On February 1, finance minister Nirmala Sitharaman will be presenting the Union government’s budget for 2021-22. In the days leading up to it, the media will be full of pieces advising the finance minister on what she should do in the budget. Politicians, economists, analysts, and journalists will all come up with their own to do lists.
The trouble with many of these pieces is that the writers tend to forget the main aim of the budget which is to accurately present the statement of accounts of the Union government. It outlines how much it plans to spend during the course of the next financial year and from where does it earn that money. That’s broadly what the budget is all about. But this rather important and fundamental point is not something you will see addressed in the thousands of words written in the media before the budget.
Keeping this factor in mind, let’s take a pointwise look at what the government should do in the budget to be presented next week.
1) In the last two years, 2018-19 and 2019-20, the government was extremely over-optimistic when it came to projecting tax revenues in comparison to what it ended up collecting during the course of the year.
In 2018-19, the government had hoped to earn a gross tax revenue of Rs 22.7 lakh crore. It ended up earning Rs 20.8 lakh crore, which was 8.4 percent lower. In 2019-20, the government had hoped to earn a gross tax revenue of Rs 24.6 lakh crore. It ended up earning Rs 21.6 lakh crore, which was 12.1 percent lower. The gross tax revenue primarily consists of taxes like personal income tax, corporate income tax, union excise duty, customs duty and central goods and services tax. A portion of these taxes is also shared with state governments.
2) Why did the tax projections go so wrong? One can only speculate here. One reason, perhaps, could be the fact that the finance ministry wanted to project a lower fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends expressed as a percentage of the country’s gross domestic product, a measure of its economic size. If a government projects higher earnings through higher tax collections, it also ends up projecting a lower fiscal deficit, provided the expenditure remains the same.
3) Another factor that could have led the finance ministry bureaucrats to project higher tax collections would probably have been the pressure to portray an economy which is doing well. Tax collections can be higher only in an economy which is doing well.
4) Not just the tax revenues, in 2019-20 and in 2020-21, the government ended up projecting significantly higher disinvestment receipts or the money it hoped to earn by selling a portion of its stake in public sector enterprises. In 2019-20, the projection was Rs 1.05 lakh crore. The actual earning was at Rs 65,000 crore. In 2020-21, the projection has gone totally for a toss. The total projected earnings through the disinvestment route were Rs 2.1 lakh crore. The actual earnings between April and November stood at a meagre Rs 6,179 crore.
While the spread of Covid is a possible explanation for this, the difference in what has been projected and what has been earned, is exceptionally huge. This when the stock market has gone from strength to strength. Clearly, the government has missed an opportunity here.
5) It is important that the finance ministry bureaucrats and the government be a tad realistic while making projections this year. When the government isn’t able to earn as much as it projected during the course of a year, it ends up cutting the projected expenditure. In 2018-19, the government had hoped to spend Rs 24.4 lakh crore during the course of the year. It ended up actually spending Rs 23.2 lakh crore, which was 5.2 percent lower.
In 2019-20, the government had hoped to spend Rs 27.9 lakh crore. It spent Rs 27 lakh crore which was around 3.2 percent lower.
6) Given that the Indian economic growth has been slowing down since the economy grew by 8.3 percent in 2016-17, any contraction in projected government expenditure tends to impact economic growth in a negative way. This becomes even more important in 2021-22, when the country will look to come out of the severe negative impact it has faced because of the coronavirus pandemic. While private consumption expenditure has improved over the months, it will still take time to reach where it was in 2019-20. In this environment, it is important that the government projects a certain expenditure number and is able to stick to it in 2021-22, unlike what has been the case in the past two years.
In fact, 2021-22 needs to be a year where the government successfully fulfills the role of being a spender of the last resort, given that individuals and corporates will not spend as freely as they had in the past.
7) In fact, when projections of tax collections go wrong, they don’t just impact the Union government, they also impact the state governments. And that is primarily because a significant portion of the tax revenue collected by the Union government is shared with the state governments. The state governments use projections made by the Union government to project their own budgets. In this, the taxes shared by the union government play a very important part. If these shared taxes fall, the budget of state governments also goes for a toss. Like in 2019-20, the amount to be shared with state governments was initially projected at Rs 8.1 lakh crore. The amount actually shared was Rs 6.6 lakh crore, which was Rs 1.5 lakh crore or 18.5 percent lower. This would have led to state governments having to cut down on their expenditure or to borrow more, if they were in a position to do so.
To conclude, everyone, from corporates to individuals, looks at the Union budget and asks what’s in it for us? All advice to the finance minister and the government on the budget basically hinges on this dynamic.
Very few like to go into the nitty gritty of the budget. Nevertheless, in 2021-22, the nitty gritty is going to be very important. The government needs to get its projections working in the right direction.
Vivek Kaul is the author of Bad Money.