How cost of populism fits into the economics

It’s a magical trick

finance

ministers have perfected over the years. On the face of it, the budget gives away lots to large sections of the populace and yet the numbers show there has been no reckless spending and the fiscal deficit remains under control.


Piyush Goyal has proved he is adept at this magic too. Despite an income support scheme for over 12 crore farmers and tax write-offs for 3 crore taxpayers, the Budget suggests the fiscal deficit for next year will be at 3.4% of GDP, unchanged from the current year. So how is this possible?

One part of the explanation is in the assumed revenue projections. The Budget assumes that nominal GDP will grow by 11.5% from the revised estimate for the current year to touch Rs 210 lakh crore. But the Centre’s tax revenues as a whole are estimated to rise 14.9% (see graphic). Taxes on corporates are estimated to rise by a similar level, but personal income tax collections are slated to go up 17.2%. The only way that is possible with a huge chunk of taxpayers being given a zero liability is if the net widens significantly in the current year and adds relatively richer segments.

The tax numbers also assume that Central GST collections will rise by 21% in the coming year. Again, it’s not clear why this should happen when rates have if anything been tweaked downwards.

On the

non-tax revenue

side, the RBI it seems will have to play Santa both in the current year and in the next. Against actual realisations of about Rs 44,100 crore in 2017-18 from dividends and surpluses of the RBI and dividends from the banking and financial sector PSUs, the amount jumped to roughly Rs 74,100 in the RE for the current year and is projected to rise further to Rs 82,900 crore in the coming year. That’s a clear indication that at least a part of the RBI’s surplus will be called upon to bail out the

fisc

.

In the larger context, while the fiscal deficit may seem to be equally under control at 3.4% of GDP in the current and coming years, there is a difference. That’s because revenue expenditure will rise by 14.3% while capital expenditure —investing in creating assets — will go up by a meagre 6.2%. the consequence is that the revenue deficit, widely considered the more worrying deficit, will widen from Rs 4.1 lakh crore in RE 2018-19 to Rs 4.7 lakh crore in the next year, reversing a decline from Rs 4.4 lakh crore in 2017-18. But given the imperatives of an election year, that’s a detail you can’t really expect the government to be too bothered about.

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