FM Sitharaman earns her spurs raising expectations sky high

On the eve of the 2021-22 budget presentation, Finance Minister Nirmala Sitharaman has clearly earned her spurs just two years into the job.

A coordinated collection tax effort revives revenue receipts in Q3

Despite the economy being somewhere between 15 to 8% below last year’s level all through Q3 (October to December) this year, cumulative receipts by December were almost equal to last years at Rs 11.2 trillion (Rs 11.8 trillion 2019-20). A very welcome and significant change from the end of Q2 (July – September) when receipts at Rs 5.6 trillion were barely two thirds of last years level of Rs 8.4 trillion. The tax departments have clearly worked long hours to make this happen.

Government systems, private business and workers demonstrate resilience

It also speaks to the unhesitant responsiveness of government servants and systems in an emergency and the plucky resilience of Indian business, truckers and workers. Rishi Sunak, Chancellor of the UK garnered headlines by distributing GBP 10 cheques to get diners to eat out, albeit possibly prematurely, considering the second/third wave which have battered Europe.

Meanwhile, the supposedly fiscal stimulus shy India, quietly spent around 1.5% of GDP (Rs 3 trillion) on free food distribution to an estimated 800 million people, shielding the poor, including children deprived of meals in shut schools and the families of 40 million (now down to 15 million) workers who lost their jobs and returned to their villages, direct cash transfers to supplement farm incomes (although agriculture production and employment was robust) and doubling the outlay to provide productive short-term employment in rural areas through MGNREGA.

Expenditure management “asymmetric allocation” strategy a winner

The real story however is the brilliant expenditure management strategy adopted as detailed in this year’s Economic Survey. The FM shunned the route of fiscal profligacy followed by her peers in the developed world – continuing thereby the commitment to fiscal discipline which is the hall mark of the BJP.

She evolved a strategy of asymmetric rationing of fiscal resources instead. Against an average spend of 75% versus the annual budget, a select ten (out of fifty) ministries were allocated above average spend. Rural Development (MGNREGA) (129%), Consumer Affairs and Food Distribution with the free food program (121%), Chemicals (including Pharma) and Fertilizer (103%), Labour & Employment (102%), Health and Family Welfare (88%), Roads and Transport (79%). The Ministry of Planning (86%) is a surprise in this select group but possibly justified seeing the need to keep NITI Aayog – the government’s brains trust- well-funded.

Fifteen ministries have allocations between 56 to 75% of their budgets. Amongst them, the Ministry of Defence at just 72%, surely needs an upgrade, whilst the Ministries of Skills Development and Steel could be downgraded to the next lot of twenty-five ministries, each with allocations less than 56% of budget.

Till December, the FM spent Rs 1.45 trillion more than the annual budget in the priority spend areas. She funded Rs 1.33 trillion of this from the savings against lower than budgeted allocations to lower priority areas and the rest through borrowing.

Pragmatic targeting of Fiscal Deficit

By end December the fiscal deficit (FD) is Rs 11.2 trillion or 5.7 % of current GDP (CSO first advance estimate, January 21) of Rs 194.8 trillion. The “actual” FD last year was 3.8% though full disclosure of liabilities has been a problem. The FM is charting her way to an undisclosed FD target – possibly 6.6% of current GDP – the Laxman Rekha established during the post “Trans-Atlantic” Financial Crisis 2008-09 by the UPA government in 2009-10- a red flag, the “report card” conscious BJP would hesitate to cross.

The additional borrowing is virtuous since it feeds into maintaining the capital spend at the budgeted level of Rs 4.1 trillion. The spend thus far is Rs 3.1 trillion versus Rs 3.4 trillion during the last fiscal year even though capital receipts from disinvestment are less than 10% of the target of Rs 2.1 trillion.

Against the odds

Keeping the funds flow stable through the current year, whilst maintaining reasonable stability in the macro fundamentals (debt below 90% of GDP and inflation below 6%) has not been an easy battle for the government and the RBI.

Actual revenue receipts till December are just Rs 10.9 trillion. Q4 could generate additional receipts of around Rs 5 trillion (assuming last year’s levels) taking total revenue receipts to just under Rs 16 trillion -slightly lower than last year’s Rs 16.9 trillion but significantly lower by 20% against this year’s target of Rs 20 trillion. So, the “asymmetric rationing” will continue through this fiscal.

FY 22 just more of the same

Next year is unlikely to be different. The need for tight treasury management will persist as will the need for emergency income and employment support to alleviate distress and stimulate domestic demand along with heightened outlays on health particularly for rolling out the vaccine program.

“Compelling need” based budgeting

The lens of “compelling need” for allocating funds should not falter. The gains made this year in compressing non-essential expenditure should be hardwired into next year’s budget.

Target overseas demand to supplement weak domestic demand

Second, enhancing exports to substitute for low domestic demand will be critical for sustained GDP growth. Rolling back import duties to ASEAN levels will sharpen the competitiveness of domestic industry and make us a credible partner for global supply chains whilst “dumping” can be combated per the existing rules stability

Stability of tax design

Third, the previous and this year saw significant rationalization of direct tax. Next year should be a “sleep year” with no changes in exemptions, deductions or tax rates whilst the economy heals. Efforts to quickly raise resources by taxing global e-commerce platforms and services outside a broad, collaboratively developed framework, would be counterproductive. Efforts towards the “ease of giving tax” should be pursued along with a guillotine on government appeals in tax litigation.

Disintermediate government from direct management of economic enterprises

Finally, government’s obsession with directly managing the industrial economy through incentives to enhance private investments or direct public investment to generate jobs, serves to distract it from its real objectives – to be the puppeteer rather than the puppet.

A massive disintermediation of government from management of banking, insurance, natural resource based mineral and metals industries and public utilities is overdue. Far from being supportive, this association has become the source of fiscal stress via low competitiveness.

Budget outlays on the key sovereign functions of domestic security, disaster assistance, defence, diplomacy, the rule of law, monetary regulation and fiscal management, together comprise less than one third of the Union budget.

Two thirds of the fiscal burden of managing real economy assets can be off-loaded to private players who could transform these comatose public assets – land, buildings, equipment, licenses or intellectual property.

For a stable government with a massive parliamentary majority, light touch regulation should suffice to facilitate foreign and domestic private investment and ensure the quality of public services. Possibly, deleting the term, “socialist” inserted in 1977 into the preamble of our constitution, would be a good way to start.

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