Budget 2018 : The Opportunity Cost of a Failed Fiscal Deficit
Finance Minister Arun Jaitley just gave away his fifth and final Budget speech at the parliament this Thursday. This budget, for the country and the BJP, led NDA government, has remained to act a crucial one. A couple of factors determines this - Firstly, its the first budget that the country is witnessing after having one of its major economic move getting rolled out - the change of taxation to the Goods and Service Tax(GST) system. Even though the change to GST, albeit the need to wait for further improvements and clarifications, has given an uncertainty on tax mobilizations, providing it with that of the practice of a year of demonetization had made the FY17-18 become a complete economic disaster. We have already witnessed a steep decline in the GDP count after the third quarter of last financial year to a nearly 2%. Thus, the two 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.
As for a simple read, one might find, provided with the eloquent rhetoric skills of the finance minister, the budget presentation a better one that has gone through and addressed all the sectors, but it is the nuances that give you the facts and whereabouts of how much it is and will have effect on our daily lives.
The government has started presenting the budget with programs that are not just impossible to get implement with the available resources, but also will have an adverse effect on the budget deficit targets even if it gets implemented in one go. It is very much visible in this budget that, by hurting the funding for the common people’s welfare, the government hasn’t forgotten to discharge its duties on fulfilling the needs of the rich and corporates through formulating the budget accordingly. But, this assault has, however, came up taking the form of a populist budget, giving them an inclusive face, whereas there is nothing much to ponder about 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 GDP compared to the former year, the term contractionary budget has itself become a cliche in analyzing the budgets of India in the recent years.
This year, the government has come up with a desolating budget that doesn’t take care of certain sectors of the economy. The government further boasts of making the rural sectors and farmers well off with the budget. But the actual facts just tells you the contrary. For the rural sector, the budget states that more efforts will be given in building infrastructure rather than addressing their critical concerns. This need not be what the people are wishing for, given their present condition of socio-economic disparity. As for the farmers, only minimal efforts have been taken to address their issues. Till the past years, as all the past economic surveys have always warned, the condition of the farmers has always kept on deteriorating and has seen no increase in their development, except the development of the numbers in farmer suicides.
However, suddenly, as the last year of the ruling term, the budget is trying to project the proposals for the upliftment of the farmers and the aged. For that, the budget put forward the idea of Minimum Support Price(MSP) in terms of cost of production. In this light, it is also to be noted that the government has not yet made any clarifications as to which cost they are going to take in account, provided that the term cost in economics is very broad, which again puts a concern as to if the farmers are actually entitled to any benefits. The same case goes with the youth population and in the education sector. There is nothing in the budget on how new jobs are to be created except stating that it will.
The funding for education has also been reduced from the percentage share of the GDP with respect to school as well as higher education, not to mention the drop in UGC funding. It is also depressing to see the government initiating the move to replace blackboard to digital board across schools in the name of digital technology while there are thousands of children in the country who are still failing to get access to schools, of which even the schools doesn’t have the basic facilities to occupy them. The budget is also trying to portray with statistics of having certain fundings kept stagnantly or increased with that of the former budget, whereas they haven't exhibited that it's not 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, making the policy announcements a mere promise to be faked. ie, 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 in his speech, the target to attain a hike in economic growth of 7.5% in GDP by the next fiscal also becomes impossible to achieve.
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. But none of this has happened except that they have come up with proposals for 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 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 FY17-18 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.
There are several consequences if the targeted fiscal deficit gets failed. 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 credibility risk. As of raising capital receipts in the present form is concerned, the government’s 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 the rise 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 minimizes 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.
Anyways, whatever it be, those who always get affected are the common working people of the country. This budget is a clear gesture of reconciliation shown by the ruling class towards the rich neglecting the actual problems of the commons and the working class. The retortion made by the worker's wing of the ruling BJP, the Bharatiya Mazdoor Sangh, stating that the budget is disappointing and has totally neglected the workers, speaks volumes on how anti-people the present budget is. Keeping in mind the factors stated above, yet again, the government, through its regressive budget, has shown its apathy towards the people of the country.
- Yadul Krishna (SFI activist, Delhi University)