It’s getting better over time

Finance Minister Nirmala Sitharaman’s Budget speech was better than last year’s. It concluded in under two hours, versus one that continued unfinished for two hours and forty minutes. Besides, this speech sounded more coherent and internally consistent compared to the previous one.

Another positive is more commendable. There has been less fudging with the revised estimates (RE) of 2020-21. For instance, at 9.5 per cent of nominal GDP, the fiscal deficit for 2020-21 (RE) is higher than what most commentators had earlier expected; as are the revenue deficit and the primary deficit. If, for instance, the revised fiscal deficit for 2020-21 was touted at 7 per cent of GDP or less, all economists worth their salt would have smelt a rat. So, kudos for coming relatively clean on the deficit numbers for 2020-21.

Despite this, I am concerned about overpromising on the 2021-22 (BE) numbers.

The budgetary estimates for 2021-22 depend upon nominal GDP growth, which is assumed at 14.4 per cent. This is presumably based on the Economic Survey’s real growth projection of 11 per cent in 2021-22, plus 3.4 per cent on account of inflation.

First, consider gross tax revenue receipt. This is pegged at ~2,217,059 crore in 2021-22 (BE), representing a growth of 16.7 per cent over 2020-21 (RE). It translates to a tax revenue elasticity of 1.16, where a 10 per cent growth in nominal GDP should raise gross tax revenue by 11.6 per cent. We haven’t had that kind of tax buoyancy for several years; and I am doubtful of that large number on the revenue side.

Second, disinvestment. Given our abysmal record over the last three years — we achieved only 45 per cent of the budgeted estimates, and in 2020-21 this was a miserable 15 per cent of a target of ~2.1 trillion — what gives us the assurance that we will indeed achieve ~1.75 trillion as targeted in 2021-22 (BE)? To achieve this, the government must overhaul everything that goes into the disinvestment process, starting with the Department of Investment and Public Asset Management (DIPAM). Without it, this will remain a pie in the sky.

Third, I cannot understand how the central government’s expenditure on pensions for 202122 (BE) at ~1,89,328 crore is 7.4 per cent less than what it was according to the revised estimate of 2020-21. Expenditure Demand 21 deals with defence pensions, which is estimated to reduce by 7.3 per cent from ~1.25 trillion in 2020-21 (RE) to ~1,15,850 crore for 2021-22 (BE). And other central government pensions under Demand 39 is coming down by almost 10 per cent from ~63,151 crore in 2020-21 (RE) to ~56,873 crore for 2021-22 (BE). What is going on here?

Fourth, you would have thought that with Chinese aggression, defence would have got a big boost. There is none. Overall, there is only a 0.9 per cent increase in outlay, from ~3,43,822 crore in 2020-21 (RE) to ~3,47,088 crore for 2021-22 (BE). Within defence, much has been said about more capital expenditure. Yet, capital outlay on defence services for 2021-22 (BE) is virtually the same as in 2020-21 (RE). Yes, there has been a 9.8 per cent increase in the capital outlay for the Army; but against that the Air Force’s outlay has been cut by 3.3 per cent, compared to 2020-21(RE), and the Navy’s by 11.4 per cent. The civil servants in the Ministry of Defence have done their work.

Fifth, how does the government propose to reduce fertiliser subsidy by a massive 40.6 per cent from ~1,33,947 crore in 2020-21 (RE) to ~79,530 for 2021-22 (BE)? This is not explained in the Statement of Major Variations of Expenditure between 2020-21 (RE) and 2021-22 (BE), as it should have.

If one were to (i) reduce gross tax receipts to the same rate of growth as nominal GDP; (ii) cut disinvestment target of ~1.75 trillion by a fourth; (iii) peg pensions at the same level as 2020-21(RE); (iv) allow for a 5 per cent increase in the defence budget; and, (v) reduce the fertiliser subsidy by 20 per cent instead of 40 per cent, the fiscal deficit will rise from 6.8 per cent of GDP for 2021-22 (BE) to about 7.6 per cent. And, if nominal GDP were to grow by 13.5 per cent, instead of 14.4 per cent, there would be another uptick in the deficit as a share of GDP. But so what?

After what we have gone through, and given that we have been upfront with the fiscal deficit at 9.5 per cent of GDP for 2020-21, who cares if in the critical turnaround year, the number is 7.6 per cent or 7.8 per cent? The rating agencies? Ignore them.