BUDGET

A Budget that
Reveals the Truth
about India’s
Growth Story
BY PRASENJIT BOSE ON 02/03/2016 • 1 COMMENT

Despite the distress signals, Arun Jaitley has

chosen to strictly adhere to a conservative fiscal
stance in his successive budgets, prioritising deficit
reduction over everything else.

Finance Minister Arun Jaitley with MoS Jayan Sinha ahead of presenting the
2015-16 Budget. Credit: PTI

Going by official statistics, the Indian economy appears to

have already achieved what is globally considered an enviable
position – a virtuous combination of high growth and
dwindling inflation. According to estimates by the Central
Statistical Office (http://www.pib.nic.in/newsite/erelease.aspx?relid=136214),
GDP growth has accelerated from 5.6% in 2012-13 to 7.2% in
2014-15 and further to 7.6% in the current financial year,
2015-16. The average annual inflation rate as measured by the
WPI has fallen from 7.4% in 2012-13 to 2% in 2014-15 and
further to -2.8% in 2015-16 (up to January 2016). If this is the
true state of affairs, Finance Minister Arun Jaitley had
precious little to do in the Budget beside ensure that nothing
upsets the applecart.

However, question arises if the current growth story, as

revealed by official data, is too good to be true. Indicators
from the latest economic survey (see table 1) show that gross
fixed capital formation (investment) has fallen from 33.4% of
GDP in 2012-13 to 30.8% in 2014-15 and further to 29.4% in
2015-16. Agriculture has grown by merely 1.1% this year after
-0.2% growth last year, with foodgrain production stagnating
at around 250 million tonnes for the past two years. Exports
and imports have fallen by 17.6% and 15.5% respectively
during this year. Despite crude oil prices (Indian basket)
dropping to around $30 per barrel now from an average of
$84 per barrel last year, annual inflation as measured by the
CPI has remained around 5%.

Table 1 – Indian Economy: Key Indicators

(http://i1.wp.com/thewire.in/wp-content/uploads/2016/03/Picture1.png)Source:
Economic Survey, 2015-16
*Data on Inflation, Exports and Imports for April-January
2015-16;
Data on Credit Growth for April-December 2015-16

Growth in bank credit has ranged between 9% to 11% in the

last two years in contrast with an average annual growth of
over 20% in the last decade. Banks are unwilling to lend owing
to a pile up of bad debts, with ‘stressed advances’ accounting
for over 8.5 crore rupees by March 2015, which is over 6.7% of
GDP. The debt distress afflicting the private corporate sector is
acting as a drag on fresh investments. These are certainly not
the signs of a booming economy.

Modi regime: fiscal conservatism

Despite such distress signals, Jaitley has chosen to strictly

adhere to a conservative fiscal stance in his successive
budgets, prioritising deficit reduction over everything else (see
table 2). The total expenditure under the UPA-II government
averaged around 14.8% of GDP, with plan expenditure
averaging at 4.5% of GDP and fiscal deficit at 5.31% of GDP. By
2015-16, the Modi government had squeezed total expenditure
in real terms to 13.2% of GDP, with plan expenditure falling to
3.5% and the fiscal deficit to 3.9% of GDP. The estimates for
2016-17 provided in this year’s Budget promise to adhere to
the same contractionary roadmap, by restricting total
expenditure to 13.1% of GDP, plan expenditure to 3.6% of GDP
and the fiscal deficit to 3.5% of GDP.

Table 2 – Expenditure: UPA-II & NDA-II

(http://i0.wp.com/thewire.in/wp-content/uploads/2016/03/Picture2.png)Source:
Budget at a glance, various years

The much-advertised improvement in the ‘quality’ of public

spending under the present regime, in terms of a spike in
capital expenditure, has also got reversed in the Budget – after
rising from 1.6% of GDP in 2014-15 to 1.8% of GDP in 2015-16,
it is estimated to fall again to 1.6% of GDP in 2016-17. The
average annual capital expenditure under UPA-II was 1.8% of
GDP. The revenue expenditure estimate in 2016-17 is likely to
overshoot because of the implementation of the Seventh Pay
Commission recommendations
(http://finmin.nic.in/press_room/2015/7thCPC_Highlight.pdf) and the OROP.
The resource mobilisation strategy of the present government
is based on increasing indirect taxes, especially excise duties
(see table 3). Gross tax revenues as a proportion of GDP, which
was 10.1% on average under UPA-II, has risen to 10.76% in
2015-16 and is projected to increase further to 10.83% in 2016-
17. The entire increase, however, is on account of indirect
taxes, with union excise duties jumping from 1.5% of GDP in
2014-15 to over 2% of GDP in 2015-16. There has been a
shortfall of over 45,000 crore rupees in direct tax collections in
2015-16 vis-a-vis last year’s budget estimates. But this shortfall
has been more than made up with indirect tax collections
overshooting budget estimates by over 55,000 crore rupees,
mainly on account of the hikes in excise duties on petroleum
products. Despite crude oil prices coming down by over 54%
since April 2015, the reduction of the retail price of diesel in
Delhi is merely 8%.

Table 3 – Tax Revenues: UPA-II & NDA-II

(http://i2.wp.com/thewire.in/wp-content/uploads/2016/03/Picture3.png)Source:
Receipt budget, various years

The Budget intends to take this regressive trend further, with

Jaitley proposing to mobilise additional revenue worth 20,670
crore rupees through indirect taxes. The direct tax proposals
would entail a revenue loss of 1,060 crore rupees, owing to the
reduction in the corporate tax rate and other exemptions.
Such reliance on indirect taxes for revenue mobilisation,
especially excise duties on petro products, is fraught with
risks. While it will soak up demand from the economy on the
one hand, it can also start an inflationary spiral on the other if
international oil prices start rising again.

Robbing Peter to pay Paul

The outlays on agriculture, rural development and social
sectors have been showcased in the Budget as the
government’s commitment to farmers and the poor. The fact is
that there was a cut in the nominal outlays for agriculture and
irrigation in last year’s budget by almost 5,500 crore rupees.
Given the widespread agrarian distress, the government has
been forced to increase the outlay for agriculture and
irrigation from 0.19% of GDP in 2015-16 to 0.32% of GDP in
2016-17, to reverse the damage (see table 4).

Table 4 – Budget Allocations on Select Heads

(http://i2.wp.com/thewire.in/wp-content/uploads/2016/03/Picture4.png)Source:
Budget speech, Annex-III-A and Expenditure Budget, vol. I,
2016-17

The allocations for the social sectors (health and education),

rural development (including MNREGA) and energy
infrastructure have remained at the same level in real terms
as in the last two years – 1% of GDP, 0.7% of GDP and 1.5% of
GDP respectively. The subsidy bill has been reduced from 2.1%
of GDP in 2014-15 to 1.9% of GDP in 2015-16 and is projected to
decline further to 1.7% of GDP in 2016-17. It is notable that not
only have petroleum subsidies been cut considerably, which is
understandable in the backdrop of the sharp fall in crude oil
prices, but the allocations for food and fertiliser subsidies
have also been cut in nominal terms for 2016-17. Cutting
subsidies on food and fertilisers to increase allocations on
agriculture and irrigation is like robbing Peter to pay Paul.
Such wobbly policies would fail to ameliorate rural distress,
forget about meeting the hyperbolic target of doubling farm
incomes in five years. It is also somewhat surprising that even
defence spending in real terms is being progressively
squeezed by this government.
While implementing the Fourteenth Finance Commission’s
crucial recommendation for devolving 42% of union taxes to
the states since last year, the government also decided to cut
down on plan expenditure citing the shrinking fiscal space of
the centre. Last year’s budget had wound up eight central
schemes, including the Backward Regions Grant Funds and
changed the funding pattern for 24 more welfare schemes,
including ICDS, National Health Mission and Rural Housing,
increasing the burden of the states. Net transfer of resources
to the states have increased substantially since last year
because of higher tax devolution, but central assistance to
state plans have also been cut down significantly (see table 5).
The increase in states’ share of taxes from 2.71% of GDP in
2014-15 to 3.73% of GDP in 2015-16, has been accompanied by
a decline in total grants and loans extended by the centre to
the states from 2.79% of GDP to 2.39% of GDP.

Table 5 – Resources Transferred to States

(http://i0.wp.com/thewire.in/wp-content/uploads/2016/03/Picture5.png)Source:
Budget at a glance, 2016-17

Moreover, the government has also failed to fully meet its

expenditure commitments on crucial heads. Last year’s budget
had estimated a net transfer of 8.42 lakh crore rupees to the
states as their share of taxes and central grants and loans.
Revised estimates show that net transfers to the states have
fallen short by 21,443 crore rupees. Similarly, plan spending of
the railways for 2015-16 was estimated at one lakh crore
rupees last year. Revised estimates suggest a shortfall of
17,800 crore rupees. Last year’s budget had estimated nominal
GDP to grow by 11.5% in 2015-16, while it actually grew by
only 8.6%. If the nominal GDP growth of 11% for 2016-17,
estimated in this Budget, turns out to be an over-estimate yet
again, revenue and expenditure targets set for 2016-17 will
come under strain.

Bad loans imbroglio

In the name of addressing the bad loans problem that is
threatening the stability of the banking system, the Budget has
thoroughly deregulated foreign investment and ownership
norms in asset reconstruction companies and also provided
them with tax breaks. Jaitley did make an allocation of 25,000
crore rupees in 2015-16 for the recapitalisation of the public
sector banks, but as per the notings in receipts budget
(miscellaneous capital receipts), this amount would be
mobilised through disinvestment.

A disinvestment target of 56,500 crore rupees has been set for

2015-16, out of which 20,500 crore rupees is to be raised
through ‘strategic disinvestment’, with the Niti Ayog
identifying the central public sector enterprises (CPSEs) for
such sale. The 24% investment limit for the foreign portfolio
investors (FPIs) in listed CPSEs other than banks has also been
raised to 49%, in order to prepare the ground for this exercise.
These set of measures taken together indicate that the
government is seeking a solution to the problem of stressed
assets by handing over those assets directly to foreign finance
and also to raise resources for the stressed asset-ridden banks
from outside, by selling government equity or assets to FPIs.

The problem of bad loans has emerged largely because of

unscrupulous businessmen on the one hand and negligent,
corrupt bankers and auditors on the other. Rather than
cracking down on the delinquent big borrowers, the RBI has
allowed huge amounts of debt to be restructured over the
years, which has prolonged and amplified the problem. The
most fair and just solution lie in bringing the large defaulters
to book and expropriating their ill gotten gains. Legal and
institutional changes are also required to deal with corporate
bankruptcy and debt recovery in order to properly identify
and criminalise wilful default. Instead of showing political will
in that direction, the Budget seeks salvation in a distress sale
of publicly owned assets to foreign capital. This needs to be
squarely opposed.

Prasenjit Bose is an economist and political activist

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