Arun Jaitley had a difficult job to do, and he has coped well. He has met his headline target of restricting the fiscal deficit for the year that is about to close, to 4.1 per cent, despite massive shortfalls in tax revenue and disinvestment proceeds. His answer has been ruthless cutting of expenditure - mostly money that should have gone to states for social expenditure programmes. As for next year, the Finance Commission took away a sizeable chunk of money and gave it to states - the total devolution of central funds to states has gone up from 5.4 per cent of GDP in 2013-14 to a budgeted seven per cent in 2015-16. Despite this very substantial loss of fiscal space, the central deficit is to come down by 0.6 per cent of GDP (from 4.5 per cent to 3.9 per cent) over the first two years of the Modi government. If one assumes no other changes in state finances, then the combined deficit of the central and state governments would have dropped over these two years from seven per cent of GDP to 4.8 per cent. This would be the lowest combined deficit since the onset of the 2008 financial crisis, though the economy has not been in the best of health. India will now cease to be ranked among countries with particularly high fiscal deficits.
The burden of passing on much larger sums to the states has been partially offset by increased revenues from the petroleum sector, and by a reduced subsidy bill. The net revenue from the petroleum sector (tax revenue less subsidy) has gone up from about Rs 37,000 crore in 2013-14 to a budgeted level of Rs 1.41 lakh crore for 2015-16. The net gain of 0.8 per cent of GDP makes up for about half the additional outflow to the states. At the same time, it is worth noting that the food subsidy bill has gone up sharply during the current year, being Rs 30,000 crore more than last year's Rs 92,000 crore. This is hard to explain when the food security programme has not been rolled out. Perhaps the sale of foodgrain stocks in the open market has been at a loss, and has been booked in the subsidy bill. Still, the bill for major subsidies is coming down to under 1.73 per cent of GDP, from 2.26 per cent in 2013-14.
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Looking forward to next year, the fiscal challenge remains daunting because the seventh Pay Commission's report will have been submitted before the next Budget. Going by past experience, implementing the recommendations would mean increased expenditure on pay and pensions going up by about one per cent of GDP. The finance minister intends to absorb that and yet manage a further reduction in the deficit from 3.9 per cent of GDP to 3.5 per cent - a combined reduction of 1.4 per cent of GDP. It remains to be seen how that will be done; perhaps the introduction of the goods and services tax (GST) next year will provide a boost to tax collection by reducing the scope for escaping the tax net.
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Meanwhile, Mr Jaitley's Budget touches the right buttons. It proposes to finance expanded public investment in the under-invested transport sector (basically roads and railways), leverage private infrastructure investment through the creation of a new fund, move forward in half a dozen ways on better administration and regulation of the financial sector, introduce "strategic" disinvestment, attack black money, monetise idle gold hoards, and reverse the export of India's financial markets. That is not a small agenda to lay out.
It is also a political Budget, manifestly tuned to the post-Delhi election political scene, and, therefore, consciously seeking to avoid a repeat of the "Shining India" message. Hence, the promise of a higher allocation for the rural employment guarantee programme, the offer of a highly subsidised accident insurance programme, the benefits offered to the middle-class (all of them admittedly sensible, and, in fact, overdue - especially the higher allowances for medical and transport expenditure and the pension savings option) - and the higher cess on incomes in the more rarefied reaches. The only issue on which one can quarrel with the government is the expansion of the tax giveaway on medical insurance; this only serves to subsidise private corporate hospitals, many of which are known as much for medical malpractice as for providing needed care. Surely, the government would do better by expanding the scope of public hospitals, where the number of patients is far in excess of present capacity.
If the Budget has disappointed some, it is because of the expectation that this would be some kind of Big Bang Budget. Still, it would be fair to say that Mr Jaitley could have done more than he has. There are too many cheques written with future dates on them - rewriting corporate taxation, introducing as many as nine new laws, implementing the report of the expenditure control committee and implementing the General Anti-Avoidance Rules, or GAAR. Also, the finance minister has needlessly fiddled with specific excise duty rates, and introduced a divergence between excise and service tax rates when they should have moved up together in preparation for the introduction of the GST next year.
