The final Union Budget for 2019-20 placed before Parliament on 5 July 2019 (hereafter the Budget) was remarkable in the extent to which it seemed to adopt an ostrich-like approach, premising itself on a denial of known facts about the Indian economy and the contemporary global scenario. Many of these facts were simply ignored while others were misrepresented or deliberately concealed, as a ‘vision’ of an economy mid-way through a glorious journey to a 5 trillion-dollar size was laid out through the Budget and the speech accompanying it. This ‘vision’ completely discounted in any substantive sense the fact that the Indian economy is currently facing a major slowdown of demand growth. It simply refused to acknowledge the evidence of nearly a decade that ‘fiscal consolidation’ and improving the ‘ease of doing business’ have simply failed to revive ‘animal spirits’ and generate a private investment led process of economic expansion. If the speech were to be believed, the agrarian crisis and the mounting problem of joblessness have been almost solved in the last five years and therefore aren’t even worth mentioning. The Budgetary exercise also seemed to be completely unmindful of the fact that the world experienced a global crisis over a decade ago whose consequences are still being experienced, including through an unravelling of the international ‘consensus’ on globalization which is generating ever increasing uncertainty about the future of the world economy.
It would be absurd to say that a Government which recently won a resounding electoral victory after five years in office, and led by India’s richest political party, is completely out of touch with ground realities. The problem is not that the Government doesn’t know the economic situation and is doing what it is doing in ignorance. Instead, the issue is that it has no idea about what to do to change it. Unwilling to consider an alternative policy framework that could steer the economy away from the path to disaster, the Budgetary exercise was only about reaffirming a stubborn commitment to the doctrine that has contributed already taking India a fair distance down that road. This choice at what is a critical point in the trajectory of the Indian economy, also perhaps revealed an increasing element of desperation, and consequently recklessness, creeping into Indian economic policymaking.
The Fiscal Crisis
Ignoring of underlying economic realities in a budgetary exercise may seem all the more remarkable given that these realities do reveal themselves to Governments through the effects that they have on tax revenues. Unfortunately, rather than facing squarely the fact that a major fiscal crisis had already hit the Central Government in 2018-19 – which is also threatening to become even worse in the current financial year – the Finance Minister opted to conceal this truth.
The previous year’s (2018-19) figures of receipts and expenditures shown in the final version of the 2019-20 Budget were the Revised Estimates (RE) that were arrived at when the Interim Budget of 1 February 2019 was presented, two months before the end of the financial year. However, by July 5 2019 not only were the actuals for 2018-19 known, the revenue trends of even the first two or three months of 2019-20 were also available. What made retaining the ‘estimates’ made 5 months earlier as the reference points for comparison an act of sheer dishonesty (even raising a question mark about the integrity of the process of arriving at revised estimates) is that what Parliament and the public was not told in the process. This was that gross revenues from all Central taxes were Rs. 1.68 lakh crores below even the 1 February RE figure and that Central Government expenditure had also been correspondingly cut by Rs. 1.46 lakh crores in order to meet the fiscal deficit target.
What was also covered up in the process was the evidence belying all the claims that ‘reform’ measures like Demonetization and the shift to GST of revenue would positively impact tax compliance. Indeed, it was precisely the Income Tax and GST revenue heads that were responsible for most of the shortfall. On the expenditure side, what still remains hidden is a clear picture of where the cuts were imposed – what is known is that transfer of food subsidies to the FCI were cut. This cut and two others – in expenditures of the Department of Agricultural Cooperation and Farmer’s Welfare and in transfers to states – together accounted for four fifths of the total reduction in expenditure. If we take into consideration the magnitudes of these cuts, it would be clear that the expenditures on Central and Centrally sponsored schemes in 2018-19 was below the level of expenditure a year earlier, 2017-18.In other words, the expenditure on a new scheme like PM-Kisan, which was introduced at the very end of 2018-19, was financed by taking away funds from other schemes benefiting the agriculture sector.
This phenomenon of revenues falling short and expenditures being cut down in order to ensure that there is no deviation from the path of steadily reducing the fiscal deficit has been a recurrent pattern throughout the current decade – since the turn towards ‘fiscal consolidation’, an euphemism for the expenditure compression based withdrawal from the post-Global crisis stimulus package. This was initiated by the UPA-2 government from 2011-12 and persisted with thereafter by the first Modi government – and now we have clear evidence that both political formations have adhered to this so strictly as to pursue expenditure cutting even when elections are impending and the electorate has to be faced. The only difference is in how they managed the potential political fallout. Indeed, the remarkable continuity of fiscal policy through a decade now almost approaching its end is revealed in Figure 1. This shows clearly that a steady trend of decline in the fiscal deficit relative to GDP in the face of stagnation in tax mobilization has been achieved by basically compressing government expenditure.
Figure 1: Central Revenues, Expenditure and Fiscal Deficit as Percentage of GDP at Current Market Prices, 2011-12 to 2018-19
Note: The data has been presented in a specific way to ensure that comparability across the entire period is not affected by i) the changes in the share of Centre and states in Central Taxes following the implementation of the Fourteenth Finance Commission recommendations; and ii) the introduction of GST with a clause of compensation of states for revenue losses from the proceeds of a GST compensation cess levied by the Centre.
Source: Union Budget Documents; Controller General of Accounts (cga.nic,in), RBI handbook of Statistics on the Indian Economy; CSO Press Release Note 31 may 2019 on Provisional Estimates of National Income for 2018-19
As is evident from Figure 1, the ratio of Central taxes to GDP has remained unresponsive to all measures to raise it barring one – namely, the increase in taxes on petrol, diesel and other petroleum products (POL taxes). This is the option, one that involves extraction from the entire populace, that the first Modi government had been able to exercise when international oil prices fell immediately after the Government assumed office in 2014.It is to the same that Nirmala Sitharaman has turned in the face of an increasingly grave crisis of revenues. The tax-GDP ratio was already in decline after 2016-17 but the Government had been unable to raise POL taxes further as oil prices had firmed up. To make matters worse, data on the first two months of 2019-20 on all taxes and GST collections of the first three months are indicating the onset of a near complete stagnation in revenues. With elections now being over, the Modi government has shown no compunction in taking a cynical recourse to taxing the common people more heavily. While much attention has been focused on the so-called tax on the super-rich, the fact of the matter is that it is not from income taxes but from excise duties that the Government hopes to garner some additional revenues in 2019-20. The projections of income tax revenues in 2019-20 have in fact been brought down by Rs. 51,000 crores compared to those in the Interim Budget. GST projections have also been cut down by Rs. 97, 857 crores while those of revenues from excise and customs duties have been upped by Rs. 40,400 crores and Rs. 10,516 crores respectively. Despite these, the projected total gross tax revenues are set to decline by Rs. 90,936 crores relative to the Interim Budget figure. Even this reduced total might not be realized as it would require the percentage increase in gross tax revenues compared to the actuals of 2018-19 to be 18.32 per cent. Almost the same annual growth was estimated in the Union Budget for 2018-19 but the final increase turned out to be merely 8.4 per cent.
A Fiscal Stimulus or a Compression?
The upshot of the above discussion is that the problem of scarcity of revenues is not an outcome of tax cuts to stimulate a flagging economy but a symptom of that economic situation. Indeed, the sum total of the tax measures of the Budget, and the POL taxes in particular, will have the exact opposite effect of squeezing consumption demand even further. On the other hand, since there is absolutely no departure from the commitment to holding down the fiscal deficit, no stimulus is being imparted through expenditure increases either. In fact, if the revenue projections remain unrealized, expenditures will be squeezed further, as has been the rule.
However, if one looks at it more closely, the desperation to hold down the fiscal deficit in the face of a revenue crisis has meant further measures in the Budget that are demand suppressing in nature. For one, the consequences of the revenue shortfalls will mean that states will have less to spend as part of their resources come from their share in Central taxes. Even if the revenue projections are met, the states will have Rs. 35, 472 crores less than the Interim Budget had promised them. Further, this will be a mere 6.26 per cent increase over what they received in 2018-19 – almost half the projected 12 per cent growth rate of nominal GDP and way below the 13.14 per cent increase seen in 2018-19 over 2017-18. On the other side, Nirmala Sitharaman has also wiped out from the expenditure side of the Final Budget Rs. 11,436 crores that was earmarked in the Interim Budget as Finance Commission Grants to urban and local rural bodies.
A similar story has also been enacted in relation to public enterprises. Between the Interim to the final Budget, the dividends and profits being squeezed out of the public sector has been increased by Rs. 27,547 crores– which would mean a 44 per cent increase over the actuals for 2018-19. The major part of this (Rs. 23,310 crores) is to come from the RBI’s surplus and the profits of public sector financial institutions. On the other hand, the capital outlay of public enterprises has been reduced by Rs. 7,211 crores while the non-budgetary expenditure out of the resources of public enterprises has been slashed by Rs. 79,800 crores. This puts into perspective the additional Rs. 70,000 crores that is being spent on recapitalization of the public sector banks supposedly to enable them to expand credit. This amount, in any case less than what was spent on the same head in the previous two years, is actually part of the capital outlay of public enterprises. This means that the Rs, 70,000 crores for recapitalization of banks is going to come from cutting the outlay to other enterprises and diverting these resources to this head – the largest cut (Rs. 87,734 crores) being in outlay to the Food Corporation of India. Not only does the amount spent on recapitalization, therefore, not represent an additional expenditure, it is a diversion from actual public expenditure to quasi-public expenditure – for supporting bank lending to private parties. To this must be added also the attempts to find resources by increasing disinvestment of government holding in public sector enterprises.
Thus the 2019-20 Budget reflects an attitude where the Central Government is window dressing its own accounts by a parasitic squeezing of other levels of government and public enterprises, whose ultimate consequence would be to compress the overall level of public expenditure in the economy – thereby worsening the already serious demand situation.
The ‘Reform’ Agenda
Fiscal compression as a response to a fiscal crisis even in the face of a downturn, ignoring the fact that the compression may aggravate the revenue crisis, is the Modi government’s way of clearly signalling its unwavering adherence to the neo-liberal doctrine of ‘sound’ public finance. This doctrine is ultimately about keeping the government small and maximizing opportunities for private capital including global financial interests. Stimulating economic growth in this worldview is all about cajoling and incentivizing profit-making private investment – and it is at that god’s temple that the Finance Minister chose to pay obeisance.
“All of India’s private sector industries – small, medium or large – have played a substantial role in growing our economy. …. We do not look down upon legitimate profit earning…… India Inc. are India’s job-creators. They are the nation’s wealth creators. Together, with mutual trust, we can gain, catalyze fast and attain sustained national growth. I wish to propose a number of initiatives as part of a framework for kick-starting the virtuous cycle of domestic and foreign investments.”
These words in the Finance Minister’s Budget Speech let the cat out of the bag. It was first and foremost an acceptance, even if unintended, of the failure of the first Modi government to achieve the much-vaunted private investment and export led growth. There would be no need for kick-starting now something that was already under way! However, this grudging acknowledgement of failure goes only so far and the full import of the evidence that this has happened despite the strict adherence to fiscal conservatism and accompanying policies like Start Up India, Stand Up India, Make in India, MUDRA, Skill India, etc., has not been appreciated. The fact of the matter is that the trends in the production and imports of capital goods, as well as of other products like cement and steel, confirm how bleak the investment scenario has been throughout the current decade. Export stagnation on the other hand cannot be wished away by data manipulation. It’s no wonder that more and more people are beginning to doubt the official GDP growth figures, the latest being the Chief Economic Adviser of the first Modi government. More importantly, there is widespread acceptance of the fact that now the demand situation is worsening as even consumption growth is losing steam. Everyone is also aware of the mutually interacting economic and political conflicts characteristic of the international stage today.
Instead of abandoning in such circumstances the faith in neo-liberalism and the profit-making it promotes, the Government opted for increasing the offerings and sacrifices before the same gods in the fervent hope that this will convince them to answer to the prayers for an economic boom. The ‘initiatives’ scattered across the Budget Speech delivered on July 5 were all about the related objectives: of making investment in India by the corporate sector and by foreign capital more attractive; facilitating greater integration with international financial markets; and greater financialization and commercialization of all activities including public services and infrastructure development. Creating a ‘financeable’ model for the development of highways; promoting PPP in several areas including railways and metro development; commercializing land parcels held by PSEs; power sector tariff reforms; easing of FDI norms in aviation, media, insurance and retail; easing KYC norms for foreign portfolio investors (FPIs), raising limits for FPI investments and relaxing lock-in period norms for such investments in infrastructure, etc. – were some of these initiatives announced. Also announced was a potentially dangerous and zero benefit step to increase the foreign borrowing component of the government’s debt. The extent to which this kind of market fundamentalism can go was reflected in the proposal to create a ‘Social Stock Exchange’ to promote privatization, marketization and financialization swallowing even social welfare into their web. The interest of workers was the additional sacrifice offered at the same altar through the declaration of labour law ‘reform’ – the long-planned replacement of existing labour laws by four labour codes – that would strengthen the hands of employers and reinforce the cheap and elastic labour regime.
The Neo-Liberal Dead End
The Narendra Modi led BJP did not become the darling of corporate India and international financial interests in 2014 without proving its unshakeable loyalty to the neo-liberal doctrine. Instead, it was considered the most politically savvy manager of its execution. So, they may appear to have no reason to complain about what the Government did in the previous five years (except perhaps for Demonetization) and what has been promised in and through the Budget. However, the worsening demand situation in the economy is hurting even corporate sales and bottom lines. They have not also shown in the last five years any great enthusiasm to begin investing heavily and in the present circumstances are even less likely to do so. So, are they unhappily happy or happily unhappy – satisfied with the policy stance of the government but dissatisfied about its outcome? Their class outlook prevents them from understanding the relationship between the two and the increasing incompatibilities underlying it – between rising inequality in the distribution of wealth and incomes and expanding consumption demand; between profiting from cheap labour and finding the outlets for investing these profits and finding the markets for selling the products produced; between the combination of privatization and keeping the taxes they pay low and the requisite availability of physical and social infrastructure, etc. It therefore the bankruptcy of their own outlook produced by wanting to have the cake and eat it too which is being reflected by a Government that ultimately represents their interests. The consequences of this, however, will be the aggravation of the existing crisis and increasing exposure of India’s economy to present and newer dangers – the ultimate price for which is being and will be paid by India’s working millions. This is the only promise of the first Budget of the second Modi Government.
The author is Professor at CESP, JNU, New Delhi.