The Union Budget brings us some fresh thoughts as every other year, the expectant populace waits for sops to be announced and some get happy about it, while some are not.
The Budget, by the way, is a zero sum endeavor; it must balance revenues with expenditure.
On the revenue side the government earns by taxes of all kinds, including on goods and services, while on the expenditure side there are two kinds, revenue kind and capital kind. If the government does not invest in the capital kind, the impact for the slightly longer term would be poor.
If the government must increase spending, which is a way to provide growth, it must also collect more in taxes, which would be counter-productive to growth as people would have to postpone spending in order to pay more for goods or services or for paying income tax. So it is always a balancing act.
India has the biggest challenge for any government that the direct tax base is one of the poorest in the whole world with a very small number of people paying taxes. So the governments have no other way but to tax the goods and services, which currently is anything between 18% to 22% of the price of goods and services on the aggregate level. Imagine for developed nations, this would be as low as 8%, which only goes to show how spending by the common man is incentivized, which reduces the need for governments to spend to keep the GDP moving.
The budget paper from the purely economic point of view should be read as like any balance sheet, first we must see the revenue side of the statement and then what is the expenditure that the government is proposing. No budget can ever balance each other and especially for a growing economy where state capacity is yet to reach optimum levels.
The fiscal gap, known as the fiscal deficit is then funded by various means, some of which has long term implications for the populace in general.
The fiscal deficit as proposed in the 2017 budget is 3.2% of GDP, which has remained the same as the actual of last year, which is commendable. So in effect once the revenue side is known, the spending side can be arranged by adding the deficit target on the tax revenues.
But sometimes, the government has compulsions to spend and it could well be that the expenditure side is arranged first and tweaked to get to the fiscal deficit number. The financing of the deficit can come from only borrowing either from the populace or from the external sources of funds.
Let me analyze two sides of this budget, the revenue side and the expenditure side. It would give us a picture of how big is the size of the government expenditure.
The gross tax revenue for FY18 stands at Rs.1911579 Crores or $281 Billion. The biggest items are:
- Corporation Tax: Rs. 538745 Crores or $79 Billion
- Income Tax: Rs.441255 Crores or $64.9 Billion
- Customs: Rs.245000 Crores or $36 Billion
- Excise: Rs.406900 Crores or $60 Billion
- Service Tax: Rs.275000 Crores or $40.4 Billion
So if the meager 3% pay income taxes, they actually end up for the 23% of all government’s revenue receipts. It is that important.
The good thing about this is that over last year the percentage change in income tax receipts is 24.9%, which is a commendable achievement of the government.
The not so good thing is that the Customs receipts are slated to go up by 12.9% from a very low number of 3.2% for last year. This would mostly involve the oil pool, where the overall price of the input has gone up and it also involves many other commodities where the same will hold good. Bulk of these commodities touches the poorer sections and they would have to pay more directly or indirectly as they consume goods or services.
The service tax collections are shown as following a lower trajectory of growth (11.1% against 17.1%) for FY18 against FY17; perhaps this subsumes the impact of GST. The same is true for Excise (5% against 34.5%), which could also be due to much higher collections in FY17 from oil related products.
If we now turn our attention to the revenue expenditure, it stands at Rs.1836934 Crores or $270 Billion.
The capital expenditure is much smaller at $46 Billion.
Revenue expenditure has broadly two categories, one is the Developmental Expenditure and the second is the non-developmental expenditure. Apart from this there are statutory grants to States, loans and advances, etc.
The people of the country are more interested to know the developmental expenditure, whereas the government has to also provide for the non-developmental expenditure, like Defense, Border services, Organs of state services like judicial, fiscal services, pension etc.
I would argue that some of these non-developmental items are by nature developmental for the country, as without a strong judiciary you cannot create the institutions you need, but on the other hand spending too much on the others could well be derogatory to the economic prosperity of the larger populace.
The developmental areas include Social and Community services, general economic services, Agriculture and allied services, Fertilizer subsidy, Power and Irrigation, Transportation, Public Works, Grants to states.
Every time it is tight rope to see how these allocations play against the other. I have rarely seen the allocations changing drastically, but this budget has continued to put emphasis on the agriculture and allied services, general economic services and on transportation and housing, which has come under infrastructure. The affordable housing push comes as a welcome step (completion of 1 Crore houses by 2019). Starting with announcements on Rural Sector expenditure adding up to Rs.3 Lakh Crores, MGNREGA, electrification completion of all villages, safe drinking water, Swatch Bharat, Skill India Mission, Mahila Shakti Kendra, Welfare of Women and Children, Efforts on Kalazar and TB, modification of labor laws, the list simply goes on.
The budget if read from the point of view of expenditure vs receipts with the budgetary allocations would make a dry reading with most of the numbers not making any sense. It is only when the pie is re-constructed that one would see where the increased focus has been put.
The bigger items as flashed in papers may not be the ones that impact a common man.
For all you know, if the common man is not a tax payer he might still be impacted more from the indirect tax he pays through the change in customs duty or excise or the service taxes. Thankfully the GST over a period of time would be working in concert for the common man.
The budget is a preamble and we now have to wait and see how the country moves in the post GST phase.