India’s Union Budget 2018 arrived with the country’s economy facing its worst slowdown in at least half a decade. While macroeconomic shocks such as demonetization and the implementation of the goods and services tax (GST) are likely to have contributed to the slowdown, its roots lie in the decline of investment in the country. The big question, then, was how the budget might address issues arising from job contraction in the informal sector, the slowdown in manufacturing, and increasing distress among farmers and lower middle class citizens.
In a budget you take from some and give to others. So who gives and who takes is where we should be looking. The challenge is to take enough from the nearly 15% of the population – or about 200 million people, comprising 40 million families – liable for direct taxes, without causing them too much dissatisfaction. This action should, simultaneously, do enough to blunt the edge of popular anger among the 60% who make little more than a subsistence income. This demographic accounts from 700-750 million people, or 150 families. These are the people who have been largely been bypassed by the huge growth gains made in India since 1998.
Defunct delivery system
For further context, the Indian government operates within a very expensive public administration (10.4% of GDP), and an almost defunct delivery system. The majority of government employees – over 25 million of them – from the bedrock of the previously mentioned direct tax-paying cohort. So, in effect, a major part of the direct taxes taken by the government come from those who work in it. The rest of us must pay for them.
So you need to get more from others. This is where indirect taxes come in. Indirect taxes are derived from a far bigger base of population. For instance, even the lowest sections of society buy boxes of matches, from which taxes are derived. As you go up the chain of manufactured goods, the incidence of indirect taxes increase. This is where you run up against powerful lobbies. For instance, the polyester yarn manufacturers will look askance at too many reliefs and benefits given to the cotton textiles sector. Balancing the budget is the easy part. Balancing competing aspirations is next to impossible.
Thus, budgets haven’t really changed over the decades. An analysis of budget breakdowns since 1999 shows that the proportions allocated to each department have not really changed. Discretionary revenue expenditure only really goes up when GDP growth accelerates significantly, as we saw between 2009-2012. Since then things have been stagnant.
Against this backdrop, how are Modi and Jaitley faring? One must say quite heroically. Like men on a burning deck, they are distracting us with promises and hoping to stave off the inevitable – popular discontent. Take, for instance, the much-hyped National Health Protection scheme to cover 500 million people, or 100 million families, with medical cover up to Rs.500,000 (US$4.7 billion). What is the outlay for this? It is a measly Rs.300 billion, meaning that families will only save some Rs.1400 on what they pay in premiums if they are already insured.
Even here the government is being disingenuous. If this were in addition to the Rs.1.3 trillion allocated to health (it was Rs.1.2 trillion in the previous year), there would be some cause to cheer. But no, instead it comes from the existing health budget, which in effect means that this year less money is being spent on public healthcare. So if government hospitals and clinics have fewer doctors and medicines, take your health insurance and go to a private nursing home or corporate hospital instead – and see how soon the cover evaporates. In effect, this is a direct benefit to private healthcare providers and insurance companies, who will get an Rs.300 billion windfall.
Similar sleight of hand is in evidence where the government has increased the standard deduction to Rs.40, 000 for salaried persons. The take from this is Rs.80 billion. But the education budget goes up by 1%, which means an extra Rs.110 billion. So who is out of pocket by Rs.30 billion?
The government has announced that it will fund 80 million new stove and cylinder gas connections. This is an existing scheme. But reports from gas agency dealers in several parts of the country, especially those in rural areas, have reported that an extremely low number of Ujjawala scheme beneficiaries are returning for refills of their cylinders. Thus, the number of LPG connections may be rising rapidly, but LPG usage is not. The catch is that families below the poverty line – i.e those who exist on less than Rs 32 a day in rural areas and Rs 47 a day in urban areas – are simply too poor afford the market rate for LPG.
There was much expectation of an agriculture-oriented budget. Nothing of that sort has been announced. Institutional credit to the agriculture sector has gone up to Rs.1.1 trillion; it was Rs.1 trillion last year.
The Finance Minister spoke about “revitalizing Infrastructure and Systems in Education by 2022. Technology to be the biggest driver in improving quality of education. To increase digital intensity in education, it will move infrastructure from blackboard to digital board. By 2022, every block with more than 50% ST [Scheduled Tribe] population will have Eklavya schools at par with Navodaya Vidyalayas.” Fine, but show me the money? He is clearly a man for the big picture who doesn’t feel the need to go into specifics.
Am I unhappy about the budget? Why should I be? The limit for senior citizens like me for investing in interest-bearing insurance schemes doubled to from Rs.750,000 Rs 1.5 million. But as Claude Pepper once said: “At my age I don’t even buy green bananas!”