By Yadul Krishna
Indias Finance Minister, Arun Jaitley, just gave his fifth and final Budget speech at the parliament recently. This budget, for the country and the Bharatiya Janata Party (BJP)-led NDA government, will go down as a crucial one.
Importance of the budget
A couple of factors make the budget very important. Firstly, it is the first budget that the country is witnessing after having one of its major economic move being rolled out – the change of taxation to the Goods and Service Tax (GST) system. India has already witnessed a steep decline in its GDP after the third quarter of last financial year. Thus, the policy moves have its own stake in forming the budget policy, whether it be on the allocation side or on the understanding of the revenues to be generated. So, it becomes an important factor in the planning of the fiscal policy as well as the fiscal deficit expectations accordingly for the upcoming financial year. Secondly, due to the harsh repercussion that the government had to face on grounds of the aforesaid reasons and the elections to the lower house is getting geared, the BJP government had to wrap the scene up and come up with an election-friendly budget that is seemingly more to the welfare side.
Reading between the lines
It is easy to be impressed and swayed by the brilliant oratory skills of our finance minister, However, the government has started presenting the budget with programs that are not just impossible to implement with the available resources, but also will have an adverse effect on the budget deficit targets even if it is implemented in one go. However, the budget has taken the form of a populist one, giving the government an inclusive face, whereas the truth of the situation is that there is nothing much in actual terms of effect, other than it being negative. Despite the fact that the total expenditure has come down to a 13.04% share of the Gross Domestic Product (GDP) compared to the former year, the term contractionary budget has itself become a cliche in analysing the budgets of India in the recent years. The budget has also failed to exhibit the expenditure in real terms.
It is practically impossible to have all these goals in the budget achieved with the fiscal deficit target, which even now is itself higher than the expected target i.e the schemes proposed in the annual budget will only make the GDP look more unfeasible with the 3.3% projected fiscal deficit. Also, as asserted by the finance minister, the target to attain a hike in economic growth of 7.5% in GDP by the next fiscal also becomes unattainable.
Failure to remedy demonetisation and fiscal consolidation issues
Since the economy is yet to recover from the disastrous effects of demonetisation, the budget should have had proposals about investing in the needed sectors, thus creating demand in the economy and to solve those issues that came as a byproduct of demonetisation, like revival of those in the informal sector and providing people with more employment opportunities. However, none of this has happened, except that they have come up with proposals of drastic cuts in the payments that were to be spent on education, social welfare and development of youth, women, and children. So, as aforesaid, if the government fails to create demand for goods and services in the economy, like what has always happened in the past, the move can even drive the Reserve Bank of India (RBI) in cutting down the interest rates which will become difficult to catch up. This budget has high complications with respect to fiscal consolidation. The government has allowed for fiscal slippage and this failure will have huge effects on the economy. The deficit for Financial Year (FY) 17-18 was kept higher to 3.5% than the target of 3.2% and this year also it fails in keeping it to the target of 3%, raising it to 3.3%. Also, the move of the government to increase Rs 50,000 crore worth further market borrowings of dated government securities will also lead to elevated fiscal slippage which will hinder economic growth recovery by conserving higher yields and getting the lending of rate cuts delayed.
Consequences of failure to meet fiscal deficit target
There are several consequences if the targeted fiscal deficit fails. For instance, the investors who buy bonds will yield higher rates if there is an increased amount of borrowing.This in turn, in all respects, will affect the interest rates. Another such problem relating to this is the emergence of credit risk. As of raising capital receipts in the present form is concerned, the governments assurance need not be taken seriously by the investors, which for them can be costly, and in turn, effects planned investments.
Having a high fiscal deficit also means that the government is not able to generate more than that of what it is spending. Therefore, this propels the government to increase the taxes in many ways that best suits them so its debts can be payed-off in the future. This process can, however, not just be concerned with higher taxes, but can also be with higher inflation. And if the expenditure increases up from the present target, as in cases of rising in international oil prices, it again will lead to further widening of the fiscal deficit.
Perhaps, there is even a bigger issue with having a high deficit. It minimises the possibilities of retrieval of the economy if we are to face any kind of unanticipated economic changes in the future that can happen rapidly, even if such event occurs in the global economic scenario. Keeping in mind the factors stated, the government, through its regressive budget, has shown its apathy towards the people of the country.
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