The 5th of July witnessed a Budget from an eclectic perspective demographically. It wasn’t a usual 11:00 am morning where economists, politicians and a bunch of enthusiastic lot anxiously waited for the Finance Minister to commence her speech but in addition, a significant number of women who left their chores and sat in front of the television solely to look up to their representative as she stood with her head-held high, bravely jettisoning the briefcase that the British Budget Chief, William Gladstone managed to leave behind the footprints of, since the 19th century. Unambiguously, the ‘bahi-khata’ did garner praise from all over the country but the gold that seemed to be hidden under the glitters didn’t quite appease.
To begin with the bright side of the story, the most encouraging commitment towards fiscal discipline paved its way brilliantly through an acknowledgement of delays in government payments to businesses, suppliers and contractors. The proposal for a payment platform to enable filing of bills and making them parallelly available to both the small-scale and large suppliers, did impress the population to a considerable extent. If the government successfully manages to implement the above, it alone will pump-up the fiscal deficit as payment delays have always been considered an instrument through which the former is kept under control.
The second impressing bit to hop on, was eating the rich. If an individual’s taxable income exceeds Rs. 2 crore, he will have to pay 25% and if it exceeds 5 crores, then a surcharge of 37% on the tax would be levied. If delved deeper into, for a person earning an approximate amount of 2.5 crores, would actually have to shell out Rs.7.5 lakh and the tax is a whopping amount of Rs. 37.18 lakh extra for someone having a taxable income of 5.5 crore INR.
Third came the long-awaited assurance of keeping the identity of the tax filer hidden from the scrutinizer with an additional promise of no contact between the two. This should come as a relief to taxpayers who get slapped with a high tax amount on scrutiny and then are encouraged to pay a bribe to “settle” the matter.
There were a handful of other significant measures which I am sure the media has tactfully captured and presented. So let me get into my understanding of the Budget.
The Budget, by definition, involves stating revenues and expenditures with a special emphasis on its net borrowing. This Budget speech, somehow chose to be anything else but this. The speech of the Finance Minister had very little mention whatsoever of the fiscal deficit which was something very unusual and out of the norm. It was mentioned by her informally after the conclusion of her speech, as having gone down to 3.3% from 3.4% in the fiscal year 2018-19 by the revised estimates. Even if we ignore this fact, the calculation of pegging the same at 3.3% somehow fails to justify itself amidst the other factors determining it.
The fiscal deficit is pegged at Rs.7.04 trillion. If this is considered equivalent to the 3.3 number as a percentage of the GDP, then the latter clearly should be focussed more on. The GDP for the current year 2019-20 has been estimated to grow at a nominal rate of 12% whereas the Reserve Bank on the 6th of June forecasted the inflation rate to be 3.3% and the economy to grow at a real rate of 7%. As per the formula, the rate then can reach a maximum limit of 10.5% in nominal terms which puts the 12% estimation right back into the difficult chair of justification. Furthermore, the 10.5% nominal rate does work out the fiscal deficit number closer to 3.4% as per RBI data and here sets in the ironical conclusion: if this is what the calculation speaks, then the absolute numerator has grown at a higher rate than the absolute denominator. To be precise, the absolute fiscal deficit proves to have grown more than nominal GDP did last year.
This clearly pushes me into the dilemma of the stringent commitment towards fiscal consolidation that the government is aiming to achieve and of course, the promise of the $5 trillion economy. India’s GDP is in rupees; that converted into dollars involves some exchange rate assumptions. Is the target achievable? Definitely it is, subjected to three provisos: One, the economy does relatively well; two, brilliant monsoons and three, Rupee Appreciation. The next question then is, do we see any visible reason for appreciation between 2019 and 2024? Probably not. The current economic scenario vividly predicts the rupee to either remain where it is or depreciate. So let’s be a little pessimistic and factor in the latter owing to which our estimation of the growth rate should hover around 12-13%. Achievable? Well, India in 1973 grew at a nominal rate of 22% but here we need to stop before clapping our hands, the inflation rate was pegged at 18.4% the same year.
The Monetary Policy Framework has estimated a 4% rate of inflation which is something we do not expect to exceed but we can expect the other half to impress us, the real growth rate and this is where the Seventh Schedule should make an entry. The nation’s growth is nothing but a conglomeration of the growth in the 29 states. Gujarat, Tripura, MP and Karnataka has shown an average real GSDP growth of more than 8% last year. If the other states can be helped with proper devolution of funds and grants, a decent number of 8.5% can easily be achieved.
All these seem achievable and yet difficult to perceive. Overall, the Budget portrayed a mixed box of measures that either seemed populist or policy-driven while the rest posed questions on these robust issues. A lot now depends upon the implementation of the same and the spillover impact of the Commission reports that are on their way this year.
Bidisha Bhattacharya is an Indian economist and former economic affairs strategist with the Indian Political Action Committee and former Consultant to the Finance Commission of India.