Fall in domestic consumption and revenue makes new Indian budget a tightrope walk
Having seen the dismal performance of the 'bahi-khata' budget 2019-20 of the Union Finance Minister Nirmala Sitharaman, Prime Minister Narendra Modi has reportedly involved himself in the budget exercises for the year 2020-21, first of its kind for a Prime Minister. He not only met economists and stakeholders while seeking ways out of the economic quagmire but also asked the Finance Minister not to make the budget highly ambitious but 'realistic'. The real GDP growth rate has plummeted to a new low and therefore even setting a target GDP for the budget has become problematic. The government finds itself between huge revenue shortfall and a high money-requirement. Ideas and suggestions are many but the money available is limited, enforcing the Finance Ministry to perform a tightrope walk.
First of all, the Ministry of Finance is trying to decode Modi's advice of being 'realistic' in the budget. The current year's budget was prepared on the assumption of 12 per cent of GDP growth rate as against 10 per cent of the last year. PM's advice reveals that he himself found 12 per cent as unrealistic for 2019-20 when the previous year's growth rate was only 6.8 per cent. Taking this hint, the ministry, as it is reported, was trying to set the GDP growth rate target for the year 2020-21 at 9.5 to 10 per cent, i.e., almost at the level of the year 2018-19. But they are still afraid of its being highly ambitious because the target for the year 2018-19 was set on the backdrop of 7.2 per cent growth rate in the previous year, while the growth rate in the current year is only around 4.8 per cent. On the other hand, if they don't prepare the budget on the presumption of around 10 per cent of growth rate, they cannot present a rosy picture of the economy. Thus, the officials are caught between the devil and the deep sea.
'Highly ambitious budget' is a term used by critics when they believe that the targets set in the budget are highly unrealistic and unreasonable and therefore, in all probabilities, unachievable. India's budget for 2019-20 was clearly of this category which set a GDP growth rate of 12 per cent when it was really growing at 6.6 per cent between October-December 2018 with an annual average of 6.8 per cent. Leaders of the ruling establishment tried to silence the critics by saying that the budget was only 'ambitious', and the targets set are achievable, though difficult. Now, almost at the end of the year, we know, the leaders of the ruling establishments were totally wrong. GDP growth rate touched a new low of 4.5 per cent in the last quarter and RBI has to revise the annual growth rate of only 5 per cent. The most recent assessment of the IMF has put it at only 4.8 per cent.
Though the calculation of receipt at 12 per cent of the GDP growth rate was resorted to by the government to portray a rosy picture of the Indian economy, the real growth at annual average of 4.8 per cent has left the country with very low level of revenue collection compared to the target set and the present requirement. After returning to power for the second term with an absolute majority in the Lok Sabha, Modi and his lieutenants perhaps thought that they are law unto themselves forgetting the fact that economy runs on its own principles and logic, not on the whims and fancies of the leadership. They started harping on making India a $5 trillion economy by 2024 and $10 trillion by 2030. To achieve this too ambitious goal, several wild provisions were made and several unrealistic taxes were imposed on industries and business. However, nothing worked. Ministry of Finance had to reduce several taxes and had to give assurance to Industries not to implement the law that had made the failure of meeting CSR contribution a crime. Several other measures were taken to revive the economy but all failed. Nothing could reverse the economic downturn.
Budget exercise for the year 2020-21 was commenced in the backdrop of such an economic crisis which has threatened to push the Indian economy to the door of economic recession. Making budget this year has become unmistakably more difficult due to lower real growth rate of 4.8 per cent than the last year which was prepared when the Indian economy was performing at 6.8 per cent. Moreover, inflationary pressure has doubled. Crude oil prices are most likely to increase which would deepen the crisis.
Among the diagnosed reasons of the present crisis is fall in domestic consumption mainly due to lack of money with the people, due to loss of job or joblessness. Millions of industries and businesses are struggling to survive, while millions of them have already shut down. Due to a fall in demand, millions of industries have reduced the level of production. Fresh investment became its victim, because investors, by and large, found it not profitable in the present scenario. Industries and business also suffered from lack of funds induced mainly by the banking crisis.
The fall in domestic consumption is primarily caused by weaknesses in the rural economy. The dream of doubling a farmer's income remains a dream. Moreover, about 40 per cent of our so-called farmers and more than half of the rural households are landless. It is thus, natural for the government toying with an idea of pumping in a large amount of money into the rural economy.
Where will this money come from? One of the sources is Official Development Assistance from IMF, World Bank, and ADB etc which usually comes with certain policy conditions, such as market-oriented reforms. It suits the present ruling establishment to buy support from poor voters in lieu of financial support from the government for furthering economic reforms, such as labour and land reforms, full or partial privatisation of PSUs, structural reforms in railways, banking sector reforms, reducing subsidies except for the targeted population, etc.
From the beginning of this month itself, the railways have increased the fares to cover up the revenue shortfall, which is an indication of government's intention to increase various charges and taxes for goods and services it provides. Proceeds from disinvestments, borrowings from market and institutions, advance transfer of funds from RBI, etc., might be other sources of money. To know how far the government succeeds in balancing the budget and controlling the deficit we will have to wait for the budget to be tabled in the parliament.
Views expressed are strictly personal