12 crore farmer families, so it gets Rs.20,000 crore in FY19, and Rs.75,000 crore in FY20; the amount appears realistic and is less than 3% of total budgeted revenue expenditure.  At the same time, the government has reduced or maintained funding for key existing schemes including MGNREGA, Swachh Bharat, Ujjwala and Pradhan Mantri Awas Yojana. Capital expenditure is budgeted to go up by merely 6%, after increasing by 20% in FY19. As a result of this compression, overall spending for FY20 is budgeted to grow by 13.3% over the revised estimates for FY19; a figure that is not too high considering that nominal GDP is assumed to grow by 11.5%. In other words, the handouts, though generous, are not fiscally impossible.

On the revenue side, the budget relies almost entirely on the assumption of strong growth in tax revenues. GST is expected to stabilize in FY20, even though inflows from GST were much lower than budgeted in the current year.  Revenues from income tax and corporation tax are budgeted to grow by 13% and 17% respectively: the assumption is that the robust growth in direct tax collections seen in recent years is expected to continue. This is not unreasonable: between FY15 and FY19 the tax-GDP ratio went up from 10% to 11.9%, and is budgeted to increase only moderately to 12.1% in FY20. The Finance Minister reduced the tax burden for the salaried class by increasing the tax-exempt income to Rs.5 lakhs per annum; increasing standard deduction to Rs.50,000, and raising the TDS threshold. These actions will have a significant impact on the middle class: data shows that of the 3.7 crore individuals who filed tax returns in 2015-16, 1.95 crore, or 50%, were in the 2.5 lakh- 5 lakh slab. It is estimated that the government stands to lose about Rs.20,000 crore due to this measure. The gamble is that a simpler, lower-tax regime will encourage more salaried individuals to pay taxes honestly. At the same time, the use of big data and other specialized techniques will enable the IT authorities to effectively identify and nab tax evaders. This combination of factors, it is hoped, will ensure that tax revenues continue to remain buoyant.  On the disinvestment front, the targets are large and appear unattainable, but as is rumoured for the current year, the government could always ask PSUs to buy up stakes in other PSUs to achieve the budgeted inflows.

Stock markets reacted positively to the budget announcements; rural demand is expected to boost sales and profits of auto and FMCG companies. But the benchmark 10-year yield went up, reflecting concerns about the government’s ability to fund its budgetary schemes. The table below shows why.

 

Table 1: Comparing Budgeted and Revised Data

 Table 1: Comparing Budgeted and Revised Data

RE: Revised Estimates BE: Budget Estimates. Source: Budget Documents, www.cga.in

 

Revised estimates for FY19 are almost identical to the budgeted estimates (made a year ago), even though current year collection data suggests that most revenue targets are not likely to be met. For instance, roughly 50% of the budgeted tax revenue and 20% of the budgeted disinvestment receipts were collected during Apr-Nov 2018. By November 2018, the fiscal deficit was already higher than the full year target.  If the government is to provide for the additional spending announced for the current year, and still achieve the revised fiscal deficit of 3.4% of GDP, it is clearly banking on strong growth in incomes, profits, and consequently tax revenues. It is not that this budget’s calculations are not unachievable, rather, they are based on assumptions that may or may not come true during the year.

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