Thursday, Dec 01, 2022

Who will pay for sops?

Government’s claim that structural changes to the economy are paying off, and that is being used to give back to the people, is problematic.

Interim Union Budget, Budget 2019, PIyush Goyal, India farmers, GST, lok sabha elections, narendra modi govt, new income tax slab, india GDP, indian express Finance Minister Piyush Goyal (C) displays a briefcase containing the Union budget to be presented at the Parliament today, outside his North Block office in New Delhi. (PTI Photo/ Arun Sharma/ File)

The Interim Union Budget 2019 is no less than a full budget with changes in taxation and announcement of lucrative schemes for various sections of the population. The recent losses in three major assembly elections rang alarm bells for the ruling dispensation. With the general election around the corner, it had to act to regain the support of various segments of the population. The government’s policies in the last five years have caused distress to farmers, youth, small businesses, the cottage industries sector and minorities.

Small and marginal farmers will get Rs 6,000 per year. Concessions on credit and crop insurance to farmers have been announced. There is a pension scheme for unorganised sector workers. The lower middle classes have got concessions in income tax. The upper middle class has got concession in taxation on a second house. There are schemes for the SCs, STs, women, nomadic tribes and senior citizens.

There is no proposal for additional taxation. Given that in the current year, tax collection was lagging behind and the fiscal deficit was running way ahead of the target — 114 per cent in the seventh month itself — next year could be worse with additional expenditures but no proposals for raising additional revenue. More taxes are not sought to be raised lest some section feels hurt and that is undesirable in an election year. The rich could have been taxed more through a wealth tax or a cess on corporation tax. Actually, the corporates were expecting a reduction in the tax rate from 30 per cent to 25 per cent, announced two years back, but they would be happy that the tax rate has not gone up.

The budget shows only a marginal rise in the fiscal deficit to 3.4 per cent in spite of the planned new expenditures and tax concessions. But if the revenue projections turn out to be incorrect, the deficit would indeed be higher.

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Is the government now reaping the benefits of the structural reforms that it carried out in the last five years — demonetisation, digitisation and GST? In the budget speech, it was claimed that demonetisation has expanded the tax base, leading to higher direct tax collection. Digitisation and GST are also supposed to do the same by expanding the tax base. It is claimed that the number of tax filers has doubled in the last few years, but the direct tax to GDP ratio has risen by 0.3 per cent last year — hardly much of a rise.

The GST collection this year is short by about Rs 1 lakh crore. Thus, tax collection is not showing high buoyancy. Non-tax revenues are also not very buoyant. There was pressure on the RBI to announce a special dividend and pass on revaluation reserves (a few lakh crore) to the government. This did not materialise due to resistance from the RBI. The government wanted this money to announce big concessions. The wonder is that without this, many concessions have been announced and without the fiscal deficit rising.

All budgets indulge in creative accounting and the current one is no exception. There is no harm in announcing higher revenues and higher expenditures. One can always correct these figures subsequently. Public memory is short and few remember last year’s figures.


Given the recent controversy on unemployment, creation of new jobs, GDP and its growth rate, the data pertaining to the Indian economy has become highly suspect. Most are incredulous that the rate of growth has been shown to be the highest in the year of demonetisation since, by all accounts, the economy was badly hit, starting November 2016. It hardly recovered when it was again hit by a structurally-flawed GST. The unorganised sector has been declining since then.

Unfortunately, the data for the unorganised sector comes with a big lag and it is implicitly assumed to be growing at the same rate as the organised sector. So, the government can claim that the economy was not impacted by the shocks. But, as this author has argued before, if the data from the private surveys is taken into account, the rate of growth of the economy would turn out to be around 1 per cent and not 7 per cent to 8 per cent. This slow growth is consistent with the problems relating to employment, the cottage sector and farmers.

Data also vitiates budgetary calculus. So, tax revenue growth is sluggish because of the low rate of growth. But if the rate of growth is around 1 per cent, shouldn’t the problem be more acute? Not really, because most of the taxes are paid by the organised sector which is growing.


Effective direct taxes are paid by about 1.5 per cent of the population even though about 6 per cent of the population files tax returns. Ninety-five per cent of the GST is paid by 5 per cent of the businesses in the country, according to the finance minister. Small businesses are largely exempt and do not have to register or they are under the Composition Scheme.

Thus, if tax collection has not suffered more despite the rate of growth falling to 1 per cent, it is due to the growth of the organised sector. Clearly, to the government and the economy, the unorganised sector matters less and less.

The government claims that the structural changes it brought about are paying dividends, which are being used to give back to the people. But these changes hurt the vast unorganised sections way beyond what is now sought to be given back. The drop in the rate of growth to around 1 per cent means lakhs of crores of income lost by these sections. While the increase in inequality does help raise some resources, that is inadequate to fund the various schemes now announced. It required creative accounting in the budget.

All this points to the belief among the rulers that in economic terms, the majority matters little. However, their votes count. So, near the elections they have to be appeased with some sops. The coming elections will once again be a test of such a hypothesis.

The writer is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences

First published on: 13-02-2019 at 12:04:06 am
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