FY 2020 budget post script

Three Pillars

The budget analysis commentariat heaved a sigh of relief after the budget for FY2021 was revealed. Unlike last year, at least the accounting seems accurate.

So low were expectations that it was almost a pleasure to review the carefully consistent allocations across the more than 700 schemes and 300 major heads of expenditure. These soak up the Rs 30.4 trillion (around 15 per cent of GDP) – including transfers to the state governments- which the Union government proposes to spend next fiscal.

Low growth, High government expenditure

Note than GDP is slated to grow only at a nominal 10 per cent next year – a more likely target is 8.5 per cent (5 per cent real plus 3.5 per cent inflation) against the proposed increase in government expenditure of 12.5 per cent in FY2021. The implication is that prepare for a continuing slump in private investment and consumption next year with government pitching in as a substitute growth engine.

Demand creation on the back burner

The budget ignored the elephant in the room of absent demand whilst focusing on incentives to boost supply (lower corporate tax and incentives for inflow of Foreign Portfolio Investment). But It is over-the-top to diss the FY2021 budget as nothing more than an accounting exercise which has trodden the well beaten path of fiscal conservatism carved out by Arun Jaitley as Finance Minister from FY 2015 to FY 2019.

Three pillar approach, two pillar too many

Admittedly, the budget lacks a strong central theme. The three-pillar approach is two pillars too many. The three-pillars of “Aspirational India; Economic Development and Caring Society” seem a trifle contrived. None of them are distinct from each other. Consider that “environment and climate change” are more germane today to the pillar “Economic development” than to the “Caring society” pillar where it is placed.

Similarly, “Aspirational India” is more about “Industry, Commerce and Investment – read good jobs” than it has to do with “Agriculture, Irrigation and Rural Development”- all sunset areas, which should rightly be under the pillar of Economic Development.

Possibly, a desire to be seen to be working to a “scientific schema” rather than on instinct or in response to changing transactional requirements, led to the putting together of the three-pillar story board. Sadly, it does little to dilute the skepticism with which analysts now approach the annual budget exercise.

Demand – The missing central pillar

Many analysts expected the central theme to be a massive demand boost – putting money directly into the pockets of the bottom 40 per cent of Indian families, thereby enhancing their incomes and encouraging higher levels of spending on consumables and low value consumer durables – fans, electric lighting, furniture, televisions, mobiles, footwear, clothing and food. These are items manufactured by the medium and small sector which cater to regional tastes and preferences. This was not to be.

No stomach for basic reform

What stymied it was not the lack of finances but the lack of will to look beyond easy wins. A central theme around boosting demand would have meant allocating around 20 per cent of the available resources or 3 per cent of GDP to financing it. This was possible only by significantly reducing the politically sensitive demerit subsidies – fertilizer, food and cooking gas, which consume funds equivalent to 1.5 per cent of the GDP.

Also, government delivery systems and data sets on land ownership or poverty status of families are so hopelessly inadequate that long lags in the delivery of direct benefits are to be expected. A 25 per cent shortfall during FY2020 in the fiscal performance of the flag ship PM Kisan Samman scheme – a disbursement of only Rs 540 billion against the target of Rs 750 billion – is a pointer to this widespread malaise of failing to convert targets into results.

FM Nirmala Sitharaman on the home stretch


Nevertheless, Finance Minister Nirmala Sitharaman has scored by simply keeping her pert nose above water. It is good to see that she has regained her impish grin after the scare she gave everyone by feeling too unwell to complete delivering her over-long speech, made even longer by her insistence on getting the Hon’ble MPs to listen to every word of it – an impossible task!

The Zamindar’s approach to budgeting – sell family silver when necessary


Of course, there are the usual heroic assumptions which are the trademark of optimistic accountants. The target set for disinvestment next fiscal of Rs 2.1 trillion is nothing short of a smoke screen for hiding the real fiscal deficit of 4.5 per cent versus the targeted 3.5 per cent of GDP.

DIPAM – the department that manages the sales of government equity in public sector enterprises- hopes to get most of the targeted amount from the sale of around 5 to 10 per cent of the government shareholding in the Life Insurance Corporation of India to the public by listing the financial behemoth on the stock exchanges.

But not all of this would be new private money. Institutional investors- public sector financial entities and banks tend to be big buyers of an initial public offer, making the sale a net transfer of resources from one part of the public sector to government. The good news is that unlike last year, future tax revenues are conservatively assessed. Purists cavil in expenditure management not enough has been done to do away with “dead wood” schemes which carry on well past their expiry date.

Public waste equals political gain

Why waste Rs 5372 crores on a stand-alone “jobs and skill development” effort or for that matter have a separate “Ministry of Skill Development and Entrepreneurship” – as if these worthy outcomes would magically be evoked just by putting up a sign board with the right words on it!

The international evidence shows that end-of-pipe schemes are not the best way to go for developing skills. The education curriculum itself should be changed to integrate marketable skills if the intention is to churn out youth with immediate employability. Hopefully next fiscal, FM Sitharaman would do an efficiency audit of allocations and make the necessary adjustments to weed out “pork”, prestige projects and poor performers.

Ministries should be made to pitch for funding of schemes and compete to get budgetary allocations. Public resources are scarce. Over 20 per cent of the available funds are borrowed which must be paid back with interest. Misallocation of public resources to schemes with low social returns is unaffordable for a resource scarce economy like ours, especially when just one of its three engines is firing.

Also available at TOI Blogs, February 7, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/fy2021-budget-post-script/

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