Adieu to fiscal fundamentalism
Nirmala Sitharaman had the toughest task that any Finance Minister has faced, at least in the past three decades. She knew the government had to spend more to ensure the economy recovers. The FM also knew that there was no way that her tax revenues would reach even close to what she had estimated last year. So, she had to bid goodbye to the fiscal fundamentalism that the Modi government has practised all these years and reset India’s path to lowering the Centre’s fiscal deficit. The second, some would say obvious, route that the FM was bound to take, was to raise money by selling public assets, what we call disinvestment.
The FM announced that there would be a significant increase in expenditure on health, but the budget of the Ministry of Health has gone up by just 10%.
The government’s revenues are set to fall by nearly Rs 2 lakh crore, or about 1 per cent of GDP. Out of this, tax revenues are expected to drop by about Rs 90,000 crore, a decline of
6 per cent compared to last year’s estimates. Within this, income tax revenue is expected to decline by 12 per cent compared to last year’s Budget projections, corporate tax revenue is projected to drop by 20 per cent, and GST collections are expected to go down by 9 per cent. Non-tax revenue, which includes what the government makes from selling its services, its interest income from loans given to states, and the dividends it earns from PSUs and RBI, is projected to be lower by 37 per cent compared to last year’s estimates.
The Modi government has repeatedly set ambitious targets for disinvestment. In 2019-20, it had set a target of raising Rs 65,000 crore by selling government companies and assets, but the actual receipts were just about Rs 50,000 crore. Last year, the target was a humongous Rs 2.1 lakh crore, almost 1 per cent of GDP. Covid meant that all that was achieved was a measly Rs 32,000 crore. Interestingly, even though this year’s disinvestment target has been set at a stiff Rs 1.75 lakh crore, it is still 17 per cent lower than what the FM set last year. Some of this is likely to be the sale of PSUs that were already meant to go on the block last year. Along with this, Sitharaman has announced that government land, airports, stadiums, highways will be disinvested to raise money.
When it comes to expenditure, the government is planning to spend an additional Rs 4.4 lakh crore compared to what it had planned last year. This is a significant increase when seen in relation to our GDP. The Centre’s budgetary expenditure has consistently hovered around 13-14 per cent of GDP. This shot up in 2020-21, thanks to the stimulus packages that were announced to deal with the coronavirus pandemic. Actual expenditure was 13 per cent more than what was budgeted last year, while India’s GDP ended up being 13 per cent lower than what was estimated in the Budget. The net impact was that expenditure shot up to almost 18 per cent of GDP. This year, the government’s expenditure will be 14.5 per cent higher than what was estimated last year, while our GDP will still be lower than last year’s estimates. Therefore, the Centre’s expenditure will end up being about 16 per cent of GDP in 2021-22.
Yet, this increased expenditure will have limited impact. That is because 28 per cent of the extra spending will go to finance Food Corporation of India’s (FCI) crop purchases. Over the past few years, the cost of procurement has been entirely borne by FCI’s borrowings. As of March 2020, FCI’s debt was nearly Rs 3.3 lakh crore. The FM has announced in her Budget speech this time that FCI’s purchases will now be funded directly from the Budget. So, the allocation to FCI has gone up from about Rs 78,000 crore in last year’s Budget to over Rs 2 lakh crore this year. Interestingly, despite the low allocation last year, the Modi government ended up giving FCI nearly Rs 3.5 lakh crore in budgetary support in 2020-21. The extra allocation to FCI in this Budget, along with what was given in the middle of the pandemic, should help clean up FCI’s books.
The other big addition to expenditure is on interest payments. Interest payments are projected to be Rs 8.1 lakh crore, which is about Rs 1 lakh crore more than what it was last year. This alone accounts for more than 23 per cent of the additional expenditure that the government is expected to make in 2021-22. So, the additional budgetary allocation to FCI and the extra interest burden together account for more than half of the government’s extra expenditure this year.
The FM announced that there would be a significant increase in expenditure on health, part of which would be spending on the coronavirus vaccine. However, the total budget of the Ministry of Health has gone up by just 10 per cent. Other key schemes of the government have either had very little increase in budgetary allocation, or even seen a decrease. Allocation for the government’s flagship PM-Kisan is down by 13 per cent. PM Gram Sadak Yojana gets 23 per cent less this year. The National Education Mission’s budget has been cut by 12 per cent compared to last year. The National Health Mission has been allocated just 9 per cent more, considering that India will be in the midst of recovering from a pandemic. While the PM has announced that another one crore people will get free LPG connections, the petroleum subsidy has been cut by a whopping 68 per cent.
Allocations to certain projects have been cut, while they have been shown as new expenditure. A case in point is the Saksham Anganwadi & Poshan 2.0, which has been positioned as a new scheme. However, this has simply replaced the Umbrella ICDS scheme which had a higher allocation last year. We might end up finding more devils in the details over the next few days as analysts pore over the voluminous Budget documents.
The author is a senior economic analyst
