Government Budgets

[op-ed snap] No rescue in sightop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Government budget- allocations to various sectors-how it could help revive the economy.


Context

The disconnect between Budget and Economic Survey is much greater this year.

Background of the economy as the budget is introduced

  • The 2020 Budget was presented against the background of-
    • Slowing economy.
    • Poor investment climate.
    • Declining consumption demand and
    • Stagnant exports.
    • The steady deceleration in growth, which registered at 4.5 per cent in the second quarter of the current fiscal — the lowest in the last 26 quarters — presented a challenge as well as an opportunity.

Infrastructure investment

  • The hope of substantial increase in allocation for infra: The hope was that there will be a substantial increase in infrastructure investment, which in turn will trigger investment demand, but the actual allocations are not promising.
    • This was particularly surprising in the wake of the recent announcement that there will be an investment of Rs 103 trillion in the next five years to leapfrog India to a $5-trillion economy.
    • Private sector expected to contribute: Much of the investment for this will have to be made by the private sector and it is hoped that the allocation of Rs 20,000 crore in equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore of investment support.

Budgetary allocation for capital expenditure

  • 1.7% of GDP to 1.8 %: The budgetary allocation for capital expenditure for the current year, which is estimated at 1.7 per cent of GDP this year, is budgeted at 1.8 per cent in 2020-21.
  • Agriculture, irrigation and rural development: The Budget also contained 16 action points on agriculture, irrigation and rural development and the Rs 2.83 lakh crore allocation is higher than the budget estimate for the previous year by just 2.5 per cent and revised estimate by 13.2 per cent.
    • But the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimate over the revised estimate.
  • Transport infrastructure: The allocation to transport infrastructure in the Budget- at Rs 1.7 lakh crore-is just 7.6 per cent higher than the revised estimate for 2019-20.
  • MGNREGA and PM-Kisan Samman Nidhi: The allocations to schemes like the MGNREGA has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in 2020-21.
    • PM Kisan Samman Nidhi: For schemes like PM Kisan Samman Nidhi, it is just as much as was budgeted for 2019-20.
    • As a consequence, not much is expected in terms of propping up the consumption demand.

Slippage in fiscal deficit

  • Increase in fiscal deficit expected: The slippage in fiscal deficit from the target set in the budget estimate in 2019-20 was expected for the following reasons-
    • Below expected nominal GDP growth: Nominal GDP growth was 7.5 per cent as against the estimated 12 per cent in the budget.
    • Overestimation in the growth of tax revenue at 18.3 per cent over the pre-actuals of the previous year.
    • Missed disinvestment target: The slippage in achieving the disinvestment target of Rs 1.03 lakh crore.
  • Thus, it is not surprising that the fiscal deficit for the current year stands estimated at 3.8 per cent of GDP and for the next year at 3.5 per cent.
  • Off-budget financing: The major concern is that the reported off-budget financing is almost 0.85 per cent. This does not capture the bills and refunds payable by the government.

Would the budgeted and revised estimates realise?

  • On disinvestment front: The disinvestment revenue is estimated at Rs 65,000 crore though the realisation so far has been just Rs 18,000 crore, which implies another Rs 47,000 crore will have to be mobilised in the next two months.
  • On tax revenue front: The RE of tax revenue for the current year is over 14 per cent higher than the actual for 2018-19.
    • This is perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, which allows the settlement of disputed tax to be paid without interest and penalty.

Tax reforms in the budget

  • DDT abolition: On tax reforms, the abolition of dividend distribution tax (DDT) was expected.
  • Complicating Income tax: The reforms in individual income tax complicates the tax by creating six brackets.
    • The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax.
  • What could have been done? The government could have simply-
    • Phased out the tax concessions.
    • Indexed the brackets for inflation and
    • Reduced the rates of tax with an appropriate adjustment in the brackets.

Conclusion

The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level.

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