Some thoughts for Sitharaman

The Budget must not compromise on capital expenditure and social sector spending in view of lower growth and higher unemployment

By Author Surajit Das   |   Published: 29th Jun 2019   12:05 am Updated: 28th Jun 2019   11:01 pm

JNU-trained economist Nirmala Sitharaman, the new Finance Minister of India, will present the Union Budget on July 5. The interim Budget promised to transfer Rs 6,000 as agricultural subsidy to all small and marginal farmers every year but there was no extra allocation. The second major announcement was on direct tax exemption for annual income up to Rs 5 lakh.

If the government has to fulfil these two promises, with all other things remaining same, the government expenditure is likely to increase and the expected tax revenue would decline in this Budget, pushing up the fiscal deficit. International finance capital may not like this development and Moody’s rating may suffer. Therefore, there will be a trade-off between keeping the international capital happy and fulfiling these promises.

Depressing Jobless Scenario
Though the government is yet to make the employment data public, the unemployment situation in the country is perceivably depressing. Real rural wages (adjusted for inflation) has not increased at all in the last five years. The average urban real wage rate, per hour, has also not registered any significant increase recently. The income of majority of Indians has stagnated and the unemployment rate too has shot up. This Budget must acknowledge this challenge and address it. The government should not fall into the trap of austerity and cut down the aggregate government expenditure (as a proportion of national income) under a demand-constrained situation like this!



Shrinking employment and depressing wages are mainly because of three reasons:

1.Slow Private Investment
Firstly, private investment is not picking up because of the lack of expected demand or business confidence that the produced product could be sold in the market at remunerative prices. The non-food credit offtake (as a proportion of national income) from the commercial banks is coming down consistently. The share of manufacturing in the total national income has been stagnant for quite some time now. The construction sector has also shown signs of stagnation. Investors are sceptical about expanding the capacity of production. Expected rate of profit is low in the economy, business situation is depressing and resultantly, employment opportunities too are shrinking. The Budget needs to take concrete measures to boost sentiments, not only for big businesses but also for SMEs, home-based and self-employment generating petty businesses.

It is important to note that the expected rate of profit will not necessarily increase by lowering corporate tax or lending rate or the wage rates. We need to boost the aggregate demand by increasing the purchasing power of the common people and by lowering the degree of inequality and unemployment rate.

2. Lagging Public Investment
Secondly, public investment needs to pick up, particularly when private investment is not increasing at a rate fast enough to absorb the unemployed labour force. Since the ‘economic liberalisation’ of 1991, we have only witnessed closing and disinvestment of PSUs. It is time to reverse the process and expand public sector investment to ensure higher employment rate and growth.

Capital expenditure of the government in strategic sectors like infrastructure attracts private investment. Under the present federal structure, particularly post-GST (more centralisation of tax powers), State governments are not in a position to enhance their capital expenditures (as a proportion of their respective GSDP) substantially. The Finance Ministry has to take the responsibility to ensure higher capital expenditure of the government as a proportion of national income without further delay.

3. Overreliance on FDI
The third factor is the overreliance on foreign direct investment (FDI) for solving these problems and neglecting social sectors like health and education. Most of the FDI inflow is domestic money routed through tax-havens to evade tax or it comes in the form of mergers and acquisitions and hardly in the form of any employment generating greenfield investment.

On the other hand, privatisation of education and health sectors have made out-of-pocket expenditures of the common people on these very high. If the government takes care of the expenditures on social sectors, the real purchasing power of the common people would rise, which may help in boosting the economy and reviving investors’ confidence, in turn enhancing growth and increasing employment.

Tax Structure
It is impossible to increase the social sector expenditure of the government or the capital expenditure as a proportion of national income (or GDP) without increasing the fiscal deficit to the GDP ratio unless the revenue of the government increases (as a proportion of GDP). The combined tax-GDP ratio of the Central government and all the State governments taken together is just 16.5% in India, which is one of the lowest in the world — lower than even the poorest Sub-Saharan African and Latin American countries. Our tax base is lower than the developed countries as majority of the population is poor. However, our tax (both direct and indirect) rates are not low as compared with the international standard.

Last year, there was a shortfall in GST collection by Rs 1.5 lakh crore for the Central government alone. After compensating for the loss in GST collection by the States, the net tax collection of the Centre would be even lower, which would constrain the fiscal space even further. The Central government must take initiative to strengthen the tax administration, improve the tax information network to reduce the degree of tax evasion and corruption. The Budget should also emphasise on the enhancement of tax-GDP ratio in a substantial manner to create more fiscal space for larger public spending (as a proportion of GDP).

As direct taxes are progressive taxes and indirect taxes regressive, if the proportion of direct taxes like income tax and profit tax increases as compared with indirect taxes like GST, inequality reduces in society. The Budget also has to balance the proportion of direct to indirect taxes in the face of increasing inequality. Even if the fiscal deficit to GDP ratio rises to some extent, capital expenditure and social sector spending should not be compromised at any cost under a situation of lower growth and higher unemployment. Otherwise, ‘acche din’ would remain a distant dream forever.

(The author is Assistant Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi)