How Modi government’s budgets have differed from UPA’s
The present NDA government has increasingly relied on cesses and surcharges to exceed its tax revenue targets. But the structure of spending has not changed much
Mumbai: With its last full budget presented on 1 February, Mint analyses how the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government’s budgets have differed from those of its predecessor.
While on the revenue side, the Modi government has been much more aggressive and successful in collecting taxes compared to the Congress-led United Progressive Alliance (UPA), the structure of spending has not changed much.
The Narendra Modi-led government has increasingly relied on hiking cesses and surcharges to raise revenue, which allowed it to exceed its revenue targets for the third year in a row in 2017-18, according to revised estimates (RE).
While this has enabled the government to reduce the fiscal deficit from 4.5% of GDP in 2013-14, the last year of the UPA, to 3.5% in 2017-18 (RE), there remain reasons for concern.
First, the increased reliance on cesses and surcharges is at odds with the spirit of fiscal federalism as they are not shared with states. However, the government continues to rejig tax rates to corner more funds under such cesses.
To illustrate, the latest budget reduced the basic excise duty on petrol and diesel by Rs2 per litre and instead raised the road cess levied on petrol and diesel by the same amount.
As a corollary, the share of indirect taxes in the centre’s gross tax collections has increased. Again, this is worrisome because indirect taxes are regressive in nature, which effectively penalize the poor more than the rich.
While there has been a change in the break-up of tax collections, the structure of spending hasn’t changed much, apart from the decline in the subsidy burden, especially on fuel. The present government initially had hinted that it would prioritize capital spending. However, the latest budget reveals that it significantly cut back on its capital expenditure commitments in 2017-18. Budgetary expenditure of the Union government is classified either as “revenue” expenditure, i.e. recurring expenses on salaries, subsidies, etc. or as “capital” expenditure, i.e. spending which creates assets like roads and infrastructure.
The centre’s capital spending is expected to clock 12.3% of total expenditure in both 2017-18 and 2018-19, which is not very different from UPA-II’s 12%. Thus, the current government does not look very different from its predecessor in terms of capital spending. To be sure, the share of capital spending in Union budgets has been gradually declining since the first NDA government under Atal Bihari Vajpayee.
The government has justified the cut in capital expenditure on grounds that revenue expenditure on areas such as health and education are also important to raise productivity in the economy. The government has gone ahead and decided to discard revenue deficit targeting and instead only focus on fiscal deficit targeting. What this means is that the government will only try to reduce the overall budget deficit, without caring whether the deficit is used to meet revenue expenditure or capital expenditure.
Thus, the broad structure of the Union government’s spending has remained similar across governments.
Of course, there have been some changes, such as a visible decline in spending on “social services”, i.e. on items such as education and health. However, the decline began during the UPA years, gradually falling from a peak of 10.4% in 2010-11 to 5.3% as per 2017-18 RE. Moreover, part of the apparent decline can be attributed to the 14th Finance Commission’s recommendations, which increased tax devolutions to states. To compensate, the centre has cut back on centrally sponsored schemes, many of which involve social sector spending.
Nevertheless, while presenting the latest budget, the government adopted a UPA-style rhetoric on prioritizing social sector spending, with a focus on farmers and rural development. However, the budgetary support to many of the schemes has not increased much.
While the government announced Rs14.34 trillion for rural spending, less than a sixth of the headline figure will come from the budget. The bulk of the amount is expected to be met from “extra budgetary resources”, mostly in the form of subsidized loans. It remains to be seen whether the government can find adequate resources to fund its ambitious social sector projects without compromising on fiscal consolidation. The challenge becomes difficult amid rising global oil prices, which could force further cuts in taxes on petrol and diesel after a Rs2 per litre rollback in October.