Till last year, between live TV programmes on the budget, I would hurriedly write op-ed pieces without enough time to examine the real stories that lay hidden in reams of data. Being abroad on July 5, and having regretted to comment on D-Day, I finally got a spell to dissect the budget at leisure. Here goes…
First, what is the projected nominal GDP growth for 2019-20? There are two numbers out there. The last line in the ‘Macro Economic Framework Statement’ states that “nominal growth of the economy is expected to be 11% in the financial year 2019-20”. Yet, the calculations carried out in the ‘Budget at a Glance’ are based on a nominal GDP growth of 12%. The difference is a whopping Rs 1,87,396 crore. If growth for 2019-20 is, indeed, 11%, then the projected fiscal deficit target will be 3.4% of GDP, not 3.3% as forecast in the budget. It isn’t small change.
Second, how sane is it to expect nominal GDP growth of 12% for 2019-20? Assuming a general inflation rate of 4%, it translates to 8% real GDP growth for the year. That’s an unrealistic target. According to official data, in 2018-19 India’s real GDP growth was 6.8%, and the nominal was 11.2%. We saw a steady decline in growth throughout last year: from 8% in Q1 (April-June 2018) to 7% in Q2, then 6.6% in Q3 and finally 5.8% in Q4. While the numbers aren’t out yet, many believe that April-June 2019 will also show sluggish growth — somewhere between 5.5% and 5.7%. In such a scenario, how can one blithely project 12% nominal, or 8% real, GDP growth? Other than to claim that having won 303 Lok Sabha seats, it must be so.
Third, should we worry about the tax revenue numbers? In a word, ‘Yes’. During 2018-19, the finance ministry got a fascinating working insight — that sources of tax revenue were interchangeable. There was a huge deficit from the goods and services tax (GST), with the revised collection being some 11% less than what was originally budgeted, or a shortfall of Rs 1,00,000 crore. Faced with this gap, the revenue department went after corporate taxes, including the associated surcharges and cess. Thus versus the budget estimate of Rs 6,21,000 crore for 2018-19, it collected an extra Rs 50,000 crore forked out by businesses in the second half of the year.
Load on Corporate Tax
I worry about this in 2019-20 as well. With the budget accounting for only a 3% rise in GST collection between 2018-19 (revised) and 2019-20 (budget), it has again put disproportionate pressure on corporate taxes. In a scenario of 11% nominal GDP growth, taxmen must collect over 14% more in corporate taxes, surcharges and cess — amounting to Rs 7,66,000 crore, which will exceed 31% of gross tax revenue. I expect torrid times, especially in the December 2019 and March 2020 instalments, when the screws will be tightened in no uncertain terms.
Fourth, will there be no end to an ever-growing reliance on cess and surcharges? In an era of growing fiscal federalism, these are used precisely because not a penny of their receipts has to be shared with the states. In 2017-18, these surcharges and cesses (excluding the GST compensation cess) accounted for less than Rs 92,000 crore, or 4.8% of gross tax revenue. In the revised estimate of 2018-19, these increased to over Rs 2,94,000 crore, or 13% of gross tax revenue. For 2019-20, these exceed Rs 3,28,000 crore, or 13.3% of gross tax revenue. Will this shady business ever come to an end?
Fifth, given the past record, why should we accept the huge disinvestment target of Rs 1,05,000 crore? This is where we have either failed miserably with far more modest targets, or have offered gloriously entertaining interpretations of stake-sale to claim achievement. Seeing is believing, especially over a nine-month period. We haven’t seen anything yet. Not for a long while, I may add.
Sixth, are we getting back to creeping protectionism? In paragraph 133 of her budget speech, finance minister Nirmala Sitharaman said, “On the customs side, my proposals are driven with the objectives of securing our borders, achieving higher domestic value addition through ‘Make in India’, reducing import dependence, protection to the micro, small and medium enterprises sector, promoting clean energy, curbing non-essential imports, and correcting inversions.”
Raising Tariff Walls
Two paragraphs later she outlined some of this glorious stuff — with tariffs being increased on cashew kernels, PVC (polyvinyl chloride), vinyl flooring, tiles, metal fittings, mountings for furniture, synthetic rubbers, marble slabs, optical fibre cable, CCTV (closed-circuit television) cameras, digital and network video recorders, not to mention imported books. We are back to where we were for decades on end — hiking customs duties to benefit friends.
Seventh, sovereign foreign borrowings? I can see the lure of it. We have no domestic funds. We need investments for infrastructure and industry.
So why not leverage the sovereign’s imprimatur to get ‘cheap’ foreign funds? This temptation has risks. And without decrying it outright, it is necessary to underscore the perils in no uncertain terms. Be very, very careful.
Eighth, how was it overall? It was better than Arun Jaitley’s first budget. But is that praise?
The writer is Chairman, Corporate and Economic Research Group (CERG) Advisory