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Mainstream, VOL LVI No 27 New Delhi June 23, 2018

Union Budget 2018-19: Ambitious, Populist and Unprogressive Budget

Sunday 24 June 2018

by A.V.V.S.K. Rao

“From birth to death, our lives are affected in countless ways by the activities of government.” —Noble Laureate Joseph E. Stiglitz

Introduction

The backdrop to the Narendra Modi Govern-ment’s fifth Budget has been a domestic economy confronted with a rather adverse global and domestic environment since 2015-16. The rural economy, particularly the agricultural sector, has been in a state of great turmoil. The Indian rural economy reeled under drought for two successive years from 2014 to 2016. Rural unorganised and informed sectors were distressed due to non-availability of working capital. Added to this the manufacturing sector has been facing fluctuations. The GDP has registered a conservative growth rate of 6.5 per cent in 2017-18. There has been a universal feeling that the economy was in a vulnerable state and even a relatively minor shock would cause a big downword slide.

The Union Budget 2018-19, presented by Finance Minister Arun Jaitly, clearly spelt out two major priorities of the government First, growth of agriculture and rural sector has to be accelerated and strengthened; and secondly, enhancing employment of illiterate and semi-literate population in the unorganised and informal sectors in rural India and thereby raising incomes and sustaining demand for the informal and unorganised sectors. However, the means employed are so cautions and even contradictory, the chances of success appear remote.

Highlights

Minimum Support Price and Enhanced Credit

The Budget raises some important questions which have to be addressed seriously and systematically. First, the government has claimed that this Budget has especially kept in mind ameliorative measures for the farmers. Given rampant agrarian distress, this is a laudable objective. But to what extent this intent will have the desired impact is debatable—in February 2015, the Narendra Modi Government had given an affidavit to the Supreme Court of India that it would not be possible to increase the minimum support price (MSP) to 50 per cent over input costs for farmers as this would distort the market. Now (after three years) in February 2018, the Finance Minister has announced in Parliament that the government is committed to give 50 per cent over input costs to farmers.

But the basic question here is: how will the government compute costs? Will cost be computed on the basis of the M.S. Swaminathan Report, taking into account all input costs including irrigation meant for cultivation, but also labour, rents, and interest on capital investment? On the other hand, if the criteria to compute cost is changed arbitrarily, then the delivery will neither match the promise made by the BJP Government in 2014 nor the expectations and needs of farmers. It is true that there has been a marginal increase in the MSP in 2017, but this has been accompanied by some very curious and irrational economic decisions. For instance, with enhanced MSP, the production of pulses grew substantially. When the farmers were in a position to earn from increased production of pulses, just then the GOI decided to import pulses on a large scale, leading to crash in the market prices. The essential
point is that after two successive years of drought, and with farmers committing suicides in record numbers, farmers need to be guaranteed with security of income. This cannot be assured unless the calculation of MSP is discussed thoroughly and clarified by the government.

Second, one of the Budget’s key instrument-alities to help farmers is to increase the credit available to them. It is mentioned in the Budget that the volume of institutional credit for the agricultural sector from year to year increased from Rs 8.5 lakh crores in 2014-15 to Rs 10 lakh crores in 2017-18 and it is proposed to raise the volume of credit to farmers to Rs 11 lakh crores for the year 2018-19. Again, in normal circumstances, it would be a positive move. However, at this juncture, when half of the farmers are already under a per capita debt of Rs 47,000, how can they be expected to take more credits when so many of them are committing suicide because of their inability to repay what they have already borrowed? Besides, most farmers are just at the subsistence level. It is a moot point whether they even have the requisite legal collateral to avail of such loan; and what impact increased lending in this form will have on banks already overburdened by NPAs is another matter.

National Health Protection Scheme

While presenting the Union Budget 2018 the Finance Minister announced the world’s largest government funded health care programme, titled National Health Protection Scheme, to cover 10 crore poor and vulnerable families—approximately 50 crore beneficiaries—providing coverage upto 5 lakh rupees per family per year for secondary and tertiary care hospitalisation. The Budget also committed Rs 1200 crores for the National Health Policy 2017, which with 1.5 lakh Health and Wellness Centres will bring health care system closer to the homes of people. Analysts have the following issues with the scheme. First, the Finance Minister has not allocated enough funds for the scheme. Only Rs 2000 crore has been earmarked in the Budget for the year 2018-19, while the actual expenditure is likely to be much higher. Insurance premium for a coverage of Rs 5 lakhs is estimated at Rs 1100 to Rs 1400 per year per family. This means an amount of Rs 11,000 crores to Rs 14,000 crores.

Providing health care to the poor is important but the Budget proposal raises more questions than providing answers. This is a sector with significant asymetric informations, and the spending will spiral year after year. According to a study conducted by the NIPFP (Delhi), to provide health cover of Rs 5 lakhs to 10 crore families even at the rate of 2 per cent premium would cost Rs 1 lakh crore. The Budget has not made such allocation. If this amount of money has be to be spent, why not strengthen the sub-centres and health centres to create a sound infrastructure for primary and secondary care?

Other Major Programmes

The Budget 2018-19 has announced a plan to build roads to connect rural India’s farmers and schools. Further, it aims to encourage clustering in horticulture production and marketing, increase the allocation for organic farming, and create infrastructure funds for fisheries and animal husbandry.

The Budget has allocated Rs 3794 crores for the medium, small and micro enterprises (MSME) sector towards credit support, capital and interest subsidy as well as to spur innovations. In a bid to reduce the tax burden on the MSMEs and help generate more employment, it is proposed in the Budget to extend the benefits of the corporation tax rate of 25 per cent to enterprises which have reported turnover upto Rs 250 crores during 2016-17. Besides reduction in taxation on the MSMEs to 25 per cent, the government should have focused or extending finance/credit by Institutions like the SIDBI and public sector banks.

In the highest ever allocation, the Budget 2018 announced a capital expenditure of Rs 148,528 crores for the Railways. A part of these funds is earmarked for capacity addition. The government has decided to double 18,000 km of tracks and to work on third and fourth lines in several sections. Provision is also made in the Budget for the acquisition of 12,000 wagons, 5160 coaches and approximately 700 locomotives during 2018-19. So far as outlay for the Railways is concerned, the announcement sounds repititive. Despite all the right steps like delegation of powers to concerned railway zones and resource constraints, project delivery continues to be unsatisfactory and needs to be fixed immediately.

In the Budget 2018-19, a huge sum of Rs 5.97 lakh crores has been allocated for infrastructure, a sector considered to be the growth-driver of the economy. The investment proposals are expected to increase the GDP growth and connect the nation with a network of roads, airports, railways, ports and inland waterways. The Government of India would leverage the Indian Infrastructure Finance Corporation Limited (IIFCL) to help finance major infrastructure projects.

The imposition of 10 per cent long-term capital gains tax on profits from shares and equity mutual funds would dampen market sentiments in the near term, but is unlikely to have any structural impact on domestic equity flows. Equities are favoured by relatively affluent savers and alternative to financial instruments such as bonds and fixed deposits invite far higher tax incidence.

A Word about Deficits

Fiscal Deficit

The GOI has chosen to deviate from the path of fiscal consolidation by budgeting the fiscal deficit target for 2018-19 at 3.3 per cent of the GDP as against the target of 3 per cent set earlier under the fiscal consolidation road map. This is the second straight deviation from the glided path of fiscal consolidation. For 2017-18, as against a budgetary tax target of 3.2 per cent, the fiscal deficit new stands at 3.5 per cent. This slippage is largely because of lower revenue receipts (non-tax revenue) and higher revenue expenditure. As against a budgeted target of Rs 15.15 lakh crores is 2017-18, revenue receipts of the government totalled Rs 15.05 lakh crores. On the other hand as against a revenue target of Rs 18.36 lakh crores in 2017-18, the Centre has spent roughly Rs 19.44 lakh crores (RE), even as it cut capital expenditure by Rs 363 billion. In absolute terms, the Fiscal Deficit has balloned from the budgeted Rs 5.46 lakh crores to Rs 5.94 lakh crores in 2017-18, rising further to Rs 6.24 lakh crores for 2018-19. (See table)

The deviation in respect of the Fiscal Deficit is at a time when the private sector is unwilling to invest. For policy-makers growth is the ultimate solution for a host of ills: poverty, unemployment, poor infrastructure, etc. For them, the government spending in excess of revenue will deliver growth. To some extent, this is correct. But if the higher deficit is due to higher spending on, say, capital goods that will crowd in or incentivise private investment, rather than wasteful current consumption that crowds out private investment. It is a risk worth taking.

Revenue Deficit

Again Revenue Deficit (RD), which is the more pernicious part of the Central Government’s overall deficit (as it measures the extent to which revenue expenditure exceeds revenue receipts), has been breached by a huge margin. As against the target of 1.9 per cent GDP, the RD for the current fiscal is estimated to touch 2.6 per cent Unlike a breach in the FD, which can be defended if used to finance capital expenditure, slipage on the RD is indefensible. Yet, it accounts for almost 75 per cent of the FD in the current fiscal and is estimated to remain high (67 per cent) next year as well.

Besides, there is something interesting. The amendment to the Fiscal Responsibility and Budget Management FRBMS Act 2003, which is part of the Finance Bill 2018, proposed to drop the words ‘achieving sufficient revenue surplus’ from the long title of the Act. Further, any reference to the accountability of the ‘balance between revenue receipts and revenue expen-diture’ that is presently required to be furnished in the medium term fiscal policy statement under section 3(3)(i) of the Act, is to be omitted. Thus, further Budgets will not be obliged to give any information on whether the GOI borrowing has been used for investment for current consumption. This has serious implications not only for transparency in government accounts but more importantly for inter-generational equity and debt sustainability. Remember, FD is financed by borrowing: when the GOI borrows to invest, future generations, who bear the burden of repayment, enjoy the fruits of that investment. However, when the government borrows to meet current expenditure like salaries, interest payments and so on, the burden of repayment falls on future generations, but without commensurate benefits. A high RD, which has been likened to borrowing for spending spree is, therefore, the least defensible part of the FD. By seeking to drop all mentions of it and hide it from public scrutiny all together, the GOI is doing the country a great disservice.

Conclusions

The Finance Minister repeated in his Budget speech the goal, articulated earlier, that farmers’ income would be doubled by 2022. Although the goal sounds impressive, in reality it implies very little unless much more is done. According to the National Sample Survey (NSS) report, average annual income of the Indian farmers, net of production costs, is currently around Rs 20,000. If in five years this is doubled, it would mean they would earn Rs 40,000 or so, which amount to Rs 3500 a month, and not even that if inflation is factored.

The Budget proposed a number of inter-ventions, but a close look at the allocations does not convince anyone that there are qualitative differences from the past. The first important proposal is fixing of minimum support price at 150 per cent of the cost for a number of crops to double farmer incomes by 2022. Interestingly, agriculture is a State subject as per the Indian Constitution and it is unclear why the Budget 2018 should focus on it. Indeed, price fluctuation is an important cause of farm distress and the attempt to stabilise remunerative prices for the farmers is necessary. However, the question is: whether this should be done through government fiat or alternatively by making large investments in storage and marketing infrastructure and food processing industries, reforming and regulating markets and expanding extension services for horticulture and floriculture. All this has to be done in collaboration with the States. Perhaps lasting solution to farmers’ distress could have been found if instead of subsidy, investment in agriculture was increased. The government should follow a rational Minimum Support Policy (MSP). For this government agencies should buy from farmers when market prices are depressed and sell stocks in open market when prices escalate. The former measure will boost farm incomes and the latter measure cushions consumers against excessive inflations.

However, the Chief Economic Advisor of the World Bank, Kaushik Basu, puts a rider to the above policy of the MSP. He has extensively discussed about the mind-set behind the reluctance to release stocks to cool rising prices by governments in India in the recent past. The argument is that selling at a lower than the purchase price (MSP plus carrying costs) would inflict losses on the exchequer and add to the fiscal deficit. Since procurement spending is a sunk cost, not selling implies even higher fiscal deficit.

The second important intervention is providing health insurance of Rs 5 lakhs to 10 crore poor families. Again the health sector comes under the State subject. The Budget proposal of providing health care on such a mega-scale is an audacious one, but where is the money for its implementation going to come from? The Budget certainly does not indicate this. Apart from the cash component, there will also be huge infrastructure costs. Currently, India’s health care system is short of doctors by 72 per cent. We have only 50 per cent nurses than what is needed. And laboratory technicians are 80 per cent less than required. The allocation to public health has gone up only marginally and in fact, as a percentage of the Budget is less than that of last year.

A day after the Finance Minister announced the world’s so-called largest health insurance scheme covering 500 million people in the country, the NITI Aayog and Union Health Ministry announced that the government’s new flagship scheme was likely to cost the exchequer anywhere between Rs 100 billion to Rs 120 billion. The Union Government said it would provide 60 per cent of the funds, and the State governments were expected to pool the remaining 40 per cent. However, the State governments are yet to provide their consent for implementing the new scheme. Experts believe that the State will be in a predicament because of their tight fiscal position and reluctance to replace their own health schemes with this newly announced National Health Protection Scheme (NHPS) in this Union Budget. About 24 States provide health scheme to their residents. Besides the GOI says its takes six months to work out the modalities of the scheme and begin to implement in the second half of the year. Besides, for many Indians it is the physical access to a quality hospital that is the main problem. Good facilities do not exist in many parts of India and so insurance-based solution does not resolve the lack of basic infrastructure. Lastly, as per many studies, India’s medical facilities in the government sector are among the worst in the world.

On infrastructure creation, while the Budget speech is eloquent, the actual allocation does not match the optimism. The total allocation for agriculture and rural development is set at Rs 14.34 lakh crores in 2018-19 and of this extra-budgetary and off-budgetary resources are estimated at Rs 12 lakh crores; so the budgetary allocation is just about Rs 1.36 lakh crore.

About deficits in the Budget, Prof Raja Chellaiah is of the opinion that ignoring the (concept of) deficit could lead to serious consequences in the condition of government finances now prevailing in India. At the same time the programme of fiscal adjustment requires that the fiscal deficit be cut. If the revenue deficit is not reduced, the reduction in the fiscal deficit can only come about through a cut in the government’s capital formation which would be injurious to growth. The government’s capital formation on infrastructure, on schools, hospitals, etc. is vital for growth and welfare. In course of fiscal adjustment such expenditure should be protected. In fact, IMF officials have frowned upon attempts of the Government of India to reduce the fiscal deficit largely by cutting down capital formation. Thus, at least implicitly they are seeking a reduction in the revenue deficit. In developing countries at least it is desirable to postulate a rule that only a small proportion of the government’s revenue expenditure, largely that relating to the provision of additional services in such sectors such as education and health, should be covered by government borrowing.

Lastly, though the media blared it away as people’s Budget, the farmers in the countryside seem to be unhappy with it. Did the Budget really mean well for the farmers haranged by both the weather god and governments of the day in the country? The Finance Minister presented a false picture of minimum support price (MSP) for various crops of farmers for Rabi 2017-18 by claiming that prices announced had covered 50 per cent of the cost of production, whereas not a single crop had a profit margin of at least 50 per cent on the cost of production. In fact, outlays for the market intervention and price support scheme fell from Rs 950 crores of the revised estimates last year, to a meagre of Rs 200 crores. That is a dramatic decline by nearly five times.

The Modi Government’s fifth Budget makes it very clear that the government is not sensitive to the plight of the farmers. This demonstrates a clear lack of political will. The Budget 2018 has not addressed the real concerns of the small, marginal farmers. It is well known that millions of hectares of land in India are mainly rainfed and most farmers are not in a position to grow a second crop and that is where injustice is done to the farmers facing crisis. Most of the farm suicides in several States like Andhra Pradesh, Telangana, Orissa, etc. are of tenant farmers. In the present Budget too, no support is provided for tenant farmers and lessees. The Finance Minister has referred to the NITI Aayog’s model Land Leasing Act 2016 which has nothing to protect the interests of tenant farmers.

In rural India, nearly 54 million house-holds are in the landless labourer category. Assuming that each such household has five members that makes 250 million of the nearly 850-900 million rural population. The remaining rural people hold agricultural land and belong to the small and marginal farmers’ category. In other words, nearly 900 million people are vulnerable to poverty and deprivation due to unprofitable cultivation, vagaries of weather and also policies of State governments. Now the issue that the Union Budget has to address is: does the economy have the capacity to create non-agricultural jobs to both the categories mentioned above? The number of landless, and small and marginal farmers looking for non-agricultural work is an immediate and top priority. Between 2005-06 and 2012-13, the number of cultivators in rural India fell from 160 million to 141 million, and the number of landless labour from 85 million to 69 million, because they found non-agricultural work particularly in the construction sector. Construction activity is increasingly absorbing poorly educated rural labour in the rural and urban areas. Construction jobs are growing more slowly since 2011-12, as public investment has fallen. And with the non-performing assets of the banks soaring, private investment has fallen as well. The result: fewer workers have been leaving agriculture since 2011-12. From five million leaving agriculture per annum between 2004-05 to 2012-13, the number is down to just over one million per annum between 2012-13 to 2015-16. This is hurting landless labour, small and marginal farmers the most. On account of rising construction activity, rural incomes in particular would rise, raising consumer demand for simple manufacturing goods, especially in the unorganised manufacturing sectors, raising employment in those sectors especially in rural areas. Here the Budget has to play a crucial role in maintaining and enhancing employment, incomes and protecting rural demand for the informal and unorganised rural sector.

The Budget 2018 could not change the mood of the farmers. In two crop seasons there is just one kharif and rabi left before May 2019 now. A single Budget cannot roll out a hospitalisation insurance scheme of the dimensions envisaged by the BJP Government. A one-year Budget cannot make rural India suddenly feel so much the better with Rs 1000 billion in just a year. It appears that the Modi Government’s final Budget is a ‘restless’ Budget. It is a Budget put together by a worried, impatient government not as sure of a second term with a clear majority as might have been a year ago.

“Never is too much spoken about so little by so many people.” (Winston Churchill) This is particularly true of the Budget 2018.

References 

1. Press Information Bureau, Government of India, General Budget 2018-19.

2. Rao. A.V.V.S.K., “Modi Government’s Budget sans Destination and Direction”, Mainstream, May 9, 2015.

3. Rao, A.V.V.S.K. and Ramulu, M., “Challenges before Modi Government—Budget boost to Rural India likely” Hans India, Hyderabad, January 30, 2018.

Prof Rao is an Honorary Professor in Economics at the Jawaharlal Nehru Institute of Advanced Studies (JNIAS), Hyderabad. He was formerly Senior Professor and Head, Department of Economics, Osmania University, Hyderabad.

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