By Shubhra Agrawal
With elections in Gujarat just around the corner, it is not surprising to see that the Gujarat budget is a populist one. Finance minister Nitin Patel presented a budget of Rs. 1,72,179.24 crore on Tuesday with surplus estimates of Rs. 521.3 crore for 2017-18, adding that the overarching thrust of the budget was to “optimise inclusive development of human resources and trunk infrastructure through effective and transparent implementation.”
The freebie phenomenon
In an attempt to cater to the demands of people of all sections, the government announced, for instance, nominally-priced digital tablets to 3.5 lakh students, subsidized food for 50,000 construction workers and several other such freebies to specific groups of people.
The budget did not include any increase in taxes – a relief for the middle class, no doubt – while agriculture, education, and health saw an increase in the share of budget allocation.
With regard to the former in particular, the government announced that it would provide a subsidy of Rs. 4011 crore to support power connections currently under construction in addition to providing means for establishing 1.25 lakh new electricity connections. The micro irrigation expansion scheme, too, has now been expanded, and the state will now provide 50 % to 70% subsidy for general farmers and 75 % to 85% for SC/ST farmers.
Is a surplus revenue beneficial?
A research report by securities firm Nomura recently analysed the financial position of 18 states in India and ranked these states based on five financial parameters: fiscal deficit or surplus, revenue deficit or surplus, share of own taxes in revenue, share of capital expenditure in total expenses, and interest payment as a share of expenditure. Gujarat stood first amongst the larger states and second overall. This comes as no surprise, given the state’s higher capital expenditure spending and greater reliance on self-generating taxes. But the state also has a negative revenue deficit of -0.7, and this surplus revenue has several implications for fiscal stability in Gujarat.
[su_pullquote]A surplus budget is always favorable in the wake of a global economic crisis. It helps ensure that credit ratings don’t take a hit and price pressures don’t get generated.[/su_pullquote]
A surplus budget is always favorable in the wake of a global economic crisis. It helps ensure that credit ratings don’t take a hit and price pressures don’t get generated. All of this boosts the confidence of investors, leading to greater investments in the region. On the other hand, budget deficit leads to growing levels of debt, which is not sustainable over a long period of time since it leads to higher taxes and consequently, a cut in expenditure on welfare schemes.
A surplus budget, however, can also spell trouble: a surplus budget indicates that the government is unable to utilise its resources effectively. Improper usage of additional funds might lead to an economic downturn coupled with inflation, ultimately leading to a fall in income and employment. However, a government budget surplus can also have a deflationary effect on an economy.
While a budget surplus might make sense when an economy is roaring along and high demand is pushing wages and prices up, at the wrong time, it can dampen economic growth by pulling in more taxes than the government spends.
Whether this surplus budget will draw more investment to the state or tank economic growth remains to be seen.
Featured Image Courtesy - LiveMint
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