The introduction of Goods and Services Tax has reduced the scope of the Budget. Previously changes in excise duty were made in the Budget. Now the rates of the GST, which has replaced the excise duties, are decided by the GST Council. The Budget has no role in their determination. Yet the Budget remains important because it indicates the direction of the economic policy to be followed by the government in the coming year.
Here are some policy issues on which the Budget will indicate the direction of the government.
Question 1: Will infrastructure spending be maintained? The Government has succeeded in increasing public investments particularly in highways and railways. One can see highways being broadened and new rail tracks being laid at a breakneck speed. This increase in public investments is largely being funded by proceeds from disinvestment of Public Sector Undertakings (PSUs). This is the correct policy.
The nation had invested monies in the PSUs earlier. Now we are recycling part of those investments in new and pressing areas such as highways. Question is whether this pace will be maintained. My expectation is in the affirmative and, if fulfilled, the FM must be congratulated for the same.
Question 2: Will revenue expenditures be contained? The expenditures on salaries of government servants, subsidies and interest payments have increased along with investments in highways. Our growth rate is stuck in the 6 to 8 percent range. It is necessary to increase public investments in space research, next generation internet, genetic modification, data processing, etcetera in order to grab the growth opportunities of future and take our growth rate to the 12 to 15 percent range.
Subsidies cannot be reduced because they hit the poor. Interest payments are even more difficult to reduce because this requires early repayment of the principal borrowing. Therefore, these investments can be made only if the expenditures on salaries of government servants are reduced. Question is whether the FM will take any steps such as freezing DA, or removing from service the most inefficient 10 percent government servants every year. My expectation is in the negative.
The Modi Government is being run by the bureaucrats. Union Ministers complain that they have become servants of the bureaucrats manning the PMO. These bureaucrats would be loath to take any steps against their brothers.
Question 3: Will direct transfer of subsidies be pushed ahead? The Government has taken welcome steps for the direct transfer of subsidies, for example, on LPG cylinders. Question is whether this policy will be expanded to the direct transfer of food, fertilizer and employment subsidies? My expectation is positive for fertilizer subsidies; but negative for food and employment subsidies.
The fertilizer subsidies are largely pocketed by inefficient fertilizer factories. These do not provide opportunity for the government servants to make money. Direct transfer of this subsidy will be beneficial for the bureaucracy as it will provide an opportunity for corruption in identification of the beneficiaries. Hence this will be implemented. The food subsidy through the Public Distribution System and employment subsidy through MNREGA provide opportunities to government servants for making money hence these will not be transferred directly.
Question 4: Will deeper steps be taken to revive the Small and Medium Enterprises (SMEs)? The present low economic growth rate coupled with a buoyant share market is explained by the transfer of business from SMEs to listed large companies. Demonetization and GST have hit SMEs hard with no impact whatsoever on large companies.
The decline of SMEs has reduced demand from the ground and led to lower growth rates for the economy as a whole. At the same time, the exit of SMEs has provided a free play to large companies hence their profits are up and the share markets are buoyant. This top-heavy model of economic development is like and inverted pyramid. It cannot sustain.
The GST Council is continually taking steps to make life easier for SMEs but these steps have proved ineffective. Question is whether the FM will take stronger steps like reintroduction of reservations for SMEs to help revive them. My expectation is negative. The Government is not even cognizant of the problem, let alone taking corrective steps.
Question 5: Will direct transfer of agricultural incomes be implemented? The Budget for the current year 2017-18 was presented in February 2017. It was heralded as a game changer for the agricultural sector at that time. But nothing has happened. The focus of government programs has been to increase agricultural production through programs like the Soil Health Card. This increase in production is a curse for the farmer.
More production coupled with lower prices leads to the farmer spending more in harvesting but not getting higher returns. Agriculture has become a loss proposition in almost all advanced countries. The United States, for example, provides subsidy to its farmers not to cultivate land because more production means more loss.
The only way to increase incomes of the farmers is to provide them with incomes directly instead of through subsidies linked to food production, irrigation or fertilizers. My calculations show that the 10 crore farmer households in the country can be provided with a direct transfer of Rs 50,000 per year if the present subsidies being paid by the Union Government alone are scrapped and the money used for direct transfer.
Question is whether the Finance Minister will take steps in this direction? My expectation is in the negative. The Government does not even recognize the problem, let alone taking corrective steps.
Question 6: Will taxes on oil be reduced? The price of oil in the international markets is increasing and likely to increase further in the coming year on the back of a buoyant United States’ economy. This is leading to a demand that the taxes collected by the Union Government on fuel oil, which constitute nearly one-half of the price, be reduced to provide relief to the consumer.
This will prevent reduction of oil consumption. The price of petrol, for example, may increase from present Rs 73 a liter to Rs 85 per liter and to, say, lower consumption by 10 percent. A reduction in the taxes will lead to lesser increase, say from Rs 73 a liter to Rs 80 a liter and to less reduction in consumption. Our exports are under stress and we are unable to earn sufficient amounts of dollars.
It is prudent to increase taxes on petrol and provide subsidies on solar power to get out of the increasing import bill. Question is whether the FM will bend and lower the taxes on oil due to public demand. My expectation is in the positive. The taxes will be lowered and we will continue to sink into the black hole of oil consumption.
Author was formerly Professor of Economics at IIM Bengaluru