Controlled hand-outs: Fiscal discipline maintained in an election year | Business Standard Editorials

As pre-election Budgets go, Piyush Goyal’s isn’t too bad. While vote-oriented announcements cost about Rs 1 trillion (or about half of 1 per cent of next year’s GDP), the fiscal deficit will remain unchanged from this year’s revised figure of 3.4 per cent of GDP. A pause in fiscal correction is tolerable, whereas a reversal of direction would have been a much more negative development. It could well have been a reversal, if any of the hairier schemes for a basic minimum income had been announced. Still, the deficit could climb for the current year if the somewhat ambitious Revised Budget numbers don’t materialise—especially on corporation tax revenue and disinvestment proceeds. Already, the scale of the government’s borrowing programme has told on interest rates in the bond market, while the government’s debt-to-GDP ratio has climbed instead of falling.

Over the five years, the government has done very well to raise the tax-to-GDP ratio from 10.1 per cent in 2013-14 to 11.9 per cent in the revised numbers for the current year. Tax compliance too has improved, if one is to judge by the rise in the numbers paying income tax. The fiscal correction achieved over the period (about 1.1 per cent of GDP) is also creditable. The primary deficit (fiscal deficit minus interest payable on accumulated debt) is negligible, so almost all of the deficit is on account of past sins. But the target deficit of 3 per cent is perennially receding; next year the Finance Commission’s recommendations on sharing resources with the states could impose additional pressures. In fact, the current year’s numbers benefit from a decline in budgeted transfers to states.

What of the election-oriented announcements? The government’s defence of the announcement carrying the biggest ticket (Rs 75,000 crore as income support for small and marginal farmers) is that it compensates for depressed prices for farm output, and therefore is nothing more than compensation for adverse terms of trade. This sounds logical, except that most small and marginal farmers do not have a surplus to unload onto the market. The unalloyed truth would be that this is one more step towards creating a minimal welfare state. It comes tinged with politics, for no effort is made to dovetail it with similar schemes announced by states—naturally, since what the central government looks for is political credit.

The other welfare measure, a pension plan for workers in the unorganised sector, with the government paying half the cost, is a post-dated cheque that might become burdensome in the fullness of time, just as many open-ended welfare programmes have become in even rich countries. As for Ayushman Bharat, it is hard to believe that the budget sum of about Rs 6,000 crore will be enough for what is claimed to be the world’s largest health insurance programme. Even with a top-up from states’ contributions, and given the likelihood of at least a couple of hospitalisations being required in a lifetime, it should be safe to assume that something like 15 million people in the covered population of 500 million will need treatment every year. At a combined outlay of Rs 10,000 crore, what seems to be assumed is either very partial coverage next year, or an average cost per hospitalisation of about Rs 6,000. How realistic is that?

In an increasingly unequal society, it is hard to argue against hand-outs to distressed or generally disadvantaged sections, especially when tax giveaways are announced simultaneously for the middle-class. But one must not lose sight of the fact that the fiscal space for the hand-outs has been created partly by squeezing the funding of existing programmes. The flagship Mahatma Gandhi national rural employment guarantee programme (Mnrega) gets less next year than the current year’s spend; so does Ujjwala (LPG connections for poor households), the Employees Pension Scheme, the “umbrella scheme for development of Scheduled Castes”, a similar programme for “Other Vulnerable Groups”, the Pradhan Mantri Awas Yojana, the Swachh Bharat mission, the White Revolution, Nutrient-Based Subsidy, and so on. Other allocations are less than the Budget allocation in the current year, including for the Green Revolution, the Blue Revolution (though we have a new fisheries department!), the National Social Assistance Programme, and the Rurban Mission. Perhaps the government has put into practice the argument that a new hand-out should be funded at least partly by cuts elsewhere.

The relief given to the lowest slab of income-tax payers is politically understandable, but the tax floor could have been set lower, at about Rs 3.5 lakh, bearing in mind the extent of inflation since the last reset in 2014 when the tax-free income limit was put at Rs 2.5 lakh. But that would not have led to prolonged thumping of desks in the Lok Sabha, to rhythmic shouts of “Modi, Modi”.

via Controlled hand-outs: Fiscal discipline maintained in an election year | Business Standard Editorials

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