India’s union budget for fiscal 2019-2020 started with a controversy over “missing numbers” that came from no less than a member of the Prime Minister’s Economic Advisory Council. Writing in the newspaper Business Standard, Rathin Roy pointed out that while the union budget claimed revenues close to 17.3 trillion rupees, the economic survey report published a few days earlier had pegged it at 15.6 trillion rupees.
The “missing” 1.7 trillion rupees figure was discovered a few days later as economists pored over both documents to figure out what had happened. In many ways, the controversy was emblematic of the disappointment expressed by nearly everyone with the budget.
Prime Minister Narendra Modi’s massive win for a second term in April 2019 had raised expectations for some bold moves to revive a lagging economy. But the finance minister’s presentation of the union budget was quickly followed by a spate of controversies, as well as thumbs down from the markets. The markets fell sharply by 800 points, registering the second-biggest fall in 11 years. That represented a paper loss of 3.2 trillion rupees for equity investors.
If that was bad, there was much worse news in store.
The mystery behind the 1.7 trillion rupees from the union budget was traced to a set of different data sets. While the authors of the economic survey used the latest revenue figures made available to them, those who worked on the union budget used the older estimates that were prevalent in February this year. In every general election year, held after a five-year gap, two budgets are presented. The interim budget is presented in February and the final budget is presented as the new government takes over after the general elections. In this case, the Modi government came back to power and presented the final budget for fiscal 2019-2020.
However, they used the older figures, even though the latest revenue estimates were in from the controller general of accounts of India. “This led to the ‘missing’ 1.7 trillion rupees because the economic survey used the latest figures, while the union budget used the February estimates,” a senior finance ministry official explained.
But that created a new problem for the government. “It is not clear why the government chose two different figures,” the official said. “The best explanation is that the government had done the same in 2014, when the government changed and prime minister Modi took over.
But other economists who have been following the budget were quick to point out other lacunae. “The economic survey says that we are growing at a nominal rate of 12%, but revenue collections are at 9%. How is that possible?” asked professor Jayati Ghosh, who teaches at the Jawaharlal Nehru University and is a well known economist and commentator on all fiscal matters.
“This raises two issues,” Ghosh said. “One, we don’t know why the government used the older projections for revenue even though we now know that revenue collections are down. Second, it is impossible to imagine that any economy can increase from a 9% to a 25% [growth] as claimed by the government. That is the basis for its other claims, which simply don’t make any sense now,” she told Asia Times.
Ghosh is also worried that the shortfall in projected revenues will lead to a shortfall in expenditure. “But there is no clarity from the government on where the shortfall is,” she said. “What is the use of having a finance minister presenting a budget to Parliament if there are no details of where the money is going? Then the budget speech is as good as an election speech and certainly not economics.”
A few days after presenting the budget, union Finance Minister N Sitharaman clarified that there was no reduction in any planned expenditures. However, she did not offer any specifics to comfort economists. Many blame two clear moves by the earlier Modi government for the shortfall in revenues.
“Demonetization in November 2016 hit the informal sector very hard and it is now clear that it has also bled into the formal economy,” Ghosh said. “Demand is down, jobs lost then have still not been revived and, with expenditure down, it is unlikely that it will revive the economy.”
Most agree that the government’s math is not adding up and that there will be a significant fall in revenues that could even lead to a tax collection rampage.
No reforms and less spending
“I, too, join the ranks of those disappointed (by the budget) for two reasons,” Yamini Aiyar, president of the think tank Center for Policy Research told Asia Times. A keen observer of the budget and governance, Aiyar led the think tank’s accountability initiative studying transparency in budgets, allocations and spending.
“First, against the backdrop of a resounding [election] mandate, this was the moment to address some of the deep-seated reforms needed to address wicked problems in key sectors of the economy such as agriculture and middle and small scale enterprises,” she said.
The gains made from the 1991 structural reforms of the Indian economy, she said, “have reached their logical end and India needs to realign its economy.” This was clearly not happening and the economy was likely to slow down even further, she said.
Quietly, officials in the union finance ministry agree with these assessments. They point out that so far most of the policy decisions taken are mostly incremental, and unlikely to revive the economy. “We will not see any uptick in investments,” another senior finance ministry official said. “And those will not go up, because some fundamental issues such as labor reforms have not been undertaken. Globally, investors are not seeing the India story any more.”
Economists are also worried that key parts of the Indian economy are in deep distress.”The data released last month substantiates” the distress, Aiyar said. “Agriculture growth, unemployment, private investment – across all indicators, the economy is in distress. The rural economy challenge is greater because of the global context: the fall in global commodity prices and deep structural issues related to agriculture and the relatively slow pace of transition from farm to non-farm employment. This needs urgent attention.”
Others like Ghosh are also worried that the shortfall in central revenues will lead to a shortfall for states. “They depend on the devolution of funds and if they are down for the federal government, then the state’s finances are also in for a hard time,” Ghosh said. “The shortfall in revenues from the Goods and Services Tax that was implemented earlier are way below projections. So state governments will have to do with a lot less. This means a number of proposed schemes and projects will have to be rolled back or shelved,” said Ghosh.
Individuals are also worried since there has been no major relief in direct or indirect taxes. However, with the government adding a surcharge to every liter of fuel sold, it is likely to hit household budgets and add to inflation. These are part of the interim measures by a seemingly desperate government to mop up funds to meet expenditure as tax receipts continue to be in free fall. For the industry as a segment, the shrinking in demand has hit nearly every sector. The budget, most agree, does very little to address the fall in demand across goods and services.