Govt's fiscal math on shaky grounds after populist schemes

The Union budget may have left farmers and middle class income category people happier. But, the expensive burden of the farmer's income support scheme and the pension scheme for unorganised workers, which were introduced in the interim budget ahead of the Lok Sabha polls this year, may not leave the government's balance sheet any happier.

Projections in the budget were in an optimistic tone, despite missing the fiscal deficit target by 0.01 per cent and keeping it unchanged at 3.4 per cent level for next year as well. Probably the first time in the last four budgets, the government has not projected a lower fiscal deficit target for the next year.

In the 2015 Union budget, Finance minister on leave, Arun Jaitley, had projected the fiscal deficit to touch the three per cent mark by the end of 2017-18. The fiscal roadmap since then has undergone many changes. With oil prices rising, Jaitley himself had set up a committee under former bureaucrat N.K. Singh, which recommended relaxing the three per cent fiscal deficit target to 2022.

"Despite elevated crude oil prices and several global headwinds, Indian economy is estimated to achieve a growth of 7.2 per cent (as per first advance estimates released by Central Statistics Office) in 2018-19, higher as compared to 6.7 per cent recorded in 2017-18," the government said in the Macro Economic Framework Statement for 2017-18, presented in the budget.

The government estimated in the budget that the growth in agriculture, industry and services sector would be 3.8 per cent, 7.8 per cent and 7.3 per cent respectively in 2018-19.

However, the government was wary of giving any estimate on global crude oil prices in the coming year, based on which it had made the estimate of its deficits. In its statement on medium term fiscal policy, the government projected the fiscal deficit to come down by 40 basis points to three per cent in 2020-21 as well as 2021-22.

Accounting for the fiscal deficit increase this year, Subhash Chandra Garg, secretary, department of economic affairs, said that the government took into account Rs 20,000 crore that is to be paid out in this year as part of the PM Kisan Samman Nidhi, which aims to provide structured income support to farmers.

Another Rs 75,000 crore outflow is anticipated by the government for the next year to farmers. The scheme, Goyal said, would be continuing alongside the ongoing farm and fertiliser subsidies being provided by the government.

"Excluding the impact of income support for farmers, the fiscal deficit would have been less than 3.3 per cent of the GDP for 2018-19 and less than 3.1 per cent for the year 2019-20," Goyal said after presenting the interim budget in Parliament earlier on Friday.

Subsidies are the second most significant component of government's revenue expenditure. Expense on subsidies for food, fertiliser and petroleum are estimated to increase by 11.5 per cent from the budget level of Rs 2,64,336 crore in 2018-19 fiscal to touch 2.97 lakh crore, the government said in the interim budget.

"As a percentage of GDP, these remain unchanged at 1.4 per cent. In the medium term, it is expected that the measure of subsidy rationalisation will bear fruits and subsidy outgo as a percentage of GDP will come down to 1.3 per cent of GDP in 2020-21 and 2021-22," the government's fiscal roadmap presented in the budget stated.

For the Pradhan Mantri Shram Yogi Mandhaan pension scheme for unorganised sector workers, the government has proposed to make equal contributions. In the current fiscal year, only a token amount of Rs 500 crore has been earmarked. “The fiscal implications of this scheme would be understood after a few years,” Goyal said.

The scheme proposes to give pension to workers at Rs 3,000 per month after the age of 60 years. Contributions to the scheme would be as low as Rs 55 per month for younger workers. According to finance ministry officials, the scheme would be run jointly by LIC of India and the State bank of India from February 14 this year.

Another important indicator, the central government debt, has also risen to unprecedented levels amounting to 48.8 per cent of the GDP. The CAG had earlier pointed out that the government had raised debt from the market, which remained out of the budget accounting processes. In a recent report, it had sought that the government authorises off-budget debt raising proposal from both houses of Parliament before executing them.

On the income side, collections from indirect taxes in FY 2018 declined to Rs 10.42 trillion against a budgeted estimate of Rs 11.16 trillion, largely on account of lesser collections from GST. Government has set a target to collect Rs 12 trillion in GST revenue next year.

On account of income tax, however, government collected Rs 500 billion more tax revenue, compared to a Rs 11.5 trillion target, budget documents showed. “Direct taxes are expected to show a growth rate of 14.9 per cent and 15.3 per cent, the growth rate in indirect taxes are expected to be slightly muted at 8.4 per cent and 11.1 per cent in the years 2020-21 and 2021-22 respectively,” it said in its budget projections.

“The overall sentiments are now cautious for India. The implications of the government’s increased borrowing on government issued sovereign bonds may leave the banks on a weaker spot, since they are the primary purchasers of the government-issued papers,” said Reetika Khera, professor of economics at Indian Institute of Technology, Delhi, and a public finance expert.