A prudent Budget that is unlikely to revive growth

BUDGET SPEECHES ARE misleading. They highlight at great length populist expenditure schemes, even if the allocations involved are meagre, and then quickly go over awkward issues such as overshooting fiscal deficit targets or tax measures that Corporate India or the ‘middle class’ may complain about. Nirmala Sitharaman also spoke at great length about various expenditure schemes, so much so that she was quite exhausted and had to cut short her speech.

She started by elaborating on the government’s initiatives for agriculture and allied activities, and the social sectors. It turns out that the increase in spending is indeed highest in these two sectors at 12.4 per cent and 11.7 per cent, respectively. This is much higher than the increase of 8.7 per cent and 9.5 per cent for transport and power, part of the infrastructure sector that typically gets the lion’s share, especially under the National Democratic Alliance government.

Whether or not this pattern of spending will provide the required stimulus to revive growth depends on the multiplier effect of specific expenditure items. The increase in social service expenditure is mainly for health services, the allocation for education has increased by only 3.3 per cent. Taken together, education and health account for just 2.6 per cent of total expenditure.

In agriculture and allied activities, the big items of increased expenditure are crop husbandry and warehousing along with storage. The increase has come largely at the cost of rural development, including MNREGA, where the allocation has been reduced by over 13 per cent. Together, the two sectors account for about 10 per cent of total expenditure compared to 13.6 per cent for infrastructure services (transport and power).

The largest chunk of expenditure is, of course, allocated neither to social services nor economic services, but to general services, which the finance minister did not talk about. This includes interest payments — the single largest item of expenditure — that will absorb as much as 22 per cent of total expenditure, followed by defence which will account for 10 per cent of the total Budget expenditure.

One of the main expectations from the Budget was that it would provide stimulus to revive faltering growth. While the increases in expenditure on infrastructure, defence, crop husbandry, etc will stimulate demand, the same cannot be said about leakages in the form of interest payments or warehousing costs, which are also largely interest on working capital.

Moreover, the overall increase in expenditure has been capped at just over 9 per cent. This is in line with a realistic revenue growth projection of 8.7 per cent, a relief after last year’s fairytale revenue projections, and slippage in the fiscal deficit target to 3.8 per cent, compared to the original Fiscal Responsibility and Budget Management Act target of 3 per cent for 2020-21. Thus, the overall assessment on the stimulus question is that, the slippage in the deficit notwithstanding, fiscal prudence has been given priority over fiscal stimulus. This will contain the growth of debt liabilities, but it will not provide the strong public expenditure push required for reviving growth.

On the receipts side, the big move is the proposed sale of Life Insurance Corporation of India shares, along with Air India, accounting for the massive increase in nondebt capital receipts to ~2.2 trillion. Whether or not these proceeds will finance capital expenditure remains to be seen. The reduction in personal income tax rates below ~15 lakh will be partly offset by the elimination of concessions, so the net revenue impact will be modest. The other main change is abolishing the dividend distribution tax, which mainly accounts for the revenue foregone estimate of ~40,000 crore. This, together with other incentives for foreign investment, suggests that attracting foreign capital is a major goal of this Budget, apart from fiscal prudence. On the indirect taxes side, there is further regression to protectionism, raising some Customs duties. This will further reduce India’s weak competitiveness in the global markets.

In summary, a prudent Budget, designed to attract foreign capital but discourage imports, and unlikely to revive faltering growth.

The largest chunk of expenditure is neither to social services nor economic services but to general services which the finance minister did not talk about