With GDP growth falling, inflation rising and the economy facing a slowdown ahead of the national budget, a section of experts in India believe that it is time to be realistic on critical budget numbers like nominal growth and other major projections.
Indian Finance Minister Nirmala Sitharaman will present her second budget on 1 February in parliament.
One of the major macro-economic projections made in the budget tabled in last July that has been completely missed is the country’s nominal Gross Domestic Product (GDP) growth. The nominal GDP is an estimate of national income at current prices, or real time prices. Last year’s budget pegged the nominal GDP at 12 percent for 2019-20, which ends on 31 March this year.
But the Indian government, in its estimates released on 7 January this year, lowered the nominal GDP projection to 7.5 percent. N. R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy (NIPFP) called it “a classic example of wrong estimation." Nominal GDP growth is now estimated to come down drastically from the budget projections.
“Budget is all about predictions and an error can also happen. But the key aspect of budget prediction is nominal GDP growth and one cannot afford to go wrong on that. It has potential to distort all projections related to revenue and expenditure,” Bhanumurthy said, adding: “One has to have a realistic or near accurate projection of nominal growth.”
Sunil Sinha, Director (Public Finance) of the rating agency India Ratings and Research, said that going wrong on budget assessments puts a question mark on the country’s policy credibility. “A government can borrow and mobilise colossal long-term funds. From a credibility perspective, budget projections and achievements should be in sync. If the numbers differ at the end, it will create problems in future fundraising,” he said.
Be it macro indicators like growth, or deficit projections, or revenues from direct tax collection and Goods and Services Tax (GST), or disinvestment, all seem to looking weak when compared with the targets put in the Budget for financial year April 2019 – March 2020.
Apart from the country’s nominal growth, the government’s January estimates have also cut down on real GDP from 7 percent projected earlier to 5 percent for the current financial year. Be it direct tax, Goods and Services Tax and disinvestments, the current year’s achievements are very far from the original the targets.
On the revenue front, against a corporate tax collection target of $108 billion for the current financial year 2019-20, the collection through 15 January stands at $54.5 billion.
Similarly, on the personal income tax front, the collection is at $46 billion, lagging behind the budget target of $80 billion for 2019-20. With only two months more to go in the current financial year, the collection is merely at the halfway mark of the target for financial year.
According to finance ministry statistics, against a Goods and Services Tax (GST) revenue target of $93 billion announced for the current financial year (April 2019 – March 2020), the mop-up until January has been just $64 billion.
India may also falter on the disinvestment target set for the current financial year. Against a disinvestment plan of $15 billion in the current financial year, not even 20 percent has been achieved so far.
With targets falling flat as the financial year ends, the question now arises what options Finance Minister Sitharaman has to boost the economy in the upcoming budget on 1 February. Coming clean on numbers, ensuring that the projections are not too aspirational, and expenditure rationalisation, seem to be ideas that may work, if the experts are to be believed.
“Budget is essentially a forecast. It sometimes becomes aspirational. The point is how close one is on nominal GDP growth. One must not falter on that so that one can have clean numbers,” said Bhanumurthy.
Pointing out that there is no magic wand with the Narendra Modi government, Sinha said rationalising expenditure may offer some help.
“Expenditure rationalisation may lift sentiment. Additional money has been given to the corporate sector in the form of tax cuts. However, gains made by the corporates are being used in dividend payouts. Increase in corporate profitability post tax cuts has not yet yielded investments. There is an urgent need to put money in the bottom of the pyramid, the rural economy,” Sinha added.
Facing an acute economic slowdown with growth at a six-year low, rising inflation, vanishing private investments and an overall sense of economic gloom, Finance Minister Sitharaman's upcoming national budget faces a stern challenge.