On February 1 this year, Prime Minister Narendra Modi had said: “This is an interim Budget. This is just a trailer of the Budget which, after elections, will take India on the path to development.” As Finance Minister Nirmala Sitharaman rises to present the full-fledged Union Budget for the current financial year, she faces the arduous task of showing the complete picture. On the one hand, voters who have returned the BJP-led government with a resounding majority expect that the full-year Budget would further expand the welfare measures announced in the interim Budget. On the other, India’s economic growth has faltered further since the presentation of the interim Budget, making it that much more difficult to come through on those promises.
Lower than expected tax revenues are a spoiler
The first key variable to watch out for is the Fiscal Deficit (as a percentage of GDP). Fiscal Deficit reflects the total borrowing requirement of the government. The previous Modi government had done a reasonable job of limiting fiscal deficit. For the current financial year too, the fiscal deficit had been budgeted at the 3.4% level. However, this number may see some change given the adverse revenue deficit (the excess of revenue expenditure over revenue receipts) for the last financial year.
As the table alongside shows, actual (A) revenue deficit for 2018-19 is worse than the revised estimates (RE) for the last financial year. That, in turn, is largely because of a massive gap of Rs 1.67 lakh crore between the expected tax revenues for the past year and the actual figures. This gap is mainly on account of lower revenues from GST, customs duty and corporation tax. The fall in revenues meant that both the actual revenue expenditure and capital expenditure were lower than the revised estimates for the last financial year.
It is clear that the finance minister would have to shore up total revenues, especially tax revenues, if she wants to meet increased expenditure demands. Without this balancing act, the fiscal deficit for the current year would likely suffer.
Nominal GDP growth is a worry
What makes this job more difficult for her is the fact that India’s economic growth seems to be decelerating; India has already lost its cherished “fastest-growing” major economy tag to China at the end of the fourth quarter in 2018-19 when the real GDP grew by just 5.3% — the slowest in 20 quarters. Almost across the board, observers, including the RBI, have rolled back India’s real GDP forecast for the current year. A crucial variable in this regard is the finance ministry’s assumption of the nominal GDP growth for the current year. The nominal GDP growth (that is GDP growth at current prices) is the most fundamental building block of the Budget-making exercise. The government’s assumption of the nominal GDP growth decides the revenue buoyancy, which, in turn, provides clarity about the possible level of expenditure it can afford, given a pre-stipulated fiscal deficit target. In the interim Budget, then finance minister Piyush Goyal had assumed a nominal GDP growth rate of 11.5%. However, if growth is faltering, this may have to be revised down. Doing so, in turn, would further bring down revenue projections, and by extension, curtail the government’s capacity to spend more. As such, the assumption about the nominal GDP growth is another key variable to watch out for in this Budget.
What about the welfare schemes?
Apart from these major macroeconomic variables, there are four key categories of data that would be keenly observed given the political economy surrounding them.
The first relates to the expected dividends from India’s central bank. For while now, the government and the RBI have been at loggerheads about the level of dividends that the RBI needs to provide the national exchequer.
The second relates to the overall disinvestment proceeds the government hopes to raise this year. This is crucial not just because of the monies that any disinvestment would bring but also for the signal it provides about the new Modi government’s intent to reduce government ownership in the broader economy.
The third and related category is the overall budgetary allocation towards the recapitalisation of public sector banks. Again, not only will it have a bearing on the overall fiscal deficit and the government capacity to fund social welfare scheme, but also provide a window into the mind of the new government’s approach towards reforming inefficient public sector banks.
The last category would have to be the allocations to the flagship schemes of the first Modi government. In the last five years, and especially in the last two, the previous government had announced several welfare schemes such as PM-KISAN (direct income transfers for small farmers), income tax exemptions (for the lower middle class), pensions for the workers in the unorganised sector as well as the Ayushman Bharat scheme for providing healthcare cover to the poor. However, the allocations in many such schemes were considered inadequate in relation to the ambitious targets that had been set for them. For instance, for Ayushman Bharat, which is arguably the world’s largest health insurance scheme as it seeks to provide health insurance of Rs 5 lakh to 10 crore poorest families (that is 50 crore individuals), the current Budget allocation of Rs 6,400 crore is hardly enough.