Five numbers to watch out for in the Budget

Finance minister Nirmala Sitharaman will present her third budget on Monday. This comes in the backdrop of expectations that the economy would suffer an unprecedented contraction of 7.7% in the ongoing fiscal year. Here are five numbers worth tracking in this year’s budget.

1 Revised Estimates for 2020-21

In addition to giving spending and incomes estimates, or Budget Estimates (BE) for fiscal year 2021-22, the budget will also give revised estimates (RE) and actual figures for 2020-21 and 2019-20 respectively. RE numbers for 2020-21 are extremely important because they will give an idea of the government’s income and spending during the pandemic. To be sure, these numbers are released on a monthly basis by the Controller General of Accounts (CGA), which works under the ministry of finance, but they come with a two-month lag. The 2020-21 RE numbers are important for two reasons. The tax collections will give an idea of the extent of economic recovery, or the government’s estimates of it Overall spending figures will tell us about not just the extent of fiscal stimulus but also areas which might have faced a spending cut to compensate for pandemic-related spending.

2 What is leading to an increase in fiscal deficit in 2020-21 and 2021-22?

Everyone expects the Budget to deviate from its fiscal consolidation path as outlined in the Fiscal Responsibility and Budget Management (FRBM) Act. However, it is vital to understand the source of the increase in the fiscal deficit. Budget documents define the fiscal deficit as total spending over and above the sum of revenue receipts (net tax revenue to the Centre and non-tax revenue), recovery of loans and other receipts under capital receipts. The fiscal deficit is normally expressed as the absolute deficit described above as a percentage share of nominal GDP. This means that the fiscal deficit can increase via three routes: a rise in government spending, fall in receipts (revenue or other) and fall in nominal GDP. It will be interesting to see which of these factors are driving the fiscal deficit in 2020-21 and 2021-22.

3 Tax devolution to states, as a share of Gross Tax Revenue

The pandemic has seen an asymmetry as far as the resource position of state governments is concerned. While they have done most of the heavy lifting, their resources have come under a bigger squeeze. The Centre did not share the proceeds of its windfall gains from lower crude oil prices with the states, as they were made via special duty and cess, which is not a part of the divisible pool. The 14th Finance Commission had promised that states will get a share of 42% in central taxes. In reality this number has been far lower. It remains to be seen whether it will go down even further in 2020-21 and what does 2021-22 bring on this front.

4 Will the pandemic boost disinvestment plans?

The 2020-21 budget had set an ambitious target of ₹2.1 lakh crore for disinvestment proceeds. The Economic Survey presented on January 29 had said that a little above ₹15,000 crore has been realised on this front until January 20. Many independent economists have been arguing that the government should adopt a bold disinvestment policy and use the proceeds to fund spending, especially investment. Because, most of the public sector units that were meant to be disinvested in 2020-21 could not be sold, a replication of this number in the 2021-22 budget will basically mean that the government intends to carry on its last year’s disinvestment activities rather than dilute or sell fresh stock in its companies. On the other hand, a huge deviation from the figure in the Economic Survey would mean that the remaining two months could see large disinvestment activity.

5 Welfare spending in the budget

Unless the government announces a new welfare scheme, the most important welfare spending numbers to watch out for in the Budget will be the allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and Public Distribution System (PDS). Previous Budgets have had a tendency to underestimate spending under both these heads. For example, the 2019-20 BE figure for MGNREGS was lower than the 2018-19 actual allocation for the scheme. Even the 2020-21 BE numbers were lower than the 2019-20 RE numbers. Because the government has significantly increased spending on MGNREGS this year, it will be interesting see the 2020-21 RE numbers. Any sharp fall in 2021-22 BE numbers will also mean that the government is planning to withdraw on this front. Budgetary allocations for food subsidy, which funds the PDS, are not very meaningful because it is the Food Corporation of India (FCI), not the government directly, which pays for the procurement operations. Any non-commensurate increase in food subsidy this year would entail a further increase in FCI’S debt burden, large parts of which arise because of delayed payments from the government.