If I gave you Rs100 and told you to spend Rs104, you'd have a loss of Rs4 (for which you take a loan). Now, next year, if I promised to give you Rs110 and told you that you'd have to reduce your loss to Rs3, you'd do the math and spend Rs113. That's a good deal. Not only do you get to spend more (Rs113 v/s Rs104), your loss also comes down from Rs4 to Rs3. This is the Union Budget. Just about everything can be captured in that equation because Rs100 is the budgeted receipt, Rs104 is the budgeted expenditure and that loss of Rs4 is the fiscal deficit. That’s all there is to the Union Budget.
That, and of course, the forecasting. Everything depends on that Rs100 as revenue growing to Rs110. After all expenditure is easier to control; earning revenue, however, isn’t always in your hands. Last year, we did great. Raising taxes on fuel more than compensated for shortfall in direct taxes and disinvestment. We got lucky, thanks to crude oil. On the revenue side, the higher taxes on fuel helped revenues and on the expenditure side, subsidies fell. The key question is – will this luck continue next year? The Finance Minister thinks it will. He has assumed a 16% rise in revenues and a modest 11% increase in expenditure will reduce the fiscal deficit to 3.5% of GDP from 3.9% this year.
There is one problem though. The Finance Minister has assumed huge revenues from disinvestment and sale of telecom spectrum. Neither of these receipts are reliable, recurring receipts like income tax or service tax or excise duty – those are related to economic growth (and let us, temporarily, ignore that the Government has assumed a pick-up in tax growth; all our fingers are crossed that the economy rebounds next year). Disinvestment and telecom spectrum sale are dependent on factors beyond the Finance Ministers control, such as global liquidity, risk appetite of investors, of telecom companies, etc. If these play out in the Government’s favor, then he will be vindicated. If not, then his calculations go awry. Only time will tell.
On the expenditure side, the increase in 11% doesn’t look much. But it includes a massive push to the rural sector and – therefore – a lower focus to manufacturing and infra. More money has been given to the Ministry of Agriculture than to the Ministry of roads and highways. There was enough indication that this was coming. Why rural? Why now? What are the implications for infrastructure and inflation from such a huge push? Let’s leave those questions for the politicians and economists. I’m sure the Modi Government is planning huge asset creation in the rural sector. After all, how else will you double farm income in five years (or 15% per year)? For their sake, I hope it happens. I also hope we still have some money – and, more importantly, ministerial and bureaucratic talent – left for Make in India.
Aside from these huge bets, the Finance Minister has done good work in other areas. First, the use of Aadhaar and Direct Benefits Transfer are structural positives for better delivery of subsidies. Second, there is a refreshingly genuine intent from Modi Sarkar to improve our creaking tax administration. And finally, the reduction in corporate tax rates and eventual removal of exemptions appears to be on track, although it could do with a harder push. On the flip side though, resorting to cess yet again was a let-down.
For the sake of all of us, let’s hope the Finance Minister’s gamble pays off. He’s done the best that he could. It’s not enough, it’s not visionary. But it’s also just an annual statement. There’s much, much more which can be done on the other 364 days in the year.
Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.
He tweets as @b50