#budget2020

A Brief Exercise in Not Taking the Economic Survey 2020 Seriously

This survey was about wealth and entrepreneurship and free markets and privatisation, not about poverty or inequality or public employment schemes.

This is a quick summary review of the latest Economic Survey (2019-20). I have to admit that this quickly-written assessment is a product of an equally quickly-read Survey. If I have not quite pored over it, it is because I found no evidence in the Survey to suggest that it is a document that was intended to be taken seriously – solemnly perhaps, but not seriously. Under the circumstances, I hope I will be forgiven for having spared myself the ordeal of a detailed study of the Survey, and the reader the even greater ordeal of a detailed review of it. Hence this considerately brief commentary.

The Survey is in two volumes, Volume 2 being given over to a purported assessment of the state of the economy, and Volume 1 to the—ah—philosophical perspective guiding it. As far as one can tell, the Vision directing the enterprise seems to be inspired by an infatuation with the perceived virtues of wealth creation and the market. These virtues are seen to be embedded in our civilisational origins (there is much talk of Kautilya and the Thirukural in this tract), and they are extolled with a somewhat startlingly passionate ardour for freedom of the market and against intervention by the government.

In the event, Volume 1 reads like a bewildering advertisement of ancient wisdom seeking and finding endorsement in an essentially rudimentary business school view of the world. This combination of ideas and orientations, executed in somewhat individualistic prose, is inspiring—or at least weird if, like me, you are an elderly codger groping in the dark, and old enough to remember that this country once had a CEA of the likes of Ashok Mitra.

And when you encounter reference to our ‘dalliance with socialism’ (presumably in the dark ages before this New Dawn), then things begin to fall into place a little more clearly: you are enabled to see that if the ‘democratic’ and ‘secular’ aspects of our republic, as vouchsafed in the preamble to our constitution, are currently under a new fix, then so is its ‘socialist’ aspect. That, regrettably, is when the jaw starts sticking out and you begin muttering to yourself.

Also read: Budget 2020: Trickle Down Economics Will Fail Like Always

Not that that’s of much help in enabling you to understand why the Survey believes that there is no basis to the criticism that recent growth rates under the NSO’s revised methodology might have been overestimated. Yes: there is actually a chapter in Volume 1 titled ‘ Is India’s GDP Growth Rate Overstated? No!’ All that stuff on civilisation and culture and tradition must have been infectious, because when I encountered the chapter, I was reminded of that old Tamil saying: ‘my father is not in the granary’ (this being the young boy’s defensively blurted declaration in the story about the debt-collectors from whom the lad’s father was hiding).

In the bibliography to the chapter, I found references to quite a few articles taking issue with Arvind Subramanian’s recently expressed reservations on growth rate estimates, but one will search in vain for any engagement with the work of R Nagaraj, the most consistent and meticulously careful commentator on the subject. Just saying.

Finance minister Nirmala Sitharaman is flanked by junior finance minister Anurag Thakur as she arrives to present the budget in Parliament in New Delhi, February 1, 2020. Photo: Reuters/Altaf Hussain

The best is reserved for the last chapter of Volume 1. The chapter, titled ‘Thalinomics’, is an affecting reminder of the Survey’s continuing concern, first reflected in its 2018-19 number, for the common man: ‘What better way to continue this modest endeavour for forcing economics to relate to the common man than use something that s(he) encounters everyday—a plate of food?’ In this cause, we are treated to an extraordinary exercise. Vegetarian and non-vegetarian thalis are constructed and costed in terms of the quantities and prices of their respective ingredients.

A linear trend line for the cost of a thali at current prices is fitted on price data from 2006-07 to 2015-16, from which point in time the price of the thali tends to fall away from the trend line. The difference between the trend (‘counterfactual’) price and the actual price in 2019-20 is calculated, and annualised estimates of the difference—for both a vegetarian and a non-vegetarian thali—are computed and presented as gains to the common man from benign government policy on thali prices: these gains, one understands, are notional estimates of savings arising from things being not as bad as they might have been under a particular, different scenario. The greatest good that can be done to the common man, it appears, is to invite him to count his blessings, considering that things might have been a good deal worse than they are.

Also read: ‘Thalinomics’ to Defence of GDP Math: Economic Survey 2020 Finds Bright Spots in the Gloom

Having said this, there is something else in the numbers put out on thalis by the Survey which seems to have quite completely escaped its authors. From Figure 1 (‘Thali Prices at all-India Level’) of Chapter 11, it appears that the cost of a vegetarian thali in 2019-20 is in the region of Rs. 23, and of a non-vegetarian thali, Rs. 37. With weights of 0.3 and 0.7 for vegetarian and non-vegetarian thalis respectively—these are the population proportions of vegetarians and non-vegetarians in India—the weighted average cost of a thali for 2019-20 might be taken to be in the region of Rs. 32.8. The Survey allows for two thalis a day per person, which works out to Rs. 65.60 as the cost of food per person per day.

The Tendulkar Committee poverty lines favoured by the Niti Aayog are Rs. 27 (rural) and Rs. 33 (urban)—or, crudely, say, an average of Rs. 30—per person per day at 2011-12 prices; allowing for a 150% rise in prices (which is roughly what is displayed by the Consumer Price Indices of Agricultural Labourers and Industrial Workers) between 2011-12 and 2019-20, the poverty line in 2019-20 at current prices would be of the order of Rs.45—which is less than 70% of the Rs. 65 (according to the Survey’s own estimate) that would be needed to avoid hunger! That is to say, a person with an income that is 144% of the official poverty line can keep hunger at bay only by completely emptying out his pockets. Thalinomics, in short, shades off into Khalinomics. My apologies, but as indicated earlier, the mood and language of the Survey tend to be painfully catching.

As for Volume 2, well, it doesn’t always quite tally with what a number of economists have read into recent trends in the economy. No doubt it is benighted, if not downright sinister, to entertain the thought that we are looking at a profoundly demand-constrained downturn in the economy, marked by serious rural distress, depressing tendencies in manufacturing output and exports, unprecedentedly high levels of unemployment, opaque estimates of the fiscal deficit, and governmental suppression or/and criticism of data sources that paint an unflattering picture of the economy.

The Labour Force Participation Survey was released only after the elections, and no doubt it would be sensible to wait for the budget to be presented before releasing the NSO’s Consumption Expenditure Survey for 2017-18, the leaked report for which presents a sorry tale of consumption downturn between 2011-12 and 2017-18. As for what the long-term term effects of demonetisation or the continuing impact of GST on the economy might be, why delve into recent history when we have the comforts of ancient history to see us through? Even the IMF and the World Bank, not to mention various credit-rating agencies, have downgraded projected growth beyond what the Economic Survey will do.

Also read: How Long can RBI and LIC Bailout a Crisis-Ridden Fisc?

And why not? This Survey is about wealth and entrepreneurship and free markets and privatisation, not about poverty or inequality or public employment schemes. The philosopher P.G. Wodehouse frequently reminds us of the girl Pollyanna who was given, at all times, to being ‘glad, glad, glad’; and like his immortal character Gussie Fink-Nottle, we too must set our faces against pessimism. That would be in the spirit of the Economic Survey, which has no use for the low opinion of his fellow-humans’ interest in their own wellbeing that a scurvy fellow like David Hume (unlike Kautilya, apparently) entertained. Indeed, the reader is exhorted along the following lines in the Preface: ‘We hope readers share the sense of optimism with which we present this year’s Survey.’

In one of his essays, Albert Camus describes a brutal boxing match which is preceded by the soothing strains of a violin. He calls it ‘the sentimental music before the massacre.’ For all that the reader might have been led to believe otherwise from this review, the Economic Survey is just like that. It is the sentimental music before the massacre.

For on the day after came the budget, with its distressingly inseparable twin, the budget speech.

The author is an economist, independent researcher, former National Fellow of the Indian Council of Social Science Research, and a retired Professor of the Madras Institute of Development Studies.

Watch | ‘Budget 2020 Not What Economy Needs, Centre Seems in Denial’: Shankar Acharya

The former CEA said that if the finance minister properly and fully stated the problem, it would actually have given reassurance and confidence.

In an interview to Karan Thapar for The Wire, Shankar Acharya, former chief economic adviser (CEA) and former chairman of Kotak Mahindra Bank, says the budget “lacks clear direction” and is not “really what the economy needs at the moment”. He suggests that the budget’s problems arise out of the fact that finance minister Nirmala Sitharaman did not begin her budget speech by clearly expressing the problem the economy faces as well as its extent and scale. He believes she needed to do this not just because it would give confidence that the government understands but also it would, thereafter, provide a sense of direction in terms of the steps that need to be taken as well as give the strength and confidence to implement them.

He says perhaps the finance minister chose not to explicitly state the size and extent of the problem in her budget because she thought it might discourage people if she did that. Acharya says that properly and fully stating the problem would actually have given reassurance and confidence.

Asked about how effective the government’s investment-based strategy to boost growth is likely to be, Acharya suggests that this is more like what you expect in a normal year rather than a response to a crisis. Whilst he welcomes the government’s commitment to invest Rs 100 lakh crore in infrastructure over the next four years, he says that the increase in government capex of 18% this year does not look like a response to a crisis. He says this is “normal”.

Nirmala Sitharaman Has Given us a Lacklustre Budget, Aimed Not at Growth or Welfare

The government’s budgetary calculations have been adversely hit. The lack of financial resources completes the circle for a government which, in the first place, is unwilling to invest for the revival of the economy.

Having been in dire straits for a better part of the current fiscal, the Indian economy needed the Union finance minister to provide the much-needed impetus through her second budget.

Unfortunately, the Union Budget of 2020 turned out to be an exercise of laissez faire, something that the Economic Survey had so glibly spoken about.

The government did not show interest in making any interventions and instead showed its unwavering faith on the market forces to turn the economy around. This is despite the fact that the demand compression being faced by the economy has too severe for the private investors be interested in putting their money.

A few months ago, the finance minister had disregarded this reality when she offered the largesse of a substantial cut in corporation tax, expecting that the corporates would respond to this “incentive”.

Also read: Explainer: Will Nirmala Sitharaman’s Corporate Tax Cuts Save India’s Economy?

The corporates never responded, but the government’s budgetary calculations have been adversely hit. The finance minister has informed us that the gross tax revenue for the current fiscal is expected to be below the budgeted figure by over 12%, which is largely due to the 20% decline in corporation tax receipts on account of the tax concessions granted to the corporate sector.

Indirect taxes have also been down as the sluggishness of the economy has affected collections of both the goods and services tax (GST) and import duties.

The capital non-debt capital receipts are also down as the proposed disinvestments have fallen short by over 38%. Which means that the government has had to borrow heavily to make its ends meet; a move that would increase the already large interest burden.

The lack of financial resources completes the circle for a government which, in the first place, is unwilling to invest for the revival of the economy.

Ever since it took office, the Modi government has relied more on aspirations, on the so-called “feel good” factor, and this Budget is no exception. The serious downside of putting forward only “aspirations” instead of concrete programmes that can also be implemented successfully, is already being experienced by the stuttering economy.

So, what are the new set of aspirations?

The finance minister has chalked out plans for an “aspirational India” in three important areas: agriculture irrigation and rural development; wellness, water and sanitation; and education and skills.

When it comes to agriculture, the “aspiration” is to double farmers’ income by 2022 by making farming competitive and by liberalising farm markets. This is the most vacuous of all aspirations as it is completely unhinged from the reality. In the midst of the farm distress that is strewn all over the country, the finance minister has put forth a 16-point programme, with scant additional allocation of resources to implement it.

Also read: Budget Fails Yet Again to Present a Roadmap to Increase Rural Demand, Double Farmers’ Income

Funds allocated to agriculture have increased by a mere 4% over the budgeted figure of 2019-20.

For this critical sector, the capital expenditure is projected at only Rs 50 crores, and this when the government has increased capital expenditure by 22% and is expected to be Rs 4,12,085 crores. In other words, a sector that directly and indirectly supports about 60% of the livelihoods in the country gets 0.01% of the capital expenditure from the Union Budget.

How can the farmers ever expect a doubling of their incomes with hardly any capital expenditure by the government?

Education is another area where the aspirations have been laid out and like in agriculture, the government has not backed its aspirational plans with any significant commitment in terms of resources. In case of primary education, an area in which the government has the responsibility to implement the Right to Education Act (RTE Act), provisioning of funds has been far lower than necessary.

Funding for the flag-ship scheme for implementing the RTE, the Samagra Shiksha, which has replaced the Sarva Shiksha Abhiyan, is proposed to be increased by only 7% over the budgeted figure of 2019-20. For the school education sector as a whole, the projected increase is even lower. It must be pointed out here that the revised estimates for the current fiscal show that the projected expenditure for the year would not be spent.

What is then the guarantee that the projected 7% increase would be spent on this scheme when the government is struggling with resource constraints?

The case of higher education is even more shocking. The projected increase in expenditure is only 3%, which only confirms the suspicion that the government is heading for privatisation of higher education. It is because of this apathy of the government towards higher education that in this country, which has the largest young population in the world, only one out of every four young people can take admission in a college.

Also read: The Good, the Bad and the Impossible of the 2020 Union Health Budget

And, finally, for the health sector additional resources allocation for 2020-21 is just 4% over the budgeted level for the current financial year. Although the government has claimed that the Ayushman Bharat programme has been a huge success, the rising disease burden that the citizens of the country does not bode well for the future of the country.

What could the finance minister have done instead to revive the economy and to address some of the most serious pain points facing the citizens?

Clearly, she could have put in more resources for this could have been both welfare as well as growth enhancing. Take for example education and health. In case of education, effective implementation of the RTE Act would need several lakhs of teachers to be given employment.

Similarly, implementing a model of inclusive higher education system would require new colleges and therefore employment to the lakhs of the highly qualified unemployed.

In the health sector, focus on setting up primary health centres and government funded hospitals can made healthcare affordable, besides bringing in lakhs of health workers. This, of course, requires the political will to get involved in making the lives of the citizens of the country better and to see them gainfully employed.

But, with its current focus on market orientation, this government cannot be expected to deliver better days for its citizens.

Biswajit Dhar is a professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.

Budget 2020 Leaves us Wanting More to be Done on Malnutrition and Hunger

There is no sizeable increase for any of the schemes when it comes to allocations, while the continual wrecking of FCI’s finances don’t augur well for the future of PDS.

Despite the annual embarrassment of India scoring a poor rank on the Global Hunger Index, nutrition and hunger hardly merit a mention in the budget speeches of our finance ministers.

The last time there was anything related to tackling malnutrition among women and children was in 2014-15 – the first budget of the Narendra Modi government – where Arun Jaitley announced that a national nutrition mission would be launched.

Almost six years later, in Saturday’s speech, Nirmala Sitharaman highlighted the government’s efforts for mother and child nutrition and stated that she proposes to “provide Rs 35,600 crore for nutrition-related programmes for the financial year 2020-21”.

While this gave an impression that there has been some significant increase in the budgetary allocations for nutrition, as seen in media reports since Saturday, the question to be asked is whether there indeed has been any enhancement. Even more important, what does this budget hold as a vision for improving nutrition and food security for all?

Maternal and child nutrition

The National Food Security Act (NFSA) provides a basket of entitlements throughout the life-cycle and the government runs a number of schemes whose specific aim is make a dent on hunger and malnutrition. The most important of these is seen to be the ICDS (Integrated Child Development Scheme) which among other pre-school, health and nutrition services also provides supplementary nutrition to young children, pregnant and lactating women and adolescent girls. The POSHAN abhiyan, a flagship initiative of the present government and mentioned in the budget speech, is also focussed on the anganwadi services while it aims to achieve convergence with various other efforts that influence nutrition outcomes.

While the ICDS comes under the Ministry of Women and Child Development, mid-day meals in schools for children up to class 8 implemented by the HRD ministry is also included in the NFSA.

Also read: The Good, the Bad and the Impossible of the 2020 Union Health Budget

The combined allocation for these schemes in the present budget adds up to Rs 35,600 crore and we can safely assume that this is what the minister was talking about as there is also no new scheme or budgetary line related to nutrition, in the budget documents that have been put out. There are some existing schemes such as the scheme for maternity benefits, Pradhan Mantri Matru Vandana Yojana (PMMVY), which provides a cash benefit of Rs 5,000 to pregnant women for the first live birth which doesn’t seem to have been added.

Source: Budget Documents, 2020

Looking at the budget allocations for these schemes in comparison to last year, it is seen that there is no sizeable increase for any of these schemes. In fact, compared to the BE figures of 2019-20 assuming an average inflation of 4.5%, in real terms there is a slight decline in the budget allocated for anganwadi services, mid-day meals and PMMVY. However, compared to the revised estimates for last year, an increase is seen, the highest being 28% increase for anganwadi services.

Here, it must be noted that even the allocated amount for anganwadi services last year was understood to be inadequate by most experts. It has been argued for many years that if the anganwadi services are to adequately provide all the services that they are supposed to, there needs to be a huge boost in the investment into the scheme. In many parts of the country anganwadi centres continue to operate from dilapidated buildings or have no buildings, the teaching-learning material is not regularly replenished and most importantly, the anganwadi workers and helpers are paid meagre honorariums (central government contributes Rs 4,500 per month and in many states that is the amount that the workers receive, viz. not even minimum wages). For instance, the budget briefs by Accountability Initiatives finds that about 30% of the supervisory positions in anganwadi services are vacant, a quarter of the centres do not have toilet facilities.

Reduced revised estimates for these crucial nutrition schemes are also worrying because this means that these already under-resourced programmes have been suffering from lack of funds resulting in irregular and poor delivery. The PMMVY is another case in point, which by design excludes more than half the pregnant women by restricting benefits to the first child. Even the small set of women who are eligible have not been receiving their cash entitlements in time, as shown recently by the ‘Jacha-Bachcha’ survey.

Poshan abhiyan

The finance minister in her speech made a special mention of the Poshan Abhiyan launched in 2017-18 and repeated twice the achievement of equipping six lakh anganwadi centres with smart phones to upload the nutritional status of more than 10 crore households. While introducing smart phones to aid better monitoring as well reducing the burden of record keeping on anganwadi workers is a desirable objective, it also has to be seen in the larger perspective.

Also read: Budget 2020: Does the Govt Intend to Reduce Coverage Under the Food Security Act?

An analysis by the Accountability Initiative, shows that, “Information and Communication Technology enabled Real Time Monitoring (ICT-RTM) for the development and setting up of Common Application Software (CAS) and expenditure on components under behavioural change such as advocacy and Community-Based Events (CBE) together comprised 72% of total expenditure”. While these are also important components given the poor state of nutrition in the countries, it also shows that funds have not been forthcoming for the actual running of programmes on the ground.

Feeding the hunger

The PDS which provides subsidised foodgrains to 67% of the population (as mandated by NFSA) should also been seen as one of the schemes contributing to food security and therefore nutrition. In the current context, where unemployment is high, wages are low and food inflation has been increasing, many media reports show that the foodgrain that people are getting from the PDS is, for many poor households, the only source of assured food. The PDS provides only 5-kg of cereals per individual, which is not sufficient but often is what is keeping families from starvation. On the other hand, the foodgrain stocks at the FCI godowns have once again been burgeoning with the stocks of rice and wheat as of January 2020 being over 75 million tonnes whereas the buffer stock norm is 21.4 million tonnes.

In such a situation one would have expected an expanded PDS covering a larger number of beneficiaries and/or increasing the entitlement per individual. Further, given the data on poor diets in Indian households, in these times of rural distress, it would have made sense to also expand the PDS basket to include pulses and cooking oil as well as exploring ways of making fruits and vegetables available at stable and affordable prices.

However, the budget speech makes no mention of the PDS and the budget itself shows signals that this government is not interested in strengthening the PDS, rather all efforts seem to be towards undermining and dismantling it. The food subsidy which reflects the amount paid by the government to FCI for procuring foodgrains and issuing them at subsidised prices to the PDS has been reduced from Rs 1.8 lakh crore in 2019-20 BE to Rs. 1.15 lakh crore in the current budget. The revised estimate for 2019-20 was also a much reduced 1.08 lakh crore.

This indicates two things – first, the government is planning to continue to bleed the FCI by not paying up the entire subsidy amount. As it has been doing over the past few years where it is transferring a part of the food subsidy in the form of loans from the National Small Savings Fund (NSSF) (see figure 3 below). This only increases the interest burden in the long run while in the short term allows the government to get away with showing a lower expenditure burden and therefore a smaller fiscal deficit.

Source: Union Budget 2020.

*This part does not get reflected in the budget documents.
Source: Economic Survey 2019-20.

Second, this underhand manner in which is the FCI is being pushed into losses raises concerns that the government wants to move towards dismantling the FCI and the PDS, in line with the kind of privatisation efforts that have been announced in this budget, of the LIC for example.

An indication that this is the direction in which it seems to be thinking comes from the recommendation that Economic Survey makes: “The coverage of NFSA needs to be restricted to the bottom 20% and the issue prices for others could be linked to the procurement prices. A better alternative would be giving income transfers to consumers through Direct Benefit Transfers (DBT)” (p.86, Vol. 1, Economic Survey 2019-20).

Also read: Budget Fails Yet Again to Present a Roadmap to Increase Rural Demand, Double Farmers’ Income

The debate of replacing the PDS with cash transfers is an old one, that keeps coming up regularly – there are a number of reasons including the importance of PDS in ensuring basic household food security, problems of access, preference and inflation-indexing, the threat to the MSP system in the absence of PDS and so on which need to be considered. What would be more productive would be to discuss further reforms in PDS and procurement such as decentralised procurement, inclusion of millets, pulses and cooking oil, de-privatisation of fair price shops and strengthening mechanisms of transparency and accountability which would not only contribute to making the PDS a more efficient system but also increase its contribution to improving household food and nutrition security.

Wishing malnutrition away

Notwithstanding its positioning, budget 2020 in effect fails on many counts to respond to the nutrition challenge in India. The direct programmes which address the multidimensional nature of malnutrition including the ICDS, mid-day meals, PMMVY and Poshan Abhiyan are underfunded and at the same time PDS which contributes to basic food security is sought to be undermined.

The government seems to be oblivious to the situation of hunger in the country. It further seeks to create an illusion of plenty by arguing in the Economic Survey in its chapter on ‘Thalinomics’ that food affordability has increased in the last few years. This chapter is based on a flawed methodology where it compares food prices as a proportion of incomes of workers in organised manufacturing who comprise less than 5% workers in India and does not take into account that wages for the majority have been stagnating and unemployment is at its peak.

Dipa Sinha teaches at Ambedkar University, Delhi.

Budget 2020: Does the Govt Intend to Reduce Coverage Under the Food Security Act?

Is the government considering an increase in issue price? The budget gives no indication of this.

The year 2020 will be the first full year of the Modi 2.0 government. It is also a rare year in which the government will not have to face any major election other than the one at Delhi.

With economic growth hovering around just 5%, economists had been expecting deep reforms, especially those relating to subsidies in the Union budget.

The Economic Survey of 2019-20 devoted a full chapter, ‘Undermining Markets: When Government Intervention Hurts More Than It Helps’, to the need for reduced government intervention. The budget presented on February 1 has not taken cognisance of the recommendations for the food and agriculture sector. But, there could be a hidden signal for things to come.

Among all the programmes affecting farmers, the largest allocation has always been for food subsidy which is provided in the budget of the department of food and public distribution.

This subsidy has seen a massive almost Rs 70,000 crore reduction in allocation this budget to Rs 1.15 trillion against the expectation of Rs 1.84 trillion for 2019-20. In the current year itself, the revised estimate of food subsidy has reduced to Rs 1.08 trillion.

Also read: Budget Fails Yet Again to Present a Roadmap to Increase Rural Demand, Double Farmers’ Income

This is the subsidy provided to Food Corporation of India and state governments (of decentralised procurement states like Chhattisgarh, Madhya Pradesh, Odisha, Andhra Pradesh, and so on, for procurement of wheat and paddy at minimum support price and its distribution under the public distribution system.

For the first time, the government has acknowledged the use of extra budgetary and other resources like National Small Savings Fund (NSSF) for meeting the requirement of food subsidy. FCI has unpaid bills of Rs 1.8 trillion and lower provision of food subsidy in 2020-21 means that the government will be looking for options other than borrowing from NSSF at 8.4% interest to reduce the burden of food subsidy.

Someday, the government will have to pay to FCI to clear the dues of the NSSF.

The economic survey recommended that the centre may reduce coverage under National Food Security Act for highly subsidised grains (Rs 2 per kg for wheat and Rs 3 per kg for rice) from about 70% of the population to bottom 20%.

For the rest, the survey proposes linking of issue price to MSP. Similar recommendation to reduce coverage under NFSA to 40% of the population was made by Shanta Kumar Committee (2015) set up in Modi 1.0 but no action was taken by the government.

So, is the government considering reduction in coverage and increase in issue price? The budget gives no indication of this but it is possible that the government may bite the bullet and reduce coverage under NFSA.

However, if that’s done it will be at odds with the government’s policy of expanding the coverage of its procurement programme at minimum support prices.

Farmers carry cabbage from their field on the outskirts of Amritsar, Saturday, February 1, 2020. Photo: PTI

In Kharif 2018, the MSP for common variety of paddy was increased by 12.9%. As a result, rice procurement in 2018-19 (October-September) reached an all-time high of 44 million tonnes.

In the last 14 years, paddy procurement has expanded from traditional states of Punjab and Haryana to Odisha, Madhya Pradesh, Chhattisgarh, West Bengal, Andhra Pradesh, Telangana and Tamil Nadu also. It is therefore unlikely that the Centre can unilaterally reduce procurement of rice, after persuading the states in the last 14 years to join decentralised scheme of procurement under which the responsibility for procurement, storage, movement and distribution under PDS is borne by the state itself.

What is however possible and highly desirable is to reduce procurement of rice in water stressed districts of Punjab and Haryana. The finance minister has also announced that comprehensive measures will be taken in 100 water stressed districts.

Similarly, after the food crisis of 2005-06, the government launched the National Food Security Mission and persuaded the states to increase procurement of wheat.

In addition to traditional wheat procuring states of Punjab and Haryana, Uttar Pradesh, Madhya Pradesh and Rajasthan have emerged as major states for wheat procurement. It is possible to move some wheat area in Punjab, Haryana and Rajasthan to rabi oilseeds but it will require some direct support to farmers to compensate for losses in initial years.

Also read: Why Nirmala Sitharaman’s New Income Tax Rates May Not See Widespread Adoption

But, the reality also is that given the employment crisis and declining wages in rural India, the government will find it very difficult to go by recommendation of economic survey for restricting NFSA coverage to just 20% of the population.

The second major item of subsidy for agriculture is fertiliser subsidy for which BE for 2020-21 is lower by Rs 8687 crore as compared to budget expectation for 2019-20. Fertiliser industry has pending bills of Rs 39,100 crore and so far, PSUs in fertiliser sector have not accessed NSSF.

In fact Modi 1.0 had decided to revive urea plants at Gorakhpur, Sindri, Talcher and Barauni at a cost of Rs 39,651 crore. A gas pipeline is being laid by oil PSUs for these plants.

Retail price of urea in India is about the cheapest in the world. Payment of urea subsidy to farmers through direct benefit transfer has been under consideration of the government for several years but no consensus has been reached with the state governments as any DBT will only reach land holders but tenant farmers will have to buy urea at market price.

Reduced allocation for fertiliser subsidy will further erode profitability of companies. It is possible that the government is considering deregulation of prices and payment of subsidy to cultivators directly. For this a massive programme of recording tenancy is necessary. But, as we have seen with PM Kisan exercises of this kind are not easy to implement.

Overall, it appears that the reduction in allocation in the budget of 2020-21 for these two major subsidies may not mean that the government is moving towards major reform of food and fertiliser subsidies.

Siraj Hussain is Visiting Senior Fellow, ICRIER. He retired as Union Agriculture Secretary.

Missing and Wanted in Budget 2020 – a Boost for India’s Economy

The budget needed to step up infra expenditure in rural areas and also boost agriculture expenditures. Without this, growth cannot turn around.

The Union Finance Minister’s speech on Saturday was as long as the crisis of the Indian economy is deep.

Be that as it may, the moot point is, will it help resolve the crisis in the Indian economy? That is what was expected.

Even officially, it is now admitted that the rate of growth is the lowest in the last one decade, after the year of the global financial crisis. All signs currently are that the economic situation is much worse than it was in 2008.

At least then the rate of growth was high (at 8%) and the fiscal deficit was low (at 3%) which gave enough fiscal space to boost the economy. Now the fiscal space does not exist.

It was expected that the budget for 2020-21 would somehow give a boost to the economy. But the budget speech does not give the confidence that the crisis confronting the economy will be tackled.

The length of the budget speech is an attempt to show the public that the government is on top of the situation facing the economy. The speech started by arguing that the macro parameters are all robust; so no crisis. If that is the case, then no big steps are required to be taken; and that is the case with the budget.

This is possibly only the public face of the budget since most people only look at what is in it for them. They do not analyse what it may mean as a whole – people are micro thinkers and not macro analysts.

The length of the budget speech is an indication that internally the party in power is aware that various sections of the population are hurting and it is necessary to try to cater to them – marginalised sections – farmers, MSME, middle classes, domestic producers, businesses and so on. That is why the FM started by talking about a ‘caring’ society.

Also read: Budget Fails Yet Again to Present a Roadmap to Increase Rural Demand, Double Farmers’ Income

In a budget of about Rs 30 lakh crore or 13.3% of GDP, there is enough money to give something to all sections and all sectors. But the issue is will there be enough money for all the big announcements.

The government maintains that it will double farmers’ incomes by 2022. It assures that it will achieve the target of Rs 104 lakh crore for infrastructure investment. It continues to talk about achieving a $5 trillion economy.

Eventually that will happen but the issue is whether it would happen by 2024?

Nirmala Sitharaman presents the Union Budget 2020-21 in the Lok Sabha, in New Delhi, Saturday, Feb. 1, 2020. Photo: PTI

When the current rate of growth is only about 4% and not even 5% assumed in the budget and that too is only the rate of growth of the organised sector, how will an average rate of growth of 12% be achieved? Starting at this low rate, in 2024-25, the rate of growth would have to be 19%, an impossibility.

How will the rate of growth stop declining and the economy turn around? Last year the rate of growth projected for 2019-20 was 12% nominal with a real rate of 7%. Now it turns out to be 7% and 5% respectively. Just like these projections have turned out to be incorrect, now too the projected rate of growth of 10% nominal and 6% real for 2020-21 would not be achieved, till the problem is frontally confronted.

Also read: Budget 2020 Sidesteps the Question of What the Govt Should Do to Revive the Economy

The fiscal deficit in the budget was fudged for 2018-19 and again in 2019-20. It must reflect the real deficit consisting of the Centre’s deficit and that of the public sector. As the CAG pointed out last year, if the two are added, then the deficit would be more like 5.8% and not 3.4%. The same is the situation in 2019-20.

This brings one to the issue of transparency of budgetary numbers.

The expenditures may be shown to be higher and so that the fiscal deficit does not go out of line in the budget print, revenues are also shown to be higher. But, during the year, as revenues fall short because the growth assumed is incorrect, the fiscal deficit starts to balloon in spite of the expenditure compression, then expenditures are further cut back and that then leads to further demand shortage.

The revenue shortfall also impacts the states since they get less of transfers than they could have got and they also are forced to cut back and that further aggravates demand problem.

The Budget Estimate for 2019-20 for revenue was Rs 24.6 lakh crore but the Revised Estimate shows Rs 21.6 lakh crore. A short fall of Rs 3 lakh crore or about 12%. Collection of all taxes are less than what was projected last year.

So, expenditures had to be cut back. Given that private consumption has been adversely impacted and investment rate has continued to fall, it was expected that the government expenditures would give a boost and that was also cut back from the expected figure so that it aggravated the demand problem. In 2020-21 too, if the rate of growth of the economy continues to fall, revenues will be less and expenditures may again have to be curtailed.

Also read: Why Nirmala Sitharaman’s New Income Tax Rates May Not See Widespread Adoption

Another source of spending for the government is the Internal and Extra Budgetary Resources (IEBR). This has been rising and that is also the case in 2019-20.

From the budget estimate of Rs.4.44 lakh crore it has gone up to Rs.6.22 lakh crore in the revised estimates, a rise of 40%. This strains the PSUs. Disinvestment can also be sued to raise funds. For 2020-21 the disinvestment target has been raised from the revised estimate of Rs.65,000 crore for 2019-20 to Rs.2.1 lakh crore.

LIC shares are to be sold as a big ticket item. Just like, in 2019-20, will such a big target be achieved? There are many a slip between the cup and the lip. How much dividend will the RBI be asked to give to the government is another matter. If these targets are not achieved, there will be further slippage.

The problem of demand emerged from the unorganised sectors of the economy.

That is where the expenditures needed to be boosted. MGNREGS which gives employment to the unorganised is being cut back from a revised estimate of Rs 71,000 crores to Rs 61,000 crores.

Since 100 days of work is not being made available under the scheme, this needed to be stepped up rather than cut back. Similarly, the expenditure on agriculture and allied activities was slated to be Rs.1.5 lakh crore but what is being spent it Rs.1.2 lakh crore (20% short) now it is slated to be Rs 1.55 lakh crore (in 2020-21).

This year, rural development spending is Rs.1.43 lakh crore and next year it is going to be Rs.1.45 lakh crore; almost static. Thus, there is hardly any increase in expenditures on agriculture and rural areas even though the budget speech made out that there is a big step up.

A big boost here would have boosted demand in the economy.

In brief, to boost the economy, the budget needed to step up infrastructure expenditures in rural areas and also boost the rural and agriculture expenditures but none of this is happening so that the boost expected is not likely to materialise and growth will not turn around so that the budget figures will again suffer the same fate as in 2019-20.

Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, and author of Ground Scorching Tax, Penguin Random House.

How Many People Will Benefit From Nirmala Sitharaman’s New Income Tax Rates?

If you have an annual income of over Rs 10 lakh and deductions of more than Rs 2 lakh, you’re probably going to want to stay in the old tax regime.

New Delhi: Finance Minister Nirmala Sitharaman on Saturday introduced India’s first ever dual income-tax system by announcing the introduction of a new optional scheme in which taxpayers can opt for reduced rates if they give up most deductions and exemptions.

In her speech, Sitharaman spoke how about how complying with the country’s income-tax law has become “burdensome” and “almost impossible” for most people, without taking the help of a professional chartered accountant.

Unfortunately, the new system hasn’t made things a lot easier.

It actually introduces three more slabs and will force (mostly young) taxpayers to think through a complex trade-off of saving for the future versus having a little more cash to spend in the present.

The finance minister says all Indian taxpayers will be allowed to choose between the old regime or the new one. From her remarks though, it seems that over the next decade, the plan is to migrate everyone as the government seems intent on removing the numerous exemptions and deductions that have been added to India’s income tax code over the last three decades.

What are the new tax slabs?

Sitharaman’s new system comes with six different slabs, starting from Rs 2.5 lakh and going up to Rs 15 lakh. The table below gives you a quick snapshot of the slabs under both the systems.

Tax Slabs (Annual Income)	‘Old’ System	‘New’ System
< Rs 2.5 Lakh	Exempt	Exempt
Rs 2.5 lakh to Rs 5 Lakh	5%	5%
Rs 5 lakh to Rs 7.5 Lakh	20%	10%
Rs 7.5 Lakh to Rs 10 Lakh	20%	15%
Rs 10 Lakh to Rs 12.5 Lakh	30%	20%
Rs 12.5 Lakh to Rs 15 Lakh	30%	25%
> Rs 15 Lakh	30%	30%

Even a brief look at the table will tell you that the rates announced by Sitharaman are a big improvement, which is what sparked the initial excitement. The catch, of course, is that the new system bans most of the major deductions and exemptions allowed under Chapter VI A of the Income Tax code and even a few other popular ones.

The ones that most people use to reduce their income tax burden are deductions under Section 80 C, which has a limit of up to Rs 1.5 lakh for investments made towards ELSS, PPF, LIC etc.

Also read: Sitharaman Misses the Chance to Exploit the Full Potential of a Higher Fiscal Deficit

Other important ones include interest paid on housing or education loans, health insurance premiums (Section 80 D), home rent allowance (HRA) deductions and donations made to charitable institutions or political parties (Section 80G). The new system also doesn’t allow the ‘standard deduction’ of Rs 50,000 that allows all taxpayers to reduce their tax outgo.

Since none of these are allowed, it seems intuitive that if you have more than one deduction – or if your deductions add up to more than Rs 2 lakh – it’s less likely that you will want to shift to the new tax regime. This isn’t set in stone of course, and a lot of it depends not only on your annual income, but also your age and family situation.

Let’s take a few hypothetical examples below – with differing annual incomes and a range of deductions – and see how they fare under both systems.

Table 1: Are the New Income Tax Rates Better?

Person	Annual Income	Deductions	Tax to be Paid in Old System*	Tax to be Paid in New System*
Abhishek	Rs 7,50,000	Rs 1,50,000	Rs 33,800	Rs 39,000
Manoj	Rs 9,00,000	Rs 2,35,000	Rs 48,360	Rs 62,400
Lakshmi	Rs 10,00,000	Rs 1,50,000	Rs 85,800	Rs 78,800
Tejas	Rs 15,00,000	Rs 3,00,000	Rs 1,79,400	Rs 1,95,000
Rakesh	Rs 6,00,000	Nil	Rs 33,800	Rs 23,400

Source: Author’s calculation. *Figure includes Cess of 4% that is applicable.

As you can see, having more deductions or exemptions usually results in a better deal under the old system. People like Abishek, Manoj and Tejas would prefer not to take up Sitharaman’s proposal. They are taxpayers who would typically have investments under Section 80C or are paying off a housing or education loan.

People like Rakesh, who earn Rs 50,000 a month, could potentially benefit from the new scheme. It’s not inconceivable that a person in this income-category would have no deductions to make, leaving him worse off under the old system.

Also read: Budget 2020: Trickle Down Economics Will Fail Like Always

However, the moment you add a standard deduction of Rs 50,000, which is available to all taxpayers as of last year’s Interim Budget last year, and a home rent allowance (HRA) of Rs 85,000 per annum, the old system automatically becomes much better for Rakesh. (This hypothetical scenario doesn’t even consider the rebate of Rs 12,500 you get if your taxable income is Rs 5 lakh, which would further tip the scales against the new system).

The other interesting example is that of Lakshmi, who earns Rs 10 lakh and has deductions of only Rs 1,50,000. The new system, which ignores deductions, is a better option for her. The question to be asked here though is how many people who earn Rs 10 lakh per annum currently have deductions/exemptions of only Rs 1.5 lakh? Is it a significant number of taxpayers?

In Lakshmi’s case as well, as the table below shows, if she increases her deductions to Rs 2 lakh, the older system once again looks like the better option.

Table 2: Tweaking the Deductions

Person	Annual Income	Increased Deduction	Total Tax to be Paid in Old System	Total Tax to be Paid in New System
Rakesh	Rs 6,00,000	Rs 1,35,000	Rs 10,750	Rs 23,400
Lakshmi	Rs 10,00,000	Rs 2,00,000	Rs 75,400	Rs 78,000

How many could shift?

It’s clear that that Sitharaman’s tax regime is more suited for people who either have very few deductions on one hand, or own their own homes and have lower Section 80 C deductions because they have a different investment strategy on the other.

Another interesting question to be considered is whether the new system changes the way people view their tax-saving investments. Put simply, what if people decide its a better idea to simply stop the investments that they were hitherto making solely to lower their income tax burden and move to the new regime? For example, what if Lakshmi (in Table 1) decides to stop the Rs 1.5 lakh in deductions that she was getting by investing in, say, a tax-saving mutual fund. She could then decide to spend some of the extra money she would get by moving to the new regime and put the rest of it in a regular (non-tax-saving) fixed deposit. It will be fascinating to see how this affects taxpayer behaviour at a national level, provided the government chooses to reveal this data.

We know that India collects roughly Rs 3 lakh crore from individual tax-payers and that the average salary income in AY’19 stood at Rs 6.9 lakh. We also know that the finance ministry believes its move will result in a loss of Rs 40,000 crore in revenue to the government. But none of this tells us how many people will actually benefit from the new income tax system.

At the moment though, most taxpayers who have spent years carefully planning how to best reduce their income tax burden are unlikely to jump ship to Sitharaman’s dream of a deduction-free future.

Budget 2020: Scientific Depts. Get 8% Hike, Much More for ‘Disruptive’ Tech

The two largest R&D projects in the new budget alone received Rs 5,900 crore more than the total hike for all scientific ministries and departments.

As India’s finance minister Nirmala Sitharaman announced the Union budget for 2020-2021 on February 1, India’s science enthusiasts keep their fingers crossed that she would have something – hopefully – to offer to science, unlike members of most other sectors who were almost impatient that the minister couldn’t get to their ‘their’ part of the speech quickly enough. The simple fact that science is mentioned at all in the minister’s annual speech often suffices to keep India’s undemanding scientific community happy.

Sitharaman did not disappoint, holding up a modest bag of goodies for science, although some of them belied their actual numbers.

On a positive note, she announced an investment of Rs 8,000 crore over the next five years for a new national mission on quantum technologies. These technologies were “opening up new frontiers in computing, communications [and] cyber security with widespread applications,” Sitharaman said. “It is expected that lots of commercial applications would emerge from theoretical constructs which are [being] developing in this area.”

The mission will build on some of the country’s existing initiatives, Ashutosh Sharma, the secretary of the Department of Science and Technology (DST), told The Wire. In 2017, the DST had invited proposals for a new research programme on ‘quantum-enabled science and technology’ (QuEST), whose objectives include development and demonstration of quantum computers, quantum communication, cryptography, quantum-enhanced and inspired technologies, advanced mathematical quantum techniques, algorithms and theories of quantum information systems.

The seeds for the national commitment to quantum computing were in mid-2017, when the DST’s Interdisciplinary Cyber-Physical Systems (ICPS) division invited proposals for projects related to quantum computing as part of the new QuEST programme. It received 130 proposals, of which the ICPS shortlisted 51 for further deliberation. Next, in January 2019, some 50 researchers and a few government officials convened at IIIT Hyderabad for the first round of discussions on QuEST.

Kasturi Saha, a researcher at IIT Bombay working on quantum optics, told The Print at the time, “We are trying to build quantum computers in the long run” – with help from Sitharaman’s 8,000-crore-rupee-bonanza. “But first, we need to lay the groundwork to enable work in quantum mechanics in India.” So QuEST, in its first phase, is expected to setup the infrastructure by 2022 and then focus on “matching international standards”.

“To catch up with other countries in the quantum computing field, India will need to invest in the right kind of projects,” The Next Web wrote. “It might also look to partner with major corporations such as IBM and Google to make use of their expertise in the sector.”

The minister also announced another seemingly major project but with none of the detail that accompanied the computing announcement: “Mapping of India’s genetic landscape is critical for next generation medicine, agriculture and for biodiversity management,” she said, alluding to a large scale genome-mapping exercise in which researchers will presumably create a database of species endemic to the Indian subcontinent, as well as Indians. However, in support of this exercise, Sitharaman only said, “To support this development, we will initiate two new national-level science schemes.”

No specifics are yet available.

She also mentioned that India’s new economy is based on innovations that disrupt established business models, such as “artificial intelligence, the internet-of-things, 3D printing, drones, DNA data storage, quantum computing, etc.” She further said that the “government has harnessed new technologies to enable direct benefit transfers and financial inclusion on a scale never imagined before,” although without discussing the efficacy of these programmes.

Referring to the cliché that “data is the new oil”, Sitharaman said the Indian government would soon publish a policy to enable the private sector to build ‘data centre parks’ throughout the country in an effort to help Indian companies incorporate data in their value chains.

Notwithstanding her references to emerging areas of R&D, the overall allocation for the major science-related ministries and departments, including the Ministry of Earth Sciences and the departments of agriculture research, atomic energy, health research, new and renewable energy, and space, received a modest 8% hike over 2019-2020. In absolute numbers, they collectively received Rs 64,467.28 crore versus Rs 59,590.36 crores for 2019-2020.

When considered individually, however, the Ministry of Science and Technology, which oversees three key scientific departments – the DST, of Biotechnology (DBT) and of Scientific and Industrial Research (DSIR) – alone has received a 10.8% hike over the promised allocation last year. Of these, the DST, which oversees the national mission on quantum technologies, has received the maximum – a 13% increase – with Rs 6301.53 crore.

The DBT will oversee the ‘genetic landscape’ project and received Rs 2,786.76 crore, which is a little over 8% of what it received last year. Renu Swarup, the secretary of the DBT, thanked Sitharaman on Twitter for what she called “a big boost to science and technology”.

The Ministry of Earth Sciences, which oversees many climate-change-related projects, received an increase of about 8% over its allocation last year, with Rs 2,070 crore.

Finally, the Department of Space received Rs 13,479.47 crore, which is also an increase of about 8%, and closely in line with K. Sivan’s request for Rs 14,000 crore, as the Economic Times reported on January 2. The Indian Space Research Organisation, which Sivan oversees, has planned at least 25 missions in 2020, and is also working on its second lunar surface mission, Chandrayaan 3, its first solar science mission, Aditya L1, and India’s first human spaceflight project ‘Gaganyaan’, scheduled for 2022. For the last, the Centre sanctioned an allocation of Rs 10,000 crore last year.

With inputs from Vasudevan Mukunth

T.V. Padma is a freelance science journalist.

Budget 2020: Trickle Down Economics Will Fail Like Always

In the backdrop of an economic slowdown, the rich are more likely to add to their financial savings rather than invest or consume.

The Economic Survey presented ahead of the Union Budget has already exposed the severity of the slowdown afflicting the Indian economy. GDP growth has dipped to 5% in 2019-20, the lowest since the global recession of 2008-09, with slowdown gripping all the sectors of the economy – industry, services as well as agriculture. The investment rate has fallen by 1.2% of GDP from last year. Bank credit growth has also decelerated for industry and services, especially MSMEs.

The Union Budget 2020-21, presented in the backdrop of this deteriorating economic situation, reveals a massive Rs 2.97 lakh crore shortfall in gross tax revenues in 2019-20 (RE) compared to the last year’s budget estimates. The drop in gross tax revenues to 10.5% of GDP in 2019-20 (RE), the lowest since 2014-15, follows the major cut in the corporate tax rate announced in September 2019, which has brought the Indian tax rate below that of ASEAN economies like Indonesia, Malaysia and Philippines. The Budget has followed the same principles of “trickle down” economics to cut income tax rates on earnings up to Rs 15 lakh per annum and removed the dividend distribution tax on companies, which account for a combined projected revenue loss of Rs 65,000 crore per year.

Finance minister Nirmala Sitharaman obviously thinks that such tax cuts for large corporates and affluent sections would translate into higher investment and consumption demand, thus stimulating the economy. However, this assumption of “trickle-down” is neither based on sound economic theory nor empirical evidence.

In the backdrop of an economic slowdown, the rich are more likely to add to their financial savings out of their additional income through direct tax breaks, rather than invest or consume. Rather than giving tax breaks, had public expenditure been incurred of the same amount on social welfare programmes or creating physical infrastructure, the money would have reached the hands of the poorer sections of society, who have a higher propensity to consume.

Also Read: Budget 2020 Sidesteps the Question of What the Govt Should Do to Revive the Economy

The Budget has walked in the opposite direction, by cutting Rs 75,532 crore from the food subsidy Bill in 2019-20 (RE) and Rs 9,502 crore from the MGNREGA in 2020-21 (BE). Making a mockery of the prime minister’s announcement of Rs 100 trillion investment in infrastructure in the next five years, the Budget allocated a meagre Rs 22,000 crore for infrastructure finance companies.

The expectation of an effective fiscal stimulus from the Union Budget thus stands belied. Contrary to the claim made by the finance minister, the minor increase in the fiscal deficit will only bolster the wealth of high net worth individuals rather than enhancing capital expenditure and creating jobs. Moreover, in the likely absence of any significant growth recovery in 2020-21, revenues from direct taxes and GST may once again fall below budget estimates. This will necessitate further expenditure compression, unless the government abandons the irrational pursuit of fiscal consolidation amidst a severe economic slowdown.

The Budget also misleads on the state of the financial sector, by exuding complacency. The latest Financial Stability Report of the RBI released in end-December 2019 has already reported a reversal in the trend of NPA reduction in the scheduled commercial banks, especially the PSBs. Not only has the IBC regime failed to bring about effective resolution of the stressed assets in the banking system, the bursting of the NBFC credit bubble has added fresh woes. Incidences of bank frauds have also hit a record high, with Rs 1.13 trillion being ripped off the banking system in the first six months of 2019-20.

Rather than addressing such corporate criminality, the government appears to be in a selling spree of public assets, budgeting a record Rs 2.1 trillion as disinvestment receipts for 2020-21, including Rs 90,000 crore estimated for the PSBs and the LIC. Gambling with the stakes of the public sector financial entities at a time of economic distress, in order to meet revenue shortfalls, is the most retrograde aspect of this thoroughly disappointing budget.

Prasenjit Bose is an economist and political activist.

Sitharaman Misses the Chance to Exploit the Full Potential of a Higher Fiscal Deficit

IT remains a genuine confusion as to whether invoking “escape clause” to deviate from the fiscal consolidation path is in response to the unanticipated outcome of structural policy announcements or whether it is for increasing capital spending.

Economists often push the idea that strict adherence to fiscal rules is growth-inducing. However, empirical evidence suggests that it is unwise to be a “fiscal hawk” in times of serious economic slowdown.

After all, there are irreversible economic costs to strict fiscal prudence. This is the significant economic policy prescription that finance minister Nirmala Sitharaman missed to explore to its full potential in her Union Budget 2020, which was supposed to revive demand and reverse the economic slowdown.

The potential of a fiscal tool in triggering the economy is also often better done through the expenditure side rather than lowering rates of taxation. For instance, Budget 2020’s ‘lower tax rates sans exemptions’ policy is complicated. This is not a simplification of tax structure. It is complicated in its nature as it will lead to a concern (“nudge”) in an Indian taxpayer over which is higher, the propensity to “save” using exemptions or “spend”?

Last year’s announcement of lowering corporate tax rates – the statutory rates – to 15% for those firms who forgo exemptions also may not result in intended benefits as the firms do enjoy an effective tax rate of around 20% even with exemptions. However, it is an empirical question and we need to wait for the evidence on how Indian companies end up acting.

Also Read: Budget 2020 Sidesteps the Question of What the Govt Should Do to Revive the Economy

If the intention of the government is putting more money into the hands of people to revive demand or to boost “sentiments”, it would have been better off by strengthening public expenditure policies. The budgetary allocations of ‘employer of last resort’ policies (MNRGEGA) and wage boost policies are significant among these policy priorities to boost demand.

Is fiscal prudence growth-inducing?

More often than not, fiscal consolidation is attained by retrenchment of public spending and not increased tax buoyancy. This has severe negative growth consequences. The International Monetary Fund (IMF) has recently slashed India’s forecast to 4.8% in 2019-20, a reduction of 1.3% within three months. Against the backdrop of the World Economic Outlook (WEO) released in Davos, Switzerland, IMF chief economist Gita Gopinath said that the economic slowdown in India has pushed down global growth forecast by 0.1%. When there is an increasing recognition that India is a “drag” on global growth, from the position of fastest growing economy a few years ago, it is high time to come out of a mode of “denial” and to float appropriate macroeconomic tools in action. However, the Union Budget has missed the chance to act judiciously to explore the power of appropriate “fiscal policy tools” to revive growth.

It is interesting to recall here that the IMF Article IV consultation report 2019-20 for India is also equally confusing when India is advised to use monetary policy to address economic growth downturn while strictly adhering to fiscal consolidation path. There is a shadow of these new macroeconomic policy consensus in the Union Budget 2020. This macroeconomic policy uncertainty affects economic growth further – unless we correct for it – and especially when the cuts in policy rates by Monetary Policy Committee (MPC) has consistently failed to trigger economic growth.

From being the fastest growing economy a few years ago, India has now been recognised as a drag on global economy. Photo: Reuters/Rupak De Chowdhuri

Invoking the ‘escape clause’ of FRBM

The finance minister also announced today that India has gone for a fiscal deficit – GDP threshold of 3.5% (instead of 3%) for the next fiscal and that it is strictly within the purview of the new Fiscal Responsibility and Budget Management (FRBM) Act, incorporated in the Finance Bill 2018.

She was referring to the “escape clause” embedded in the Act, to have flexible upper bound of deficit-GDP ratio under special circumstances. Sitharaman quoted from the Section 4 (2) of the FRBM Act, which provides for a trigger mechanism for a deviation from the estimated fiscal deficit on account of structural reforms in the economy with unanticipated fiscal implications, and justified why she has taken a deviation of 0.5%. The minister re-confirmed that it is consistent with Section 4(3) of FRBM Act, both for RE 2019-20 at 3.8% and BE 2020-21 at 3.5%.

Subsequently, the net market borrowing net market borrowings for the year 2019-20 would be Rs 4.99 lakh crore and for the year 2020-21, it would be Rs 5.36 lakh crore. The revised path to fiscal consolidation is incorporated in the ‘Medium Term Fiscal Policy cum Strategy Statement’ which was tabled in the Parliament on Saturday, where one gets a cue that a significant part of the market borrowings for the financial year 2020-21 would go financing the capital expenditure of the government which has been mentioned to have scaled up by more than 21%.

It remains a genuine confusion as to whether invoking “escape clause” to deviate from the fiscal consolidation path is in response to the unanticipated outcome of structural policy announcements the government has made or whether it is for increasing capital spending for the economy. Nevertheless, the renewed emphasis on capital formation – especially infrastructure investment – is welcome.

In addition to this announcement, the Union Budget also has mentioned allocation of Rs 22,000 crore for equity to fund certain specified infrastructure finance companies, who would leverage it manifold and provide much needed long-term finance to Infrastructure sector to spurt the economic growth.

New FRBM and the Anatomy of Revenue Expenditure

Having said that, it is significant to examine the anatomy of India’s revenue expenditure. If invoking the “escape clause” is linked to forward looking strategies to increase capital formation, then India needs to maintain the “golden rule” of fiscal rules that revenue deficit is zero. The New FRBM 2018–19 mentioned that “in the proposed FRBM architecture, Government will simultaneously target debt and fiscal deficit, with fiscal deficit as an operational target and do away with the deficit targets on revenue account that is revenue deficit (RD) and consequentially, effective revenue deficit (ERD).”

Also Read: Sitharaman’s ‘Budget of Giveaways’ Will Not Help India’s Broken Economy

This “non-zero Revenue Deficit” is dangerous especially when the escape clause is invoked. The golden rule is to prevent fiscal profligacy and to imply a hard budget constraint on government to prevent the use of borrowed resources for the purpose of recurrent spending including wages and salaries, interest payment, pension and subsidies. However, with the simultaneous situation of invoking escape clause to raise the threshold fiscal deficit ratio to GDP and having a non-zero revenue deficit can be tricky.

Ex-post to the new FRBM in 2018, with no target, revenue deficit has increased stubbornly high to 2.4% in 2019-20 and would be at 2.7 % of GDP in 2020–21. The anatomy of revenue expenditure reveals that Centre intends to spend on interest ( 23.28 %) and defence (10.62) highest and for other components (refer Table 1). There is also deviation between BE and RE figures (as reflected in the ratio of BE/RE for the year 2019-20) in the components of revenue expenditure. This deviation between BE and RE is referred to as “fiscal marksmanship” and it is perfect only if the value is 1.

Table 1: Anatomy of Revenue Expenditure

	2018-19Actuals	2019-20BE	2019-20RE	2020-21BE	Fiscal Marksmanship BE/RE 2019-20
Pension	6.92	6.26	6.82	6.93	0.95
Defence	12.56	10.96	11.72	10.62	0.97
Subsidy –	0.00	0.00	0.00	0.00
Fertiliser	3.05	2.87	2.96	2.34	1.00
Food	4.38	6.61	4.03	3.80	1.69
Petroleum	1.07	1.35	1.43	1.34	0.97
Agriculture and Allied Activities	2.73	5.44	4.48	5.09	1.25
Commerce and Industry	1.20	0.97	1.06	0.89	0.95
Development of North East	0.08	0.11	0.10	0.10	1.12
Education	3.47	3.40	3.51	3.26	1.00
Energy	1.96	1.60	1.57	1.40	1.05
External Affairs	0.67	0.64	0.64	0.57	1.03
Finance	0.64	0.72	0.92	1.37	0.81
Health	2.35	2.33	2.37	2.22	1.02
Home Affairs	4.24	3.73	4.60	3.76	0.84
Interest Payments	25.17	23.70	23.16	23.28	1.06
IT and Telecom	0.64	0.78	0.59	1.95	1.36
Others	3.22	2.75	2.85	2.77	1.00
Planning and Statistics	0.23	0.21	0.22	0.20	1.00
Rural Development	5.74	5.05	5.31	4.76	0.98
Scientific Departments	1.07	0.98	1.03	0.99	0.99
Social Welfare	1.89	1.82	1.79	1.77	1.05
Tax Administration	3.00	4.21	5.09	5.03	0.85
of which Transfer to	0.00	0.00	0.00	0.00
GST Compensation Fund	2.34	3.63	4.49	4.45	0.83
Transfer to States	5.15	5.58	5.76	6.59	1.00
Transport	6.20	5.65	5.86	5.58	1.00
Union Territories	0.61	0.54	0.56	1.74	1.00
Urban Development	1.75	1.72	1.57	1.64	1.14
Grand Total	100	100	100	100	1.03
Grand Total (in Rs crores )	2315113	2786349	2698552	3042230

Source: (Basic Data), Union Budget 2020 documents, Government of India

Financing Pattern of Fiscal Deficits

The efficacy of invoking “escape clauses” do not remain at levels of deficit, but also at the financing pattern of deficits. Over the years, there has been a shift in financing pattern of fiscal deficits from seigniorage financing to bond financing. With an “escape clause”, there can be a provision for eventual monetisation of a portion of deficits, as it requires a direct seigniorage financing with Reserve Bank of India. Seigniorage is technically the change in high powered money to GDP, which has the potential of inflationary pressures.

However, such eventual monetisation can happen only if the real rate of growth is less than the real rate of interest (r>g) and results in some unpleasant monetary arithmetic. This also leads an economist to think further what MMT genre of economists who argue whether to go for seigniorage rather than the eventual destruction of the economy through fiscal retrenchment and fiscal rules. Because to them, saying “there is no fiscal space” is a white lie when you have the ability to decide on your seigniorage financing of deficits. Are there any elements of a new macroeconomic thinking towards such “fiscal seigniorage” in the Union Budget 2020?