India’s Budget 2018: fiscal deficit set to widen

The ceremonial announcement of the Indian government’s annual budget goes back to the days of the East India Company and the mid-19th century. Given that India is still a centrally planned economy, it remains an important exercise. The government of the day uses it to announce broad policy guidelines and present a balance sheet of the previous fiscal year as well as its tax plan.

The budget announced last Thursday is the current government’s last, with general elections due in mid-2019. It was expected to present a strong policy focus on the rural economy with handouts to farmers because the ruling Bharatiya Janata Party (BJP) has suffered recent electoral reverses in rural areas. And indeed, it does have a rural focus. Finance Minister Arun Jaitley reiterated a promise that farmer incomes would be doubled by 2022 and the budget made a commitment that the government would acquire food at a Minimum Support Price that is 50% more than the input costs. Apart from this, there were allocations to rural infrastructure and housing projects.

A back-of-the-envelope calculation suggests that doubling incomes in four years implies a growth rate of above 18%. It is hard to believe that is possible in real terms, net of inflation, since the entire Indian gross domestic product is growing at around 6.5% annually at the moment and the agriculture sector is growing at a considerably lower rate of around 2.1%.

Other claims and estimates in the budget also seem less than credible. For example, a health-insurance scheme that was originally announced in 2016 has been rebranded and relaunched with claims that it will be the largest health-care initiative in the world, covering 500 million persons, with up to 500,000 rupees’ (nearly US$7,800) coverage per individual per annum. But the budget appears to make an allocation of just 2 billion rupees to this scheme.

The biggest credibility crisis revolves around the core of the budgeting exercise – keeping expenditure in line with revenues.

The biggest credibility crisis revolves around the core of the budgeting exercise – keeping expenditure in line with revenues

The current government has deservedly received kudos for maintaining fiscal discipline and reducing the fiscal deficit in successive budgets. When it took charge in May 2014, the fiscal deficit was in the range of 4.4% of GDP in 2013-14. Over the next three fiscals, the deficit was gradually reduced to 3.5%, admittedly with the help of one big windfall. Crude-oil prices fell sharply from September 2014, and that allowed the government to impose a series of taxes on gasoline and diesel and thus raise revenues.

However, this fiscal (April 2017-March 2018) saw a big slippage from its commitment. The February 2017 budget had committed to targeting a fiscal deficit of 3.2% of GDP. The numbers now being announced indicate that the deficit will be at least 3.5% of GDP for the current fiscal year, and it could actually be higher. This budget indicates that the deficit will be targeted at 3.3% for 2018-19, instead of the earlier target of 3%.

What’s more worrying is the fact the accounting is somewhat inconsistent and implies that the actual deficit could be more. An estimate by the Central Statistics Office on January 31 indicated the fiscal deficit was likely to be 3.7% of GDP. However, the budget announced last Thursday says it will be 3.5%. It is no longer clear who is following which estimate.

The fiscal-deficit calculation ignores the fact that the government will be issuing 800 billion rupees’ worth of bank recapitalization bonds over the next year, which will add to its debt. The government is also counting on revenues received from “disinvestment,” when it transfers shares that it owns directly. This will go into the custody of companies in which it holds a majority stake, and receiving cash from the reserves of those companies in return. Consistent accounting norms would consider this just a transfer of assets from one pocket to another.

India’s Budget 2018 also raises protectionist barriers by increasing customs duties on a wide range of items. This is supposedly to encourage manufacturing under the “Make in India” scheme. This is ironic given that Prime Minister Narendra Modi gave a stirring speech decrying protectionism in the recent World Economic Forum at Davos, Switzerland.