For starters, remember the budget is really a statement of GoI’s receipts and expenditure for the current year, and an estimate of receipts and expenditure for the next fiscal. It is not a magic wand that can dramatically set all our economic ills right. Two, it is the budget of the Union government. And, in a federal republic, states account for about 60% of combined government expenditure and, more importantly, are responsible (under the Constitution) for delivering the things that most impact the lives of ordinary citizens: health, sanitation, law and order, education, etc.
Little Elbow Room
Three, and this is most important in the present context, the budget is framed against the backdrop of the macroeconomy. A budget framed when the economy is growing at 8% gives the finance minister the freedom to do many things (including spending liberally, while perhaps lowering tax rates). In contrast, a budget framed in the backdrop of a pandemic, an economy that has slowed dramatically (nominal GDP in March 2021 is estimated to be close to where it was in March 2019) gives the FM, however feisty, little elbow room to make citizens smile. Never mind that she’s promised us a budget like no other.
There are committed expenses (read: salaries, pensions, interest payments, defence expenditure) that cannot be cut. At the same time, additional spending on a mass immunisation programme or income support to sections of the population particularly badly hit (whether by way of outright support, or through enhanced spending on infrastructure) cannot be avoided, if the nascent economic recovery is to be supported.
Meanwhile, revenues, especially tax revenues, cannot be expected to come to the rescue. Even assuming a V-shaped economic recovery and nominal GDP growth of 15.4%, as estimated in the Economic Survey tabled in Parliament on Friday, tax revenues are unlikely to increase to the extent needed to support the much larger expenditure programme. Remember, little over 1% of the population pays income tax, and corporates tax rates have already been cut. Indirect taxes (apart from customs duty and excise duty on some goods) are now the remit of the Goods and Services Tax (GST) Council, where the FM has limited say.
Yes, you can sell the family silver (read: public sector undertakings). Unfortunately, successive governments have been very bad at this. As against the current year’s target of Rs 2.1 lakh crore, GoI had raised little short of Rs 15,000 crore by November 2020. Even if disinvestment does pick up pace in the next fiscal, our record does not give much reason for hope.
Does that suggest the Union budget is irrelevant? Not quite. There are two reasons why the coming budget, like all budgets, is relevant. One, the unique position of the Union government as sovereign means it can spend more than its revenue without obsessing about how to finance the resultant fiscal deficit. It can either borrow. Or resort to the admittedly less desirable option of printing money. Budget estimates for 2021-22 are important because they tell us both the size of the expected fiscal deficit and, more importantly, how GoI intends to finance it.
Debt Comes Cheap
The mechanics of how government plans to bridge the gap is crucial. If it borrows only as much as the market is willing to absorb and the money is spent on the right things (read: on capital, rather than revenue, expenditure), it can crowd in private investment and stimulate growth. Remember, the rate of interest on (risk-free) government borrowing sets the floor for all other interest rates in the economy. Hence, the quantum and share of the fiscal deficit as a proportion of GDP is a key number to watch out for. Ordinarily, a fiscal deficit of more than 5% would be a no-no. However, pandemic-induced spending has resulted in huge deficits the world over.
The good thing is rock-bottom interest rates are keeping the cost of debt manageable, making borrowing not just necessary but affordable. The International Monetary Fund (IMF) estimates that global debt shot up by $19.5 trillion last year. Nirmala Sitharaman must remember that this is no time to play lone warrior. There is a time and place for fiscal prudence. Like St Augustine, she must plead, ‘Give me continence, but not yet.’
But that is not the only reason Budget FY2022 is a key event. Budget speeches lay out (lofty?) policy intents (doubling farmers’ incomes by 2022, making India a $5 trillion economy by 2024, etc) and outline the policy thrust for the next fiscal. Privatisation of Life Insurance Corporation (LIC), for instance, was announced in the FM’s budget speech last year.
It is a different matter that many of these promises have not been fulfilled.
But keep an eye out for them. For, as Narendra Modi said in his address on the opening day of the budget session of Parliament last Friday, Budget FY2022 must be seen as a ‘shrankhala’, part of the chain of mini-budgets (stimulus packages) announced to date. So, tone down those expectations. But only for now!