Some thoughts on the Budget

The four key features of the Budget: Context, transparency, expansionary and protectionist

Ten days after the presentation of the Union Budget ,everything worth saying has already been said or voiced in the media. So here I shall limit myself to sharing my thoughts on just four subjects.

Budget speech and its context

All Budget speeches are made in particular economic contexts. Their effectiveness and success depend not just on the substantive content of the announcements made, but also on conveying credibly the finance minister’s grasp of the prevailing context and outlining the government’s economic and financial policies to promote the best possible economic development path in the years ahead. The economic context for the present Budget included the sharp slowdown of economic growth over the past two years, the worst unemployment/ underemployment situation in nearly 50 years, seven years of stagnant exports, declining investment rates, a stressed financial system and major problems in key sectors. In other words, a near crisis in the economic situation.

A striking disappointment about the speech was that none of this was recognised in the opening pages. Perhaps, the finance minister wanted to avoid any sense of negativity. But the result was to convey an aura of denial, which reduced the effectiveness of the speech. A far better approach might have run as follows: First, frankly recognise the gravity of the economic challenges; then point to the several pre-budget steps already announced in September and October, including the major reduction and restructuring of corporate taxation; go on to explain how the Budget proposals would further improve matters; and indicate that other measures and reforms would be forthcoming to ensure a strong recovery in investment, growth, employment and exports.

Transparency and realism

A fundamental purpose of any Budget is to present an honest accounting of the past year and realistic projections for the year ahead. Unfortunately, “fudgeting” has become a common practice in quite a few Indian budgets (across different governments) in the 21st century, including in the last three years. To the credit of Finance Minister Nirmala Sitharaman, in this Budget, she has taken significant steps to improve transparency by presenting a statement on the vexed issue of extra-budgetary spending/borrowing (see Annex V of speech Part A and Statement 27 of the Expenditure Profile). That shows a total of about 0.85 per cent of GDP of such expenditures/borrowing in both 2019-20 RE and 2020-21 BE, excluding the footnoted reference to amounts for public sector bank capitalisation. Much of this is for financing the food subsidy through the Food Corporation of India. If added to the “shown” fiscal deficits (FD) for these years, it would raise the ratios to 4.6 and 4.4 per cent, respectively.

illustration: Binay Sinha

While this improvement in transparency is welcome, it increases the appetite for more. Why are similar transactions through the NHAI and NABARD not included? If one uses the correct yardstick of whatever adds to the stock of government debt should be included in the FD flows, why are the amounts for public sector bank capitalisation left out? Including these, would increase the FD ratios above 5 per cent in all the years from 2017-18 onwards. More fundamentally, since these higher numbers are closer to the actual fiscal deficits, why are they not presented instead of the understated amounts of 3.8 and 3.3 per cent?

It is heartening that the recent report of the 15th Finance Commission clearly criticises recourse to off-budget borrowings and expenditures and calls for their “elimination in a time-bound manner”. It also calls for “an overarching legal fiscal framework that defines …the budgeting, accounting, internal control and audit standards to be followed at all levels of government”. Very necessary and very welcome.

Budget: expansionary or contractionary?

There has been much commentary complaining about insufficient fiscal stimulus from the Budget. Some have called it contractionary. I find this inexplicable. How can a central government Budget proposing FD of about 5 per cent or more of GDP be contractionary? Together with about 3 per cent in the states, that means a combined FD of about 8 per cent and a public sector borrowing requirement (PSBR) of 9-10 per cent of GDP!

If one is referring to the change in FD level between 2019-20 and 2020-21, there isn’t one, once one adjusts for extra-budgetary borrowings/expenditure. Indeed, if one classifies disinvestment receipts below the line (as one should according to accepted international standards), then even the direction of change is expansionary, since a three times higher figure has to be added to the FD in 2020-21 compared to 2019-20.

So the finance minister has to be commended for not giving us even higher FD plans to propitiate the stimulus-wallahs. That would have been quite unwise in the current context of high fiscal deficits, a 70 per cent government debt-to-GDP ratio and low growth of nominal GDP.

Protectionist customs duties and procedures

The biggest weakness of this Budget is its continuing lurch towards protectionism. This is the fourth Budget in a row, beginning with Arun Jaitley’s February 2018 Budget and including Piyush Goyal’s Interim Budget of February 2019, that has raised customs duties across a wide array of products. This year the products include a number of household goods and appliances, electrical consumer appliances, footwear, furniture,  toys, certain machinery items, certain medical equipment, components of mobile phones, e-vehicles of various categories and walnuts. Furthermore, the provisions for anti-dumping duties and safeguard duties are also being tightened, as are rules of origin under extant free trade agreements, all of which promise bigger bureaucratic hurdles for imports.

For 25 years since 1991, successive Indian governments reformed our trade policies in favour of greater openness and engagement with world trade. Customs duties were greatly reduced and quantitative restrictions largely eliminated. As a result, our foreign trade — both exports and imports — expanded robustly, providing a significant boost to our economic growth and employment. Since 2017, we have reversed policy and retreated from engaging with the world economy. Our ministers and senior officials do not seem to appreciate that higher duties and restrictions on imports hurt our capacity to grow exports. No sizable, non-oil country has sustained high export growth while imposing significant duties and restrictions on imports. And no such country has sustained high overall economic growth without high export growth. We ourselves grew fastest when our exports expanded robustly (1992-97 and 2003-2012).

If we cannot learn from our own recent economic history, we condemn ourselves to slow economic development.

The writer is honorary professor at ICRIER and former chief economic adviser to the Government of India. Views are personal.