Big Budget Promises Cant Mask Modi Govts Poor Economic Performance

From 2016-17, India’s finance ministry began providing two pie charts in its “Budget at a Glance” document—these depict where a budgeted one rupee comes from (revenue) and where it goes (expenditure). A closer look can decode some important public finance aspects which these diagrams may hide.

In 2016-17, of that total one-rupee revenue, 30 paise was estimated to come from indirect taxes (comprising service and other taxes, union excise duties and customs duties). In 2018-19, budget estimates showed that the share of indirect taxes (comprising GST and other taxes, union excise duties and customs duties) in the total one-rupee revenue had gone up to 35 paise. But the share of customs duties in the budgeted one-rupee revenue estimates has fallen from 9 paise in 2016-17 to 4 paise in 2018-19. This implies that the government expected to increase its indirect tax revenue quite substantially in this two-year period, riding on an expected increase in GST (Goods and Services Tax) collection.

But what is the reality?

The 2018-19 budget estimated GST collection at an ambitious Rs 1.12 trillion per month. In reality, GST collection plummeted from April 2018 till September 2018 and could not achieve the monthly estimated collection even once till October. In September 2018, the collection was a dismal Rs 0.94 trillion. During the festive season of October 2018, it improved to Rs. 1.01 trillion—the first seven months’ collection had an overall shortfall of 13% of budget estimate. Later, even November collections did not bring any cheer as the overall shortfall remained around 10%. It is unlikely that this shortfall will be made up in the remaining 3-4 months in this fiscal year.

The state-level details of the shortfall show what the real issue is. The states where shortfalls are continuously rising or at least not falling include highly industrialised states such as Gujarat, Maharashtra, Goa, Punjab, Tamil Nadu and Delhi. In November 2018, the shortfall was as high as 37%, 25% and 21% in Punjab, Goa and Delhi respectively. In the new year, the GST Council has decided to form a panel of state finance ministers to study and analyse the reasons behind these shortfalls. This is probably too little and too late an intervention, given that the centre has to compensate states 100% during the first five years of implementation of GST, which implies further rise in central government expenditure in future.

So what are the repercussions of this?

GST collection shortfall will definitely translate into a larger revenue deficit, and the FRBM (Fiscal Responsibility and Budgetary Management) Act ties the hand of the government. If the government follows the FRBM, then it needs to find funds from other sources. The Reserve Bank of India (RBI ) has already been admonished and tamed; probably a large fund transfer is on the cards through a dividend, or a part transfer of central bank reserves, or both.

Simultaneously, one can expect a heavy cut-down in government expenditure in the interim budget. However, as this is an election year, there has to be enough “sound and fury”— even though this government has failed  miserably in most of the economic policy fronts.

The government’s reliance on off-budget borrowing is also expected to increase. The Comptroller and Auditor General (CAG), in a report tabled in Parliament in January 2019, had admonished the Narendra Modi government for borrowing through off-budget channels to finance capital and revenue spending in 2016-17 and for hiding the true extent of fiscal and revenue deficits. It also strongly recommended disclosure of its rationale and objective to Parliament to increase fiscal transparency. But what was done in 2016-17 may be repeated this year, and most likely the CAG’s advice may be disregarded.

If we return to the “Budget at a Glance” pie diagrams, in 2016-17, out of the one-rupee revenue the budget estimated 33 paise would come from direct taxes—19 paise from corporation tax and 14 paise from income tax. In 2018-19, budget estimates for direct taxes stood at 35 paise—19 paise from corporation tax and 16 paise from income tax. This implies that the government did not expect corporate tax revenue to be buoyant. With the ambitious “Make in India” scheme not taking off during the last four years or so, this expectation is broadly in line with the reality.

The point to be noted here is that the amount of revenue generation from both direct and indirect tax collections is pegged at 35 paise in the one-rupee revenue pie in 2018-19 budget estimates. Ideally, revenue from direct tax collection should be more than the indirect tax collection. That is the hallmark of any progressive tax structure, as any public finance textbook would confirm. Emphasis on indirect tax collection means that for daily necessity goods, both rich and poor are taxed at the same rate, and that is why a progressive tax structure puts emphasis on direct tax collection where the rich would pay more taxes. The one-rupee pie, however, shows no such movement towards a progressive tax regime.

Tax compliance hovering around an estimated 11.6%, coupled with a low tax-GDP ratio, undoubtedly makes direct tax collection a difficult job. But this also signifies the prevalence of black money in the economy. The Modi government tried to tackle the problem of black money through demonetisation which proved to be an unmitigated disaster. So, this part of the one-rupee pie is also unlikely to change even in this year’s budget.

As the government’s promises of creating 10 million jobs a year and doubling farmers’ income have fallen flat, many are expecting big announcements in this year’s interim budget, particularly for farmers and the middle class. However, with reports coming in that the 2017-18 unemployment rate is estimated to be at a 45-year high of 6.1% in the withheld NSSO Labour Force Survey, any amount of “sound and fury” announcements in the interim budget would be grossly inadequate to resolve the current faltering state of the economy.

The author is a Senior Fellow with Observer Research Foundation’s Economy and Growth Programme.