<b>A K Bhattacharya:</b> Jaitley's three Budgets

Fiscal deficit reined in, but fall in capex's share in GDP, high reliance on indirect taxes worrying

Finance Minister Arun Jaitley will present his fourth Union Budget next week. One way to assess the finance minister’s performance so far and understand what he is likely to do in the Budget for 2017-18 is to look at what he has tried to achieve in his last three Budgets. The story that emerges is quite interesting and instructive.

Jaitley’s track record on the fiscal consolidation front is admirable. In spite of pressures on him to stray from the path of fiscal responsibility, he has in each of his three Budgets worked towards reducing the government’s fiscal deficit — from 4.1 per cent of gross domestic product (GDP) in 2014-15 to 3.9 per cent in 2015-16 and to 3.5 per cent in the current year, a target that he is expected to achieve. 

It could be argued, of course, that not much ought to be read into this achievement of the finance minister because he has only maintained the healthy trend of gradual reduction in fiscal deficit that his predecessors started in 2012-13. Never before in post-reforms India have Union Budgets seen a steady reduction in fiscal deficit for five consecutive years. Jaitley’s big test, therefore, would be in 2017-18 when it would be known if he has fallen prey to the temptations of declaring a pause on further fiscal consolidation or reined in the fiscal deficit for the sixth year running.

Jaitley’s fiscal consolidation efforts, however, need to be examined in the context of how he has planned to achieve those numbers. On taxation, the finance minister has done reasonably well by raising its share in GDP from less than 10 per cent in 2014-15 to close to 11 per cent in the current year. That the government’s total expenditure was also reined in during the same period has certainly helped him reduce the fiscal deficit. 

But take a closer look at his taxation efforts and an interesting trend emerges. In the three years under Jaitley, corporation tax collections as per cent of GDP have declined marginally even as personal income-tax mobilisation has seen a steady rise. This could have taken place for a variety 

of reasons. 

Jaitley’s three Budgets have offered tax concessions to both companies and individuals, but it is likely that poor corporate earnings have prevented the anticipated buoyancy in collections that would have otherwise resulted from lower taxes. With regard to individual income-taxes, the increase in the ratio could be due to a wider coverage, with more taxpayers being captured in the tax net. 

But what is inevitable is a general conclusion: Jaitley’s tax efforts have seen a bigger mobilisation from indirect taxes instead of direct taxes. Barring Customs, collections under both excise and service tax have seen a steady rise in the last three years. This is understandable because Jaitley increased the service tax rate as also the excise duty on petroleum products. But this has had an impact in another area. In the last two and a half decades, the imbalance in the mix of direct and indirect taxes has been largely corrected as both the segments account for almost an equal share. But the trend of indirect taxes rising as per cent of GDP at a sharper pace than direct taxes needs to be watched carefully.

On the expenditure side, Jaitley has done reasonably well on subsidies, reducing its share in GDP from over two per cent to about 1.65 per cent. Of course, lower international crude oil prices and a more efficient subsidy transfer system have helped, but due credit for reducing the overall subsidies bill must go to the finance minister. 

The devil, however, is in the detail, as far as the government’s expenditure is concerned. Despite promises of substantially increasing public investment, the government’s capital expenditure has seen a slow rise as per cent of GDP. Indeed, in the current year, capital expenditure will decline to 1.63 per cent of GDP, compared to 1.75 per cent in 2015-16. This trend needs to be corrected.

Far worse is the fall in defence expenditure at a time when the government needs to strengthen its armed forces. Defence expenditure as per cent of GDP has been declining every year since 2010-11. Jaitley’s three Budgets also maintained that unhealthy trend.

Can Jaitley significantly reverse the direction of government expenditure on both defence and capital expenditure in his Budget for 2017-18? And can he do it without a pause in fiscal consolidation? For an answer, wait until February 1.