The budget was long in speech and short on the assumptions that went into its making.
“Assumptions are the mother of all screw-ups,” goes an old English saying.
The central government budget, presented by Finance Minister Nirmala Sitharaman, earlier today rests, like any other budget, on assumptions — many of them.
The question as always is: will these assumptions hold up during the course of 2020-21? While Sitharaman’s speech was pretty long, the devil as usual is in the details. The details come out only once the finance minister’s speech ends, and the budget documents become available in the public domain.
So, what do these details tell us? Let’s look at it pointwise.
1. The budget is an account of what the government plans to spend money on during the next financial year and how it plans to go around earning it. In 2020-21, the government hopes to earn a gross tax revenue of around Rs 24.23 lakh crore. Gross tax revenue essentially comprises different kinds of taxes like income tax on companies, personal income tax, goods and services tax, excise duty, customs duty, and so on.
The central government keeps two-thirds of this tax and shares the remaining with state governments. In 2020-21, the central government expects the gross tax revenue to go up by 12 percent. On the face of it, this seems like a reasonably fair assumption when one takes into account the fact that in the budget presented in February 2019, the government had assumed that gross tax revenue will go up by 18.3 percent during the course of the year.
But, as I said earlier, the devil lies in the details.
The central government hopes to earn a gross tax revenue of Rs 21.63 lakh crore during the course of 2019-20. The trouble is that during the first nine months of this financial year (April to December 2019), the government earned Rs 13.83 lakh crore, or around 63.9 percent of the annual target of Rs 21.63 lakh crore. Also, during this period, the gross tax revenue collected has been 2.9 percent lower than the revenue collected during April to December 2018.
Once we take these factors into account, it is safe to say that the gross tax revenue the government will collect this year is likely to be lower than Rs 21.63 lakh crore. In that scenario, the growth in tax revenue required to earn Rs 24.23 lakh crore in the next financial year, will be higher. So, the assumption of 12% growth doesn’t really hold.
2. Between April 1, 2017 and March 31, 2020, the central government will have ended up spending Rs 2,61,443 crore on recapitalising public sector banks in order to keep them going. These banks have ended up with a huge amount of bad loans. Bad loans are loans which haven’t been repaid for a period of 90 days or more. The government has had to constantly keep investing more money in these banks (i.e. recapitalise them), in order to keep them going.
As of September 2019, the total bad loans of public sector banks stood at Rs 7,79,347 crore. This basically means that the government will have to keep investing more money in these banks to keep them going. The rate of recovery of bad loans is not good enough for banks to be able to keep going on their own. The amount of money that the government expects to spend in 2020-21 to recapitalise these banks is precisely Rs 2 lakh.
Yes, you read that right. Rs 2 lakh. This is an assumption that is bound to go wrong. This in a scenario where the government plans to spend more than Rs 20,000 crore in recapitalising public sector duds BSNL and MTNL.
3. The government is betting big on disinvestment of public sector enterprises bringing in the big bucks in 2020-21. It hopes to earn Rs 2,10,000 crore through this route. Of this, Rs 90,000 crore is expected to come through the disinvestment of public sector banks and financial institutions.
As the finance minister said in her budget speech, the government plans to sell its remaining stake in IDBI Bank. At the same time, the government plans to list the Life Insurance Corporation of India on the stock exchange. This will bring in the big bucks.
While one cannot fault the government for its ambition, one also needs to take into account past performance on this front. In 2019-20, the government had plans of earning Rs 1,05,000 crore through this disinvestment route. This has been revised to Rs 65,000 crore. The problem is that during the first nine months of this financial year, just Rs 18,100 crore has been earned through this route.
The trouble is that the government wakes up on the disinvestment front only during the second half of the year. This needs to change. Also, as I have said earlier, a disinvestment calendar needs to be drawn up and put in the public domain. The government should try to follow it as far as possible.
One thing that the government missed out in this budget is making an inventory of and selling the massive land bank that it has.
4. The government has allocated Rs 1,15,569 crore towards food subsidy in 2020-21. This basically means that the Food Corporation of India has been short-changed again. The total food subsidy that the FCI needs to claim in 2020-21 stands at Rs 3,08,680 crore. This essentially implies that the FCI will be short of around Rs 2 lakh crore.
The FCI buys rice and wheat directly from farmers and sells it through the public distribution system at extremely cheap rates. The government needs to subsidise it for this difference to ensure that the FCI remains a going concern.
Given that the government is not going to subsidise it for this, in order to keep going, the FCI will have to borrow this money from the financial system. As per the budget, Rs 1,36,600 crore will be financed from the National Small Savings Fund. All money invested in the National Savings Schemes goes into the NSSF. The remaining money will have to be borrowed from banks.
This is technically money that the government of India, and not the FCI, should be borrowing. By resorting to this accounting jugglery, the government has managed to bring down the fiscal deficit — or the difference between what it earns and what it spends — by nearly Rs 2 lakh crore. If this was taken into account, the actual fiscal deficit of the government would be close to Rs 10 lakh crore and not Rs 8 lakh crore (Rs 7,96,337 to be very precise), as it is expected to be. This means the actual fiscal deficit is almost 25 percent more.
To conclude, this budget, like many others before it, was long in speech and short on the assumptions that went into its making. And that’s the sad part, given all the wrong assumptions that the government had made in the 2019-20 budget.
(This is part four of the four-part budget series, funded by our NL Sena members. You can read the earlier pieces here.)
Vivek Kaul is the author of the Easy Money trilogy.