Budget 2017: Jaitley's numbers just don't add up; expect little relief from note ban pain

The big picture that can be said to have emerged from the Union Budget for 2017-18 is that it serves to confirm the fact that the government has no plans to ease the pain of demonetisation, or compensate for any negative political fallout of the measure, by deviating from the path of fiscal conservatism and opt for what is pejoratively referred to as populism.

While this decision to shy away from an expansionary fiscal policy may be hailed by some and by financial markets in particular, whether it addresses the real issues confronting the Indian economy is another matter.

The prioritisation in the budgetary exercise of keeping up an image of fiscal ‘prudence’ is clearly indicated by two things – the holding down of the proposed growth in total expenditure by the central government and the questionable assumptions made regarding GDP growth and growth of revenues both in 2016-17 as well as 2017-18. If the former is the actual or real instrument of trying to rein in the fiscal deficit, the latter aids the objective of the budget showing for the time being at least, fiscal deficit numbers which may not be realised unless the curbs on expenditure growth are even more severe than shown in the Budget.

Union Finance Minister Arun Jaitley. PTI

Union Finance Minister Arun Jaitley. PTI

The increase in total central government expenditure in 2017-18 over the 2016-17 revised estimates proposed in the Budget has been pegged at less than 7 percent, which in real terms implies near stagnation in such expenditure. The estimated increase in nominal expenditure is significantly below the 11.75 percent increase in nominal GDP that has been assumed as well as the 12.7 percent increase that the Budget expects in the central government’s net tax revenues. In other words, the continuation of the trend of reducing the expenditure-GDP ratio has been clearly indicated which leaves little room for any substantive ‘populism’.

The fact that the Budget this year was presented a month early meant that the estimates (revised figures for the outgoing financial year and budgeted ones for the coming year) had to be arrived at with relatively less data on current economic trends than would be available a month later.

What magnified the problem, however, is that the first year of the change in the date of presentation of the Budget coincided with at least two other things that increased uncertainty – the demonetisation decision announced on 8 November 2016 and the possible transition to the Goods and Service Tax (GST) regime sometime within the coming financial year. Both are abnormal events which mean an increase in the speculative element in estimates of things like GDP and tax revenues, in the current and the next year. They, however, also increase the possibility of cherry-picking figures that are more conducive to showing a lower fiscal deficit-to-GDP ratio.

One of the expected and inevitable implications of demonetisation was the slowing down of GDP growth, something which would also have an adverse effect on revenue realisations. Unless expenditure had been also cut, this should have implied a rise in the fiscal deficit as well as its ratio to GDP. Now, the revised estimates for total expenditures in 2016-17 are 1.84 percent higher than the original budget estimates. Yet the revised fiscal deficit figure is almost identical to the original budget figure and the same percentage of GDP (i.e. 3.5 percent).

This result been achieved by first taking nominal GDP in 2016-17 to be 11.04 percent greater than in the previous year and then taking the revised estimates of tax revenues in 2016-17 to be 4.44 percent greater than the budget estimates (or a 17 percent increase over the previous year) mainly through higher realisations of excise duties. Thus, the pre-demonetisation assumptions about GDP growth made without considering its effects have been retained.

Similarly, the revised estimates for tax revenues in 2016-17 do not seem to reflect the very sharp decline in tax revenue growth in December 2016 compared to the average level over the preceding period of the year. As per data available from the Controller General of Accounts, the increase in tax revenues in December 2016 over the same month last year came down to 5.33 percent from a 21.55 percent increase in the April-November period. Realisation of the revised estimates for revenues in 2016-17 would thus require tax revenue growth to rebound to a 15 percent level over the last quarter of 2016-17.

Similar questions also exist with issues about estimates of GDP growth and revenue realisations in 2017-18, the year to which the Budget actually relates. The assumption of a 11.75 percent increase in nominal GDP again does not seem to consider the immediate and enduring effects of demonetisation. The RBI and the government have scandalously conspired to deny the nation precise data on the deposits of invalidated notes and the amount of fresh currency put into circulation.

However, the reserve money data issued weekly by the RBI does tell us that the effective currency in circulation even on 27 January, 80 days after the demonetisation announcement, had to be less than 57 percent of the pre-demonetisation level. Also, if the increase over the previous three weeks was to be taken as an indicator of the speed of remonetisation, restoring normal levels of currency may not happen till June of 2017.

To this one must add the fact that economic activities once derailed do not recover instantaneously even if the original causes of the disruption are eliminated. As such, the assumed growth of GDP in 2017-18 may not be actually realised.

An extremely curious element in the estimated growth of tax revenues in 2017-18 over the previous year is that as much as 42.28 percent of the increase is accounted for by anticipated revenues from personal income tax, a head which accounted for less than 21 percent of total tax revenue in the 2016-17 revised estimates. Leaving out personal income tax, whose growth in the next year is assumed to be nearly 25 percent, the estimated growth of the aggregate of all other taxes (gross) in 2017-18 is 8.91 percent or less than the assumed GDP growth.

However, the tax proposals announced by the finance minister provide no justification for this huge increase in income tax revenues – instead, those proposals have a net revenue loss effect to the tune of Rs 20,000 crore. So, is this huge jump in personal income tax revenues expected to come from a dramatic increase in the number of taxpayers?

It thus seems reasonable to conclude that in the Budget-making exercise, the finance minister has found it convenient to buy into his own and his government’s rhetoric on demonetisation.
Effectively, claiming that the drastic measure has not had, and will not have, any adverse effects on GDP or the tax revenue realisations of the government, and instead will generate a big expansion in the tax base, of course is a way of justifying it and avoiding any measures to address the problems caused.

Additionally, it has also suited the objective of throwing up fiscal deficit numbers which can be used to show that fiscal consolidation is on track. The problem is that if the actual revenue and GDP numbers turn out to be more adverse than assumed, the pressures to cut expenditures even more will only mount. An already contractionary fiscal policy may thus become even more so. Is that really what the country and its people need at this juncture?

Even before demonetisation, the Indian economy has in the last few years been showing clear signs of sluggishness. Stagnation in output growth in the agricultural and manufacturing sectors, the dramatic slowdown in growth of construction activity, the stagnation in investment and adverse trends in India’s foreign trade in goods and services have all been indicators of this – whose result has been the aggravation of the employment and livelihood crisis faced by millions of Indians.

The root cause of the difficulties faced by the Indian economy has been the extreme unevenness in the distribution of the benefits of growth, which in turn have meant the absence of a wide enough demand base for sustaining growth. Conservatism in fiscal policy pursued by the current as well as the previous government, has reinforced the constraints rather than easing them. Even as the tax-GDP ratio has come down and persistently stayed below the level in 2007-08, the burden of satisfying the preoccupation with bringing down the fiscal deficit has fallen on expenditure compression.

Union Budget 2017-18 reflects a clear choice to stay on the same path even amid the additional difficulties caused by demonetisation – and therefore, promises little relief.

(The writer is a Professor of Economics at Jawaharlal Nehru University, Delhi)


Published Date: Feb 02, 2017 03:50 pm | Updated Date: Feb 02, 2017 04:21 pm


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