The budget 2020-21 has generated a mixed reaction from economists. While some have pointed at the fiscal constraints due to inadequate revenue receipts for not providing enough space for an expansionary fiscal policy, others have praised it for setting more realistic projections for growth and tax buoyancy.
As financial accruals are important to boost investment and growth, these need a closer look.
Heavy dependence on non-tax receipts
A reading of the budget documents shows that the central government is heavily banking on disinvestment and communication services for higher receipts (revenue and capital) in FY21 - total receipts up from Rs 26.99 lakh crore in FY20 (RE) to Rs 30.95 lakh crore in FY20 (BE). This is an increase of 15%.
Of this, "miscellaneous capital receipts" go up dramatically from (minus) 38% in FY20 (RE) to (plus) 223% in FY21 (BE) - from Rs 65,000 crore to Rs 2,10,000 crore. This head shows two capital receipt sources: (a) "disinvestment receipts" of Rs 1,20,000 crore and (b) "disinvestment of government stakes in public sector banks and financial institutions (LIC and IDBI) of Rs 90,000 crore.
Another component going up substantially is "other communication services" (non-tax revenue) from which the budget estimates to receive Rs 1,33,027 crore in FY21(BE) - up from Rs 58,989.64 crore in FY20 (RE). This is an increase of 125%. There is as yet no clarity whether this would be generated from spectrum auction or adjusted gross revenue (AGR) from telecom companies which is still pending before the apex court.
The following graph maps the state of revenue and capital receipts.
Higher dependence on capital and non-tax revenue receipts shows less confidence about tax revenue.
Indeed, as the graph above shows, between FY20 (RE) and FY21 (BE), the shortfall in tax revenue is across the board - GST, excise duties, customs and income tax.
When it comes to "gross tax revenue", the budget documents show a massive shortfall of Rs 2.97 lakh crore in FY20 (RE) from the FY20 budget target - (minus) 12.1%. More than half of this (Rs 1.55 lakh crore) is accounted for by a shortfall in corporate tax. The government had cut the corporate tax by Rs 1.45 lakh crore in September 2019.
What the above graph also shows is that the receipt targets for FY21 (BE) may be unrealistic.
What happens to the government's investment plans if the receipts from disinvestment and communication services receipts fail to match the budget estimates?
Surely, that would be a major setback to all its investment plans.
Capex up, revenue expenditure down
When it comes to expenditure, comparison between FY20 (BE) and FY20 (RE) shows a decline in total expenditure - fall in revenue expenditure while capital expenditure is up.
A higher capital expenditure (creating more assets) is better for economic growth.
Budget documents show the capital expenditure as percentage of total expenditure has shown an upturn and is budgeted to go up to 13.5% in FY21 (BE) - as shown in the graph below.
Capex has higher fiscal multiplier effect
Capital expenditure is important because of its higher fiscal multiplier effect. According to the RBI's Monetary Policy Report of April 2019, while the revenue expenditure multipliers for the central and state governments are less than unity, that for the capital expenditure is far higher for both the central and state governments - at 3.25 for the central government and 2.0 for the state governments.
This RBI report also provides another significant pointer: empirical estimates suggest a negative relationship between revenue and capital expenditures. That is, an increase in revenue expenditure reduces capital expenditure.
Higher capital expenditure by governments also crowds in private investment and induces more than a proportionate increase in investment. Therefore, output goes up significantly. On the contrary, higher revenue expenditure impacts private investment negatively and hence the multiplier effect is less.
Revenue expenditure is important too
Nevertheless, lower revenue expenditure at a time of demand depression is not such a good idea.
The budget documents show the allocation for the rural employment guarantee scheme (MGNREGS) has been reduced from Rs 71,001.81 crore in FY20 (RE) to Rs 61,500 crore in FY21 (BE) - a shortfall of Rs 9,502 crore.
This is likely to deprive a large number of rural poor accesses to income and consumption because of growing rural distress and unemployment.
Need for regular and sustainable source of finance
There is no gainsaying that the government needs a regular and sustainable source of finances to fund its capital and revenue expenditures - rather than banking on one time or occasional receipts from disinvestments or telecom charges. There is no disputing either that India needs to raise its tax revenue.
When it comes to tax-GDP ratio, a comparative analysis by Business Today shows that in 2018 India (centre and states taken together) recorded a 17.5% of tax-GDP ratio which is considerably lower than the developed economies and so is the case with the number of people paying taxes (in 2017-18) - as shown in the graph below. This can be explained by relatively lower-income levels of Indians.
Therefore the real challenge is how India can raise its tax revenue to fund its long-term growth. Eminent economist Dr C Rangarajan, for example, believes that this could be done by raising the income levels, lowering the tax rates and ensuring a higher economic growth.
That may be easier said than done in a slowing economy but are there alternatives? That is a topic for another day.