Finance Minister Nirmala Sitharaman addressing the post-budget press conference in New Delhi on February 1. Photo: PTI
Like the COVID-19 pandemic, the Union Budget for 2021-22 was also hyped to be a once-in-a-lifetime affair. Instead, Finance Minister Nirmala Sitharaman delivered a Budget that was not just underwhelming but deeply divisive. Coming as it did in the wake of the unprecedented collapse of the economy, the Budget was expected to not just spark a recovery but extend support to those whose incomes had been ravaged in the pandemic. It failed on both fronts, but still drew cheers from the well-heeled, a measure of how divisive its effects are likely to be.
Fiscal fundamentalism with a vengeance
Fiscal fundamentalists, from the time of the British Prime Minister Margaret Thatcher and United States President Ronald Reagan, suffer from what can be only described as an asymmetry complex. Shorn off the sophistry, what it implies is that deficits are okay as long as they are in favour of the rich; they become a strict no-no only when the not-so-rich and the poor are to benefit. Much the same logic applies to the latest Union Budget. All the cheerleaders in the media and industry have given rave reviews to the Budget for its expected expansionary impact.
Some have cheered it for its renewed commitment to fiscal rectitude and “transparency”; others have highlighted the sharp increase in allocations for capital investment; still others have welcomed it for its “magic” in achieving all things good without the crushing burden of taxes. Missing from this gleeful welcome, curiously, for a Budget that is essentially a statement of expenses and earnings, was the unprecedented collapse of revenue, not just in the current year but also in the next year. And, thereby hangs a tale, a story of deep inequities that have been dramatically heightened during the pandemic.
First, the supposed sparkling recovery in capital expenditure, by 26.2 per cent, which the media latched on to as an indicator of the government’s willingness to spend for a recovery. As subsequent more sober analyses by brokerage houses and investment banks have shown, this increase was lower than the 30.2 per cent growth in capital expenditure in 2020-21 (Revised Estimate). Moreover, as a proportion of the gross domestic product (GDP), all this supposed heavy lifting is only going to improve capital expenditure’s share of GDP from 2.3 per cent in the current year to 2.5 per cent next year. In fact, if one includes the resources available with public sector units (PSUs) to the Centre’s capex, the combined share of capex as a percentage of GDP falls from 5.6 to 5.1 per cent.
More worryingly, since capital expenditures account for only about 12-13 per cent of the total expenditures, and since all other expenditures are projected to remain stagnant in the next year, the overall expenditures are actually set to decline in real terms. Total expenditures, after excluding capital expenditures, are projected to decline from Rs.30.11 lakh crore in the current year to Rs.29.29 lakh crore in 2021-22, an almost 3 per cent decrease. While the Minister has assumed that the GDP would grow by 14.4 per cent in 2021-22, what was the point in being so niggardly on the expenditure front when it is obvious that a recovery of incomes is not only going to be prolonged but also in fits and starts? That is, if the purpose of a government-led “stimulus” is to undertake investments to generate growth and to support a recovery of lost incomes through expansion of expenditures, the Budget’s bias is evident.
Logically speaking, a deficit can arise from two possible scenarios: when expenditures overshoot earnings or when earnings fall short of expenditures. Faced with the pandemic-induced crisis suffered by the economy, Nirmala Sitharaman had the option of increasing tax collections, especially from those who have benefitted from the pandemic. This is not as provocative as it may appear at first glance. The largest companies in India have since the pandemic made money hand over fist, raking in high profit. And, as attested by the almost obscene run in the stock markets, the well-heeled—high net worth individuals (HNI) in the language of the street—have also benefited from the pandemic. Clearly, at least in the wake of the pandemic, a sense of equity would have justified a tax to moderate this degree of inequity.
In fact, given that the drop in revenues was in substantive measure caused by the pre-pandemic largesse to large industry via the reduction in Corporation Tax—the Budget was a time to reconsider the rash move. As the accompanying piece by Zico Dasgupta, highlights, collections from the Corporation Tax have declined by about one percentage point of GDP during the Narendra Modi years. In fact, during the pandemic year, collections of the Corporation Tax are lower for the first time than the collection through Income Tax. That is, all of India’s largest companies contribute less as taxes than all individual tax payers.
The cut in Corporation Tax was the primary reason why revenues have collapsed in the current year. Last year, the Finance Minister expected revenues to grow by about 20 per cent, reaching Rs.20.2 lakh crore. Instead, revenues amounted to only Rs.15.6 lakh crore, a shortfall of 22 per cent. In fact, revenues for 2021-22 are projected at Rs.17.9 lakh crore, 11 per cent lower than what was expected for the current year. With revenues in free fall, it is obvious that the prime impetus to a rising deficit is arising on the revenue front and not on the expenditure front. Therefore, ethically and morally speaking, the prime responsibility for the fiscal deficit of 9.5 per cent projected for 2021-22 ought to fall on the shoulders of those who, despite the pandemic, have reaped a bounty.
The humbug of budgeting
It is true that allocations for the MGNREGA was increased significantly during the current year, but that must be balanced by two sets of considerations. For one, the higher allocation for the MGNREGA was the least the Narendra Modi government could have done as an atonement for the sin of having abandoned millions of migrant workers during the lockdown. Secondly, this magnanimity must be balanced by the fact that other schemes such as the Integrated Child Development Services (ICDS), India’s longest-running welfare scheme for children and mothers, were virtually abandoned. A similar fate befell the mid-day meals scheme, for which, in any case, the States are already bearing a heavier burden.
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In fact, as Jean Dreze and others have pointed out, the meals scheme for schoolchildren was allocated Rs.13,215 crore and Rs.11,500 crore in 2021-22, which, factoring for even a conservative inflation rate of 5 per cent, implies a cut in real terms of 38 per cent. The ICDS too has suffered a cut of 36 per cent in real terms. Similarly, food subsidies are projected to fall by almost 50 per cent, relative to the Revised Estimate for 2020-21. That is, the government has, at the first opportunity, chosen to abandon whatever little extra it spent during the year of the pandemic. The fact that this is being done when the pandemic and its economic effects are still all-pervasive amounts to sheer negligence. That this is being done even as the government takes care not to inconvenience the rich even remotely, says a lot about its intentions.
This was supposed to be a Budget with a “health focus.” But more obfuscation was in store. The “massive” increase in health allocations claimed by the Finance Minister evaporated on closer inspection. Nirmala Sitharaman claimed that allocations for “health and well-being” were being increased from Rs.94,452 crore (Budget Estimates for 2020-21) to Rs.2.24 lakh crores in 2021-22—a spectacular increase of 137 per cent.
This apparently all-encompassing category of “well-being” is such that it defies comparison. First, of this increase, Rs.35,000 crore is for the COVID-19 vaccination drive, which, logically, should be outside the nucleus of the funding for health and family welfare. And, if one turns to the allocation for the Department of Health and Family Welfare, the guardian of most of the health schemes, they indicate a much more modest increase. The Department has been allocated Rs.75,000 crore in 2021-22, just 9 per cent higher than that budgeted in 2020-21. In fact, the allocation for 2021-22 is almost 10 per cent lower than the Revised Estimate for the current year.
The Budget was welcomed for its “transparency”, especially with respect to subsidies. This essentially makes a virtue of necessity. For some time now, some budget items, most notably food subsidies, were funded in a roundabout manner, through the National Small Savings Fund. The Finance Minister has now brought this back into the Budget. This is not because of a new-found zeal for transparency but simply because the actual fiscal deficit numbers would otherwise be suspect in the eyes of the “market”, the ultimate judge of all things good and bad. Since the government’s budget is going to binge on a significantly higher market borrowing programme, this was simply necessary. Otherwise, it stares at the possibility of being punished by the rating agencies, which would increase the cost of borrowings.
A key thrust in the Budget was on privatisation, and with a decidedly ideological zeal. No longer as coy as her predecessors, she preferred to use the term privatisation, instead of “disinvestment”, a word that had been favoured since the days of P.V. Narasimha Rao. Disinvestment in government-owned companies is supposed to yield Rs.1.75 lakh crore, compared with the Rs.2.10 lakh crore projected for the current financial year.
There are several issues with this kind of single-minded devotion to ideological duty. First, there are no new entities on her “to sell” list, barring the intent to privatise two public sector banks. To an alert mind that has followed privatisation in India in the last 30 years, this rings alarm bells. If the same assets, barring the two banks, were worth approximately Rs.35,000 crore more last year, why is the Finance Minister so eager to incur what is obviously a loss to the nation? It does not take a desh bhakt to figure out that the Narendra Modi government’s tryst with privatisation is bound to be far more controversial than Atal Behari Vajpayee’s in the early years of the century (Frontline issues dated March 17, April 14 and April 28, 2001). It remains to be seen whether Modi is forced to make a hasty retreat like Vajpayee did after the sale of PSUs at scandalously low prices ignited a controversy.
Second, the timing of the aggressive sale raises questions of prudence. Given that the economy is down in the dumps and given that industrial asset prices are likely to be at a discount, why should the government—even assuming that privatisation is the right thing to do—sell assets now, instead of after a recovery? The ongoing boom in the stock market is unique in that unlike all previous episodes there have been very few initial public offers. Surely, this indicates that there is no risk appetite for fresh investments, unless the assets are sold at a substantial discount. And, since investors know that the government is desperate, they would only drive down asset prices even lower, implying even greater losses for the public exchequer.
Thirdly, as academics like Sushil Khanna have pointed out, the government’s access to resources amounting to at least Rs.1.5 lakh crore a year that are now being contributed by PSUs, would no longer be available. What is the point in selling assets now, which would jeopardise future revenue streams?
Like all previous Budgets in the Narendra Modi years, this one too has a severe adverse impact on State finances. In 2020-21, the States, cumulatively, were short-changed to the tune of Rs.2.34 lakh crore when one compares the Revised Estimates for the year with initial Budget Estimates. Revenues from goods and services tax (GST) are expected to yield Rs.6.3 lakh crore in 2021-22, 8.70 per cent lower than the budgeted estimate for 2020-21. The GST compensation to States was lower by almost one-fourth when compared with estimates in the current year. The compensation cess in the current year is likely to be just Rs.84,000 crore; although it is projected to increase to Rs.1 lakh crore, it would still be 9 per cent lower than levels projected for the current year, and made last year, before the pandemic was in sight.
Thus, States, which have had to do the bulk of the heavy lifting have to fend for themselves in 2021-22. Since States are undertaking about 60 per cent of all expenditures, without having the commensurate ability to levy and collect taxes, a major crisis is looming for Indian federalism. And, in that tussle, it is likely that GST, at least as it exists today, is going to feature as a major bone of contention.
In fact, addressing a recent conference after the Budget, Kerala Finance Minister Thomas Isaac called for a “restructuring” of the GST. First, he called for “flexibility” in the setting of rates for the State GST (SGST) component of the GST. He suggested that the rates of the SGST could be set within a band instead of a single, inflexible, rate. Further, he pointed out this would be of no consequence to the GST collections of the Centre. He also explained that this would allow States to prioritise tax rates according to their situation and needs. Isaac also called for a change from the current 50-50 split in GST revenues between the Centre and States. He called for a higher share for the States, possibly in a 60:40 split, arguing that the States were in any case undertaking the bulk of the expenditures. It is evident that as the burden on the States mount the GST regime would be in for a perfect storm.
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Union Excise Duty is the only tax collection that increased in 2020-21 (revised), primarily because of the increase in rates on petroleum products. Excise collections, which were projected to yield Rs.2.67 lakh crore in the current year, are expected to deliver Rs.3.61 lakh crore, 35 per cent more. States have taken umbrage at the levy of Special Additional Duties on petroleum products, which are not shareable with the States. The widespread levy of cess is also a retrograde step. They are generally for short durations and for specific purposes, but of late they tend to extend forever as a revenue-gathering tool.
This Budget marks a significant point in the Indian tryst with deregulation, one that makes India stand as the odd man out in a pandemic-ravaged world. Governments all over the world, even the most gung-ho fans of private enterprise, have taken a break by admitting some role for the state. India, under Modi, is out of step, not just with the world but with its own people. It was out of step with the miseries of a pandemic-hit people; it promises to remain steadfastly so in its aftermath.