Budget 2020: Tactics over strategy
There are questions about fiscal deficit, tax reforms and expenditure management
One way to understand the budget presented on Saturday is to focus on three key themes — the fiscal deficit, tax, and expenditure.
The estimates presented in the 2019-20 budget were unrealistic, because the actual tax collections in 2018-19 had been much lower than those used as the basis. The corporate tax cut was also subsequently announced. Therefore, tax revenues were expected to fall short.
The conflict over the Reserve Bank of India’s economic capital came to a head at an opportune time, yielding additional non-tax revenue. The 15th Finance Commission also gave a relief by reducing states’ share of centre’s tax collection by 1 percentage point. However, the shortfall in tax revenue and disinvestment receipts was much larger.
Seeing these difficulties and expecting them to continue, the government has invoked the escape clause in the Fiscal Responsibility and Budget Management (FRBM) Act, and allowed itself additional fiscal deficit of 0.5 percent of GDP in 2019-20 and 2020-21. The statement to justify this is comprised of three short paragraphs, saying that the deviation is because of “the structural reforms such as reductions in corporation tax”. Overall, expenditure increased from 12.2 percent of GDP in 2018-19 to 13.2 percent of GDP in 2019-20 – the first fiscal expansion by Union government in recent years.
Two points need to be considered regarding the deficit estimates.
First, the government has now made it a norm to rely on extra-budgetary resources (loans from small savings fund to public sector enterprises; public sector enterprise bonds repaid by government) to finance its expenditure. Until last year, these seemed to be measures to avoid invoking the escape clause of the FRBM Act. This year, the government has invoked the escape clause, but it has also made the reliance on extra budgetary resources more formal.
In 2019-20, ₹1.51 lakh crore were budgeted for Food Corporation of India (FCI) for food subsidy, but the revised estimates show only ₹75000 crore. The FCI is borrowing the remaining amount (and more) from small savings. This practice of putting the subsidy on budget at the beginning of the year, but giving less was going on since 2016-17. In 2020-21, the budgeted amount itself is less, and it is now a norm that loans from small savings will fund the food subsidy bill, among other things.
Second, even the relaxed fiscal deficit targets will not be easy to meet. In 2020-21, the budget projections of gross tax revenues are ambitious, given the continuing slowdown and recent experience. The budgeted disinvestment and spectrum auction receipts are very ambitious. The state of the telecom sector does not support robust proceeds from spectrum auctions. Big ticket strategic disinvestment could help meet the target.
While tax collection has been disappointing in recent years, tax disputes have been rising. Income tax collection under dispute increased from ₹2.2 lakh crore at the end of 2017-18 to about ₹4 lakh crore at the end of 2018-19. Corporation tax collection under dispute had increased from ₹3.07 lakh crore in 2016-17 to ₹3.99 lakh crore in 2017-18.
Perhaps this is encouraging the government to change its approach.
The FM expressed the intent to make the tax system more taxpayer friendly by empowering the taxpayer through a charter, reducing conflict with taxpayers, and other measures. This is a good step. However, the announcements in the budget are only a modest beginning.
While the taxpayer’s charter appears to be a good move, the amendment to the income tax act says that the tax authorities will adopt and declare a charter. This is a principal-agent problem. If the Parliament or the Minister want to empower the taxpayers, they must give the basic charter in an instrument that cannot be changed by the very tax authorities whose discretion the charter will limit. This is more important because the division between tax policy and tax administration is not sharply defined in India. Further, a charter needs to be backed up by systems to enforce it. Otherwise, it is just a few nice, but ineffective, words.
The scheme to reduce the number of disputes waives interest and penalties for those who settle. However, this only focuses on the symptoms of the problem. The amnesty will benefit those who think they are going to lose in the dispute, while those who think they are right are likely to continue the dispute, especially if the amounts are large. Even though it will lead to a reduction in the number of disputes, and might also benefit some hapless taxpayers who are tired of the dispute, the amnesty is asymmetric in the wrong way. Therefore, it is not clear whether it serves public interest. Disputes are symptoms of the problem, and not the problem.
Building a tax administration that is both effective and fair is a big challenge for any country. While the government has expressed its intent, it should begin by reforming the tax laws and making structural changes to tax authorities.
Looking at the expenditure decisions in the budget, two things are becoming clear.
First, while the government has reformed the mechanisms of expenditure — of procurement processes and scale up of direct benefit transfer — it has little imagination to strategise on expenditure allocation. It seems to assume that every social and economic problem is amenable to a small government scheme. Experience tells us that such schemes keep piling up, and are easier to start than to close. Since there is no expenditure strategy, strange decisions are taken. In a difficult time as this, allocation to MGNREGS has been cut substantially.
Second, some of the decisions taken during the previous tenure of the government are showing their consequences. A consequence of one rank one pension is that between 2015-16 and 2020-21 (budgeted), the average rate of increase in defence pensions is 17.3% per annum, while that for non-pension defence expenditure is 7.6%. Similarly, the cash transfer to farmers (PM-KISAN) is now a permanent part of the budget — about 2.5% of total budgeted expenditure.
Overall, one can say that in spite of its political capital, this government prefers tactics and operations to strategy when it comes to the economy.
Suyash Rai is a fellow at Carnegie India
The views expressed are personal