Union Budget 2017-18: An analysis

Venkatesh Athreya
Professor and Head (Retired),
Department of Economics,
Bharathidasan University
 Evaluating a Budget
The Budget is:
1. One of several economic policy instruments

operating within a given economic structure and

a prevailing distribution of assets and incomes

2. A statement of estimated annual receipts and expenditures of

government

3. Includes announcements and policy pronouncements

4. Can be evaluated from micro and macro perspectives

 The Budget in context
• The Union Budget is presented in a specific national and
international economic situation

• It is set against an overall governmental policy framework

• It should ideally respond to the people’s aspirations as

expressed through elections or people’s movements but
rarely does!

• It acquires importance because total central government

expenditures account for 13-15 % of GDP
 Deficits: Various Concepts

KEY TERMS

Total Expenditure= Current expenditures (also called revenue

expenditures) PLUS Capital expenditures

Total Receipts = Current receipts (also called revenue receipts) plus

capital receipts

Current or revenue expenditures are those that do not result in the

creation of any real assets

Capital expenditures are those that result in the creation of real assets
 Deficits: Various Concepts
Current receipts typically include taxes, surpluses of government owned
enterprises and charges levied by the government for services it
provides. They exclude receipts obtained through borrowing or through
sale of real assets

Capital receipts include receipts from the sale of assets and through
borrowing.

Overall Budget Deficit = Total expenditure MINUS total receipts

Revenue Deficit = Revenue receipts MINUS revenue expenditures

Fiscal Deficit = Total Expenditure MINUS all non-debt receipts. (This

means that government borrowing is not counted as a receipt)
 The fallacies of an obsession with fiscal deficits
• The fiscal deficit is so defined that it delegitimizes
government borrowing in an economy. The underlying
ideology is that the government “has no business to be in
business.”
• The fiscal deficit includes receipts from the sale of
government assets as a legitimate receipt. This is in support
of the agenda of privatization.
• Theoretically, in an economy at less than full employment,
the fiscal deficit has no implications for inflation. Even at
full employment, an argument against a fiscal deficit
presupposes that private use of resources is more efficient
than public use.
The fallacies of an obsession with fiscal deficits
• When an economy allows unregulated inflow and outflow of capital
as finance, a large fiscal deficit becomes the trigger for outflow of
finance capital, especially on account of the rating agency system.
• In such an economy, macroeconomic policy is greatly constrained by
the assumed need to keep fiscal deficits in check.
• However, even if one were to assume that the fiscal deficit has to be
minimized, the option of raising receipts through effective taxation of
the rich instead of slashing subsidies and thereby reducing
expenditure to lower the deficit remains.
• The neoliberals counter this argument by saying that taxation dis-
incentivizes investment. This is not an empirically sustainable
argument for a modest change in the tax rate or for removal of
exemptions
• Ideally, taxation of the well-to-do within reasonable limits should be
the first fiscal option, followed by borrowing to finance the
government expenditure necessary to ensure reasonable human
development and economic growth.
 Economic Survey: Highlights
• The Economic Survey for 2016-17, prepared by the Finance Ministry and
tabled in parliament the day before the budget presentation, notes the
uncertain international situation, with the Trump presidency in the US,
possibility of rising interest rates there dampening capital flows into India,
and of rising prices of crude oil in international markets

• It also notes the negative impact of demonetisation, conceding that there

would be real pain in the short term even while hoping that there would be
(unspecified) potential long term gains

• The Survey revises downward the estimate of the growth of GDP in 2016-
17 to between 6.5 and 6.75 per cent from the previous estimate of 7.6%
 Specific Context of Union Budget 2017-18

• Changes in the International Arena: Slow global growth, Trump Presidency,

Changes in US monetary policy, Upward trend in oil prices…..

• Budget presented on February 1, without the benefit of third quarter data

for 2016-17, rendering the budget numbers less reliable

• Railway budget included in General Budget

• Elephant in the room: Demonetisation!

 Union Budget: Estimated Expenditures
• Budget estimate (BE) of Union government expenditure for 2017-18 is Rs
21.47 lakh crore as against the revised estimate(RE) of Rs 20.14 lakh crore
for 2016-17, an increase of hardly 6 %, suggesting no increase in real terms.

• As a share of GDP, the total expenditure declines from 13.5% in 2015-17 RE

to 12.7 % in 2017-18 BE.

• This implies a contractionary fiscal stance, unexpected in the wake of the

deflationary impact of demonetisation. With considerable stocks of
foodgrain and banks flush with deposits due to demonetisation, the
government could have borrowed from the banks and upped spending to
stimulate growth
 Union Budget: Estimated Expenditures
• Allocation for the two departments of (a) Agriculture and Farmers’ Welfare
and (b) Rural Development, taken together, rises from Rs 167,768 crores in
RE 2016-17 to Rs 187,223 crores in BE 2017-18, an increase of 11.5% in
nominal terms, implying only a modest increase in real terms and a small
decline as share of GDP.

• The allocation for Education and Health was Rs 114,806 crores in RE 16-17.
It is Rs 130,215 crores in BE 17-18, a rise of around 14%, but still a rather
modest increase given our overall low spending on these key sectors

• The total expenditure on infrastructure as a share of budget outlay is also

marginally lower in BE 2017-18 as compared to that in RE 2016-17
 Union Budget and Employment

• An especially important negative impact of demonetisation has been on employment in the

informal sector. There was a widespread expectation that the budget would address this
issue by substantially increasing allocation for the rural employment guarantee scheme and
possibly initiating a similar urban employment guarantee scheme. But these have been
belied.

• The allocation for the MGNREGS in BE 2017-18 at Rs 48,000 crores is barely greater than the
RE 2016-17 figure of Rs 47,499 crores. Given the increase in wages for NREGS work, there
will be a decline in the number of days of employment per household registered in the
scheme. Besides, there are wage arrears from the current year.

• A larger point needs to be made. As data from the Labour Bureau surveys remind us, job
creation has nosedived over the past year, and this was a key issue for the budget to take
into account. However, the budget has made no serious effort in that direction.
 Union Budget: Tax Proposals
• The tax proposals in the budget are estimated to result in a loss of Rs 20,000 crores
in direct tax revenues. The indirect tax burden, a large share of which is borne by
ordinary working people, is rising steadily. For instance, the revised excise duty
collection in 2015-16 was 2.88 lakh crores as against a budget estimate of 2.29 lakh
crores. In 2016-17, the excise duty collection was 3.87 lakh crore rupees as against
a budget estimate of 3.19 lakh crores.
• The clamour for lower tax rates on corporate profits is to be assessed against the
reality of effective tax rates of hardly 25 % on profits accruing to large corporate
entities. A figure of annual revenue foregone on account of concessions to the well-
to-do corporate and individual entities of several lakh crore rupees does not speak
of equity in budget-making.
• We have seen the abolition of the wealth tax in a country characterised by obscene
wealth inequality. We have also seen repeated overtures to tax evaders even while
the rhetoric around demonetisation was of wiping out black money.
 Union Budget: Underlying Philosophy
• The economic philosophy underlying the budget is one which sees the State
as at best a necessary evil, and believes that the sole path to rapid growth
and social well-being is through incentivising corporate investment.
• It also puts exclusive emphasis on so-called fiscal prudence which is
interpreted to mean minimising fiscal deficits essentially through
expenditure reduction.
• The self serving argument that a lowering of tax rates will lead to an
improvement in compliance is not sustained by evidence from across the
world. The reason is simple enough: If the marginal costs of tax evasion are
perceived to be lower than the benefits from such evasion, compliance
need not improve at all.