Need a pro-growth budget, but it comes with a generous dosage of populism

There are at least five reasons for which the forthcoming Union Budget is expected to be distinctive. First, it is going to subsume the accounts of the giant Indian Railways. Second, we now know that the facile distinction between plan and non-plan expenditure will no longer be valid.  Third, hopefully the budget would witness implementation of the Shivraj Singh Chouhan Committee on rationalisation of centrally-sponsored schemes.  Fourth, in all likelihood, the Budget is going to declare that Goods and Services Tax (GST) will be rolled out from July 2017. Fifth, and most importantly, the budget has to demonstrate some trickle down of the seeming benefits (?) of the demonetisation process.  

To probe into the last issue, it may be useful to recall that the Union Government like any other household has to face a budget constraint whereby expenditure has to be matched by (a) income, and (b) borrowing. For the government, in aggregative term (and neglecting some less important items), this budget constraint takes the form: “tax revenue + non-tax revenue + borrowing = expenditure”. 

As far as Budget Estimates of 2016-17 is concerned, while tax revenue accounted for nearly 53 per cent, the share of non-tax revenue was about 16 per cent of total receipts; borrowing, on the other hand, accounted for nearly 27 per cent of total receipts. These numbers in some way reveal the predicament of the government. It is difficult to increase tax revenue while non-tax revenue (comprising four items: interest receipts; dividend and profits, other non-tax revenue; and receipts of Union Territories) is mostly beyond the ambit of annual control of the Finance Ministry. 

Thus, in the face of government's limited capability to earn more, any demand for more expenditure on any item amounts to the proverbial magical trick of bringing out rabbits out of empty hats. Moreover, as far as the composition of expenditure in 2016-17 is concerned, while revenue expenditure accounted for 88 per cent of the total, capital expenditure was at a meagre 12 per cent. Thus, as government has huge amount committed liabilities (like wages and pensions), its capability of building up capital assets is also limited.  

While being agnostic about the impact of demonetisation, it may be noted that demonetisation can have its impact on the forthcoming Budget in a number of ways. First, tax revenue may go up partially and temporarily out of the additional tax revenue that government could earn on non-declared on income under post-demonetisation effective tax amnesty. 

Second, a key item of the non-tax revenue is “Dividend/Surplus of Reserve Bank of India, Nationalised Banks & Financial Institutions". As per RBI's accounts of 2015-16, surplus transferred to the Union Government amounted to Rs 659 billion. Now that Government has passed the Ordinance on extinguishing specified bank notes, the legal hurdle of transferring additional surplus of the RBI (arising out of money that has not come back to the banking system) has been cleared. 

On both these accounts the revenue of the government is expected to go up this year. Of course, these gains are to be netted out of the possible tax loss arising out any adverse impact that GDP is going to have out of the demonetisation process. Of course, a lot on the devils would lie in details, about which we have little clue at the current juncture.

Faced with this possible problem of plenty, what can the Budget do? Three options are at hand. First, the government can give some sops to the households and corporates - such as increasing the exemption limits in case of personal income tax, or tinkering with the corporate tax rates.

Second, in order to demonstrate the trickle-down effect of demonetisation, the Budget can declare specific social welfare schemes, linking money declared to have been recovered under the demonetisation to some such expenditure. Both these possible initiatives could go well both with the imperatives of populist electoral compulsions as well as generating demand in a somewhat depressed economy. 

My own take is that apart from adopting a combination of these two sets of policy measures, the government could give a third signal that it is firm on its way towards fiscal consolidation and adopt some responsible fiscal deficit numbers in tune with the expected report of the Panel to review the Fiscal Responsibility and Budget Management Act.

Symptoms of growth losing momentum is evident in India as the IMF revised India's growth estimate in 2016-17 downwards by a full one percentage point - to 6.6 per cent on January 16, 2017 from the earlier estimate of 7.6 per cent (in October 2016). At this juncture, my expectation is for a growth oriented budget in India - in all likelihood it could come with some generous dosage of populism.
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Partha Ray is the professor at Indian Institute of Management (IIM) Calcutta