budget 2021 – OpenAxis

Finance Minister Nirmala Sitharaman presented the Union Budget for Financial Year 2021-22 on 1st of February 2021. Announcements regarding privatization and asset monetization attracted attention while the accounting treatment of fiscal deficit raised eyebrows even as it found approval from experts.

Fiscal deficit is the difference between the government’s total income and total expenditure. More accurately, fiscal deficit occurs when the government’s expenditure exceeds its income. In the Revised Estimates for FY 2020-21, the headline fiscal deficit number was announced as 9.5 percent of GDP. In the previous budget (for FY 2020-21), the fiscal deficit was targeted at 3.5 percent. This steep revision in fiscal deficit estimates for the current financial year (2020-21) as one of the highlights of the Budget. If we take a closer look at fiscal deficit revision and the path the government wants to take in the future, we find three important points to underline.

The Good

The Revised Estimate for fiscal deficit for 2020-21 actually found approval from experts. Why was it so? This was because of the FM’s announcement regarding how food subsidies are accounted for. The Food Corporation of India (FCI) procures wheat and rice from farmers at Minimum Support Price (MSP) and then sells them at a loss through the Public Distribution System (PDS). The loss that the FCI suffers is on account of the food subsidy that the government provides. Ideally, the Union government is required to allocate funds for this shortfall in the budget, but this was not the case so far. For example, while the FCI suffered losses of over Rs 3 lakh crore in 2019-20, the budget only allocated Rs 75,000 cr. The FCI was forced to borrow the difference from other sources like the National Small Savings Fund. This helped the government exclude the actual food subsidy numbers from its accounts and this shored up the fiscal deficit number. However, the problem was that this made the fiscal deficit numbers suspect. With the announcement this year, the FM has made budgetary provisions for payments to FCI for this financial year on account of food subsidy. In return, the actual subsidy numbers are now reflected in the accounts and this is one of the reasons (but hardly the only reason) for the sharp jump in fiscal deficit for 2020-21 in Revised Estimate. This transparency in accounting is a refreshing change and can be called a good thing in Budget 2021.

The Bad

The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003 was introduced to bring transparency and discipline to India’s fiscal policy. The Act stipulated that the Union government will reduce its fiscal deficit to 3 percent of GDP by the end of FY2020-21. Abiding by FRBM rules that have helped the governments over the years burnish their credibility among rating agencies. FRBM Act also provided the government exemptions on account of national security, calamity, etc. While announcing the Union Budget for 2020-21, the FM had invoked one of the clauses in FRBM Act to raise the fiscal deficit target for 2020-21 by 0.5 percentage points to 3.5 percent of GDP. This has now been revised to 9.5% in RE 2020-21. As pointed out by Vivek Kaul, the fiscal deficit as a percentage of government expenditure will be at 53.6% in 2020-21. The budgetary provisions for payments to FCI explain only a part of this sharp jump in fiscal deficit in this financial year. The other reasons are a shortfall in tax collection, much lower than expected receipts from disinvestment, and a shortfall in non-tax revenue. While the transparency in budgetary accounting is good, it does not hide the fact that the fiscal deficit is way above the FRBM target.

The Ugly

The FRBM Act, 2003 did not just have a fiscal deficit as its target. One of the foremost targets of the Act was the reduction and eventual elimination of the revenue deficit. This meant that the 3% target for fiscal deficit would be used to fund capital expenditure only. Revenue deficit is when the government’s total revenue expenditure exceeds its total revenue receipts. Expenditure incurred on payments of salaries, pensions etc. is classified as revenue expenditure while expenditure on building assets like roads, waterways, rail lines, factories, etc. is classified as capital expenditure.
FRBM Act sought to eliminate revenue deficit so that any deficit would be on account of capital expenditure only. This is because capital expenditure has a 2.5 multiplier effect on the economy while the multiplier effect for revenue expenditure is only 1 (Sukanya Bose and N.R.Bhanumurthy – NIPFP). FRBM Act thus encourages the government to switch from revenue expenditure to capital expenditure. In 2018, the government stopped targeting revenue deficit. Instead of eliminating revenue deficit, the government squeezed capital expenditure to meet the fiscal deficit targets. For example, in BE 2020-21, the Union government’s capital expenditure for FY2020-21 was Rs 4,12,085 crore (Gross Budgetary Support) while the in RE 2020-21, this figure has actually gone up to Rs 4,39,163 crore (Budget at a Glance, Page 8). In RE 2020-21, the revenue deficit is projected to climb to 7.5%. For FY 2021-22 (according to Budget Estimates 2021-22), capital expenditure (Gross Budgetary Support) is projected to increase by 26.2%.

Source: Union Budget 2021

This squeeze on capital expenditure while not targeting revenue deficit as laid down in the FRBM Act is the ugly part of how fiscal deficit numbers have played out over the last few years.

To be fair, the government has increased the budgetary support for capital expenditure for FY21-22 to Rs 5,54,236 crore (BE 2021-22). This would take total capital expenditure for 2021-22 to Rs 11,37,067 crore. To put things in perspective, the revenue deficit estimate (BE 2021-22) is Rs 11,40,576 crore and this situation can hardly be called comforting.

Ankur Bhardwaj is Editor, Centre for Economic Data and Analysis (CEDA.) Previously, he was Associate Editor – Web at Business Standard.

Picture Credits: Canva

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Q: There are a lot of worries about the Fiscal deficit for this financial year. Could you tell us the concerns around it and how the government plans to fund it?

A: Very loosely put, the fiscal deficit is the difference between the government’s expenditure and its receipts. The concern that surrounds it is how do you fill up the gap between your spendings and receipts? Or if you borrow today, how do you repay it tomorrow, and will you have enough to repay it?

And if we don’t borrow today, then how will we finance what we want to do? That is the same decision that any business or economic entity faces. Your borrowings are contingent on your belief that you can generate more income and pay off the debt later. Granted your activities are productive enough to cover the costs of borrowing. It’s the same logic that works for the government, but it can get a lot more complicated sometimes.

The fiscal deficit is higher owing to the huge shock to the economy last year that resulted in low receipts and businesses shutting down.. So, where does the government get its revenue from? Now, since the government does not do any productive activity (like run businesses or earn profits from them), it essentially taxes other productive work, its citizens, businesses, etc. That is how it raises its revenue. Now, when you have an economic shock, especially one as large as the COVID-19 pandemic, your productive activity slows down as businesses aren’t creating much since they are not profitable. So, their tax revenues, which are the proportion of what they produce go down.

So that’s the reason why you have a higher fiscal deficit. Now, the question about concern is really about how optimistic we are about our future and about our ability to meet the government’s increased debt burdens.

So the last part of the question you asked was how do you finance the fiscal deficit. One way is to disinvest. So you have wealth which you sell off and use the assets to finance expenditure.

The second way is that you go to people and borrow. So that’s the debt market. Typically, that’s the way the government fills the gap.

And the third way is by monetizing the fiscal deficit, which is essentially printing money. This is done by the RBI buying the government bonds and printing more money against that. So, it’s essentially just increasing the money supply.

Q: Could you tell us something about the expenditure for the agriculture sector. A lot of reports mention that there isn’t a lot being done for the farmers, even against the backdrop of the protests. Can we observe an emerging pattern of inequality here?

A: Yeah, I have an unpopular view about this. I think the only thing the government or the society can do for the farmers, is to ensure that we have fewer farmers. That is the only way out.

So I think that agriculture adds about 14-15% to our GDP and employs about 45-48% of the people. That is where you have inequality. At the upper end, you have people who are in productive sectors like services but on the lower hand, people are tied to agriculture.

Increase in productivity with so many farmers is bad for the farmers, it is good for the consumers. So the only thing the government can do is, therefore, focus on moving people away from farming into value-added activities. Typically it would involve people moving to cities and into manufacturing or services. Our problem has been that we don’t have a manufacturing sector, so we have been unable to implement this transition. And it is a very difficult transition as services typically require the kind of skills and human capital that people in rural India don’t have. So now what happens? This is a structural feature and the government has two choices: either people’s income increases itself so that they are no longer poor and reliant on you or if they remain poor, you will have to pay to support them. And that is the essence of this distinction between growth and inequality discussion.

If you don’t do anything in terms of investing in people, if the skills don’t improve, if they don’t engage with other jobs, there’s nothing you can do. None of them are leaving agriculture or moving away from social security schemes. So where do you bring the money from? So to me, this expenditure needs to be balanced. This choice needs to be made. And the only way to have to be able to manage this is to invest in growth.

Q: So does the government have to invest in education training or similar programs to encourage having fewer farmers in the agriculture industry to increase labour productivity?

A: See that is unfair. We all blame the government, but it is a difficult job to do. As I said, the government doesn’t engage in productive activities, but what it can do is enable the right kind of environment to generate productive activity. The bottom line is that businesses need to grow.

We need more of the right kinds of businesses and entrepreneurs, and more formality in our labour markets. The government’s job is to worry about why jobs are not being created. Now what they can do to resolve this is to encourage entrepreneurship and increased business activity so that people can start or grow businesses and hire more people.

Now, what is the challenge here? Consider how in a lot of banks that you deal with, look at what has happened with the call centres. They’ve all been replaced by chatbots. Call centres are not really skilled jobs. You just have to talk to people. But they were a huge boost to India in some sense, because they moved a lot of people out of lower-middle-class backgrounds into a sort of middle class, but now they’ll all go away. Just like how mobile phones ran out the STD booths. This is a reality that we are going to run into very soon. So what should the government do now? Well, at the micro-level, they should essentially invest people with enough skills and create an environment which encourages business activity.

So when we think about what the government can do in terms of job creation, I think over the long term, we need to be cognizant of the fact that by its own admission, this government is spending huge amounts of political capital on digitization but aren’t spending anything on creating it. The question is who will work in those areas? So if I look at the education of the labour force today in India, 28 to 30% or one-third of our labour force is illiterate. We don’t have the labour composition that can be a part of this economy that we are talking about. For example, mobile phone penetration in India is high, but only in absolute numbers. So it is a huge market for people. However, the government’s job is not to create huge markets, but to figure out what is happening to those people who don’t have mobile phones. How will they survive?

The digital divide in this country is huge. So, what technology 4.0 we are talking about? We don’t even have automation of the basic kind right now. Most businesses in this country don’t have computers. We really need to understand the reality in which we exist.

We have this challenge in the long-term that we need to start acknowledging and addressing now, and then you hope that there is enough creativity and innovativeness in your country’s population, which will take care of itself. And I believe there is. The government’s job is just to create and keep creating the right environment and then hope for the best.

There are things that they do in terms of job creation, for example, investing in infrastructure will create jobs, but they’ll create construction jobs. The whole world is moving towards, you know, having AI, ML and robots in construction and moving people away to more productive work. We are trying to create jobs where we have people moving from agriculture to construction. This is okay for now, but is this really what we want for the future? These are some hard questions that we need to answer.

Q: We also wanted to ask you about your expectations from the budget and whether or not they were met?

A: Honestly, I think this is a fair budget and I’m quite okay with it.

One of the things that I do like about the budget is asset monetization. There’s a lot of land that is lying around, which is not the government’s job to hold anyway. So, releasing productive assets and transferring them to other people in the economy who can use it better is a great idea. I would also like the Indian government to have a national social infrastructure pipeline at some point.

And I really would like them to have a plan, (like the one that they have for capital expenditure they’re making on infrastructure, for example; in which they give a plan for three, five or 10 years) for education and health. I think now is the time to make commitments. India needs to start thinking about how they’re going to tackle this problem of a low level of education and skilling and increasing enrollment ratios in secondary education.

There is all this discussion around technology 4.0, but how are we going to do it? Our kids don’t even finish school. So what are they going to do? They just want to use YouTube. They become a market for others. Agreed, the mobile phone penetration is high in India, but that just increases the size of the market for somebody else, because the technology is not in the hands of producers or entrepreneurs, that technology is in the hands of consumers. So yes, we’re consuming technology a lot, but what are we doing with it? Or we are basically giving a huge market to Google and Facebook and YouTube.

And yes, we can replace TikTok with Tik Kik and PUBG with FAU-G. But that is not what we need to do. If you want to harness this technology, you need to turn these to as many people as possible, especially to producers and entrepreneurs.

We really need to have a plan for education and health, just like we do for other forms of investment because human capital is a form of investment, not expenditure. We really need to get our act together there.

Q: There’s a lot of information available about the budget. What would you recommend as a good, informative source for somebody who just wants to understand it?

A: I would suggest that you just look at the budget documents, they are annotated along with footnotes explaining everything. You can just go to the website (www.indiabudget.gov.in).The best way to learn for yourself is to spend time on it and make your own judgments, that is what I would advise.

Nishant Chadha is a Fellow and Head of Projects at the India Development Foundation, and a visiting associate professor of Economics at Ashoka University.