Modi’s election budget widens fiscal deficit

The Narendra Modi-led government presented its last budget on February 1. Normally, a pre-election budget is meant to provide enough funds for the government to function until a new government is set up and it delivers a budget.

The post-election budget is expected to be presented in July. However, politicians have tended to disregard convention in recent years. Indeed, the Modi government has shown little regard for propriety or niceties in its five years in office.

The Interim Budget 2019 turned out no different. And it, without a doubt,  seeks to make amends for all the economic policy errors the government made during in its time in office, be it demonetization, jobs crisis or farm policy failures related to minimum support prices and procurement.

Fiscal gifts

The Interim Budget delivers fiscal goodies to many groups. The pension scheme Pradhan Mantri Shram Yogi Mandhan, with its token allocation of Rs. 5 billion, is directed at unorganized sector workers who suffered jobs and income losses because of demonetization.

The income support of 6,000 rupees a year promised to farmers under the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), inspired by Telangana’s Rythu Bandhu welfare program, aims to alleviate farm sector distress.

To compensate for the lack of job opportunities for educated youngsters, the Interim Budget promised income tax and other tax moves for middle-class households. But no meaningful plan for creating jobs was announced.

The Interim Budget’s fiscal deficit target for 2018-19 was pegged at 3.4% of GDP, higher than the amended target of 3.3% of GDP. It is widely expected that once the actual numbers for the year come out in May, after the financial year’s end on March 31, the slippage is expected to be higher, possibly much higher.

Widening fiscal deficit

For 2019-20, the fiscal deficit was put at 3.4%, higher than the Fiscal Responsibility and Budget Management target of 3.1%. But soon after the budget speech ended, global ratings agency Moody’s Investors Service said the government’s inability to meet such targets for two consecutive years was a big “credit negative”. It expressed doubt that the 3.4% fiscal target for 2019-20 could be met.

Besides the populist schemes, the next government’s inheritance will also be lazy fiscal consolidation, despite the tax bonanza it collected from consumers of petroleum products on account of low global crude prices for most of its tenure.

Part of the problem has been the inability to put an end to creative accounting that successive governments have resorted to. Last year’s budget, for instance, allocated Rs 900 billion for compensation to states on account of revenue lost due to the transition to the Goods and Services Tax (GST).

The Interim Budget shows that the compensation actually paid during the year by the Modi government to the states is going to be just Rs. Rs 517 billion. But for 2019-20, the Interim Budget has allocated Rs 10.12 trillion for GST compensation payments to states. This shows that the Modi government plans to shift a substantial portion of compensation due to states for the year 2018-19 to 2019-20.

In other words, the Modi government may have passed on a significant burden for the last year of its tenure to the new government.

A second trick employed is the use of over-optimistic estimates for several sources of revenue. Recent spectrum sales did not yield much, however, with 19% lower receipts in 2018-19 than what had been budgeted last year (Rs. 392 billion). And yet, the target for spectrum receipts in 2019-20 has been set higher at Rs. 415 billion.

Even if a new government gets elected mid-year, it seems unlikely that the Interim Budget’s promises to farmers and middle-class income taxpayers will be reversed.

So, these populist outlays will add more than Rs. 1 trillion to the next government’s costs on account of revenue foregone and increased expenditure due to the income tax rebate for the individuals with income up to Rs. 500,00 (Rs. 185 billion) and allocation towards PM-Kisan (Rs. 750 billion).

As a result, not only will the next government have to pay for the Modi government’s economic policy mistakes, it will also have to bear a considerable burden of its bid to win back their support in the coming election.

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