5-Institute budget seminar on Union Budget 2019–20: Our notes

1.1 The 5-Institute budget seminar on ‘The Union Budget 2019–20: Reforms and Development Perspectives’, was held on 22 July 2019. This seminar brought together five policy experts who shared their thoughts on the union budget 2019 (“ Budget”) presented by the National Democratic Alliance — II (“ NDA-II”) government on 5 July 2019. The session was moderated by Puja Mehra, an independent economist. Vihang Jumle and Tuhina Joshi, associates at Ikigai Law, attended this event. This blog summarizes the discussions that took place during the seminar. All speaker’s presentations are available here.

2. Summary of presentations

2.1 Rathin Roy, Director, National Institute for Public Finance & Policy.

Presentation title: A silent fiscal crisis?

2.1.1 Roy began by stating that India was in a state of a silent fiscal crisis. Per Roy, while the Budget made it appear that India’s finances were in order, a closer look revealed that there is a drastic difference between the government’s provisional accounts and its revenue estimates for 2018–19. He stated that the revenue estimates (the government’s earnings) for 2018–19 were one percent lower than what was reported in the economic survey of India 2018–19 (“ Economic Survey “). This one percent amounted to approximately INR 1.7 lakh crore, signifying a massive shortfall in earnings. Roy stated that shortfalls in tax revenues were the reason for this discrepancy.

2.1.2 Roy explained that the GST decline in revenue that followed the introduction of the Goods and Services Tax (“GST”) showed that the GST was not revenue neutral, and was actually leading to losses for the exchequer. These shortfalls in revenue had required the centre to generously compensate the states for their lost revenue and continue the adoption of GST to fulfill the centre’s political mandate.

2.1.3 Roy concluded that the government was facing a silent fiscal crisis because the government’s revenues were shrinking without intent, there were shortfalls in tax revenues, all while over-optimistic income tax exemptions and hidden expenditure cuts were being made.

2.2 Shekhar Shah, Director General, National Council of Applied Economic Research.

Presentation title: Union Budget 2019–20

2.2.1 Shah began his presentation by focusing on the agriculture sector. He stated that the effects of demonetization, reduced gross capital formation in agriculture (0.5 percent since 2013), increased volatility in growth and slowing gross value-added growth (in 2018–19) had given farmers cause to worry. Per Shah, while the Budget promoted schemes such as Ujjwala Yojana and Saubhagya Yojana, their implementation remained a challenge. He remained pessimistic about the monsoon providing any relief, since 16 states had remained rainfall deficit in 2019.

2.2.2 Shah discussed a few highlights from the Budget such as the increasing investment needs in India, e-invoicing of GST, development of tourism, pension schemes, reduced taxes on e-vehicles, bidding of projects for sunrise sectors, tax exemptions for start-ups, advanced technologies and the announcement of ISRO’s New Space India Limited. He critiqued the hike in customs duties for certain goods and commented that domestic micro, small and medium enterprises were being protected by India and that this indicated the return of a ‘license raj’.

2.3 Nishant Chadha, Fellow & Head — Projects, India Development Foundation.

Presentation title: 5 Institutions Budget Seminar Human Capital.

2.3.1 Chadha opened his session by emphasizing on India’s growing need for human capital investment. Per He stated that India needed to think of its budgetary allocations for developing human capital as an investment in its labour force, rather than an expenditure. Per him, India should be focusing on a strategic long-term investment plan for its own citizens. He highlighted the fact that human capital investment is often side-lined due to expenditures incurred for addressing the challenges of labour markets. He informed the audience that investments in human capital provide both monetary and social returns. Per Chadha, India will be unable to sustain a growth rate of 7 percent to 8 percent annually if it continues to ignore its unskilled labour, increasing technological unemployment, and poor levels of tertiary education (11.54 percent of the labour force in 2017–18). Identifying education as a critical issue, he remarked that while the government’s national education policy was well thought out, it had not set any appropriate timelines for its implementation. He also observed that the Budget focused more on higher education (by setting INR 400 crore for development of word-class institution) and less on primary education, which was a big miss. Chadha stated that India needed to focus on its research and development capabilities. He also dismissed the Budget’s proposal to skill Indian labour for jobs abroad stating that India needed to focus on solving domestic issues before entering the global arena. He also asked for a change in attitude towards labour welfare and stressed on the need to brainstorm solutions rather than policing the market.

2.3.2 Chadha drew a comparison between the expenditure of the centre and the state. He mentioned that the central government’s spending was a small proportion of overall public expenditure. The centre paid only 15 percent of the education expenditure and 25 percent of the health expenditure while the rest was paid by the states. He also drew a comparison of expenditures on health as a percentage of GDP between India and China, with both countries spending approximately 1 percent in 2000. By 2015 China’s expenditure had grown to 3.25 percent whereas India’s expenditure remained at 1 percent. He also mentioned that India’s out-of-pocket expenditure was higher than government spending on both health and education.

2.3.3 Chadha provided a breakdown of higher education expenditure in India to illustrate that the government was spending excessively only on a small number of Indian students. The allocations are 59 percent for autonomous bodies, 20 percent for central sector schemes/projects, 14 percent for University Grant Commission or UGC and All India Council for Technical Education or AICTE, 6 percent for centrally sponsored schemes and 1 percent for establishment expenditure. Autonomous bodies included the Indian Institute of Technology, Indian Institute of Management, Indian Institute of Sciences etc (“ Elite institutes “). The centrally sponsored schemes/projects also included special projects and grants for elite institutes, exchange programs for elite institutes etc.

2.3.4 Chadha concluded saying that India’s education challenges could not be solved by establishing a body such as the Kendriya Vidyalaya, which has not seen much progress. Chadha asked for a long-term strategic plan and asking for a smooth transition process from schools to colleges for students. He also asked for cuts in expenses on small groups of students that belonged to Elite institutes. He said that investment in primary and secondary education and R&D should not be considered as a “ substitute “ and that both were equally important. Chadha also called for improvement in average productivity levels.

2.4 Rajat Kathuria, Director & Chief Executive, Indian Council for Research on International Economic Relations (“ ICRIER “).

Presentation title: Growth and Development Perspectives: Trade, Telecoms and Tax, Crossing the T’s.

2.4.1 Kathuria began by stating that India needed to reduce its compliance cost of paying taxes in order to increase the government’s revenue. He suggested that the Indian government could refer to Her Majesty’s revenue and the customs department’s tax structure since it was more efficient.

2.4.2 Per Kathuria, falling Indian exports (17 percent of GDP in 2013 to 12 percent of GDP in 2018) and slowing investments posed a major challenge to the USD 5 trillion economy aim. He used the example of east Asian economies who had relied on high exports to sustain high growth rates to explain that the USD 5 trillion economy dream could only be achieved by driving high exports and investments. He further added that exports also enabled the transfer of technology between countries.

2.4.3 Kathuria said that the Regional Comprehensive Economic Partnership deal was a “ surrogate “ for a free trade agreement with China. Per Kathuria, India could benefit by attracting firms exiting out of China due to US-Sino trade. How Kathuria observed that India could benefit out of the US-Sino trade war, since firms were increasingly looking to exit China. However, India did not appear on the list of destinations where they could open new units. Instead, these firms were turning towards their home countries like Thailand and Mexico. Therefore, for India to benefit, it would have to make the domestic market attractive for these firms.

2.4.4 He criticised the increase in customs duty imposed by India and said that global participants did not resort to protectionist policies but instead worked toward increasing competitiveness. Citing one of ICRIER’s research, Kathuria said that “ an import tariff is an export tax “ and explained how an increase in customs rates dis-incentivize firms from setting up a business and taxed a country’s competitiveness.

2.4.5 Kathuria concluded by saying that India’s increasing customs rates were taking it away from the global value chain. He reiterated the urgent need to address the high compliance cost of paying tax in India. He suggested that ensuring the tax department’s accountability was crucial in increasing India’s revenue from taxes.

2.5Yamini Aiyer, President & Chief Executive, Centre for Policy Research.

2.5.1 Aiyer began by stating that “ politics “ defined the content and structure of the Budget in India. Per Aiyer, though the Budget should be analysed basis the figures it presented, it was equally important to focus on the narrative that the Budget presented. She said that the two narratives were:

a. India was a strong nation with many ambitions;

b. The Indian government focused on welfare;

2.5.2 Aiyer highlighted how the Budget digressed from core issues such as farmer welfare, housing, etc. and instead began with USD 5 trillion economy objective. She said that the government may meet its objectives by building a compensatory state and not a developmental state. This would involve the creation of status welfare structures such as the direct provision of private goods to the public sector instead of solving for job crisis etc. Per Aiyer, welfare schemes such as Ayushmaan Bharat would not be at the centre of building the Indian economy in the coming days. She opined that central schemes were crafted to make the voters feel that their political leaders were at an arm’s distance from them. Renaming schemes to start with “ Pradhan Mantri “, direct benefit transfers, etc. played a pivotal role in creating a direct connection between the voters and their leaders. She mentioned that the Budget was about the persona it created of the government than the government’s capability.

2.5.3 Per Aiyer, the Budget was a continuation of the interim Budget proposed in February 2012 however it was not clear how the government planned to generate sufficient funds to meet its proposals. Aiyer said that though the government’s revenue was shrinking, its ambitions were expanding and it was likely that the funds for the states may be reduced for the centre to be able to meet its objectives. Per Aiyer, the government is likely to control its fiscal deficit.

2.5.4 Aiyer concluded saying that the status quo was likely to continue, welfare architecture may see minimal growth, the fiscal situation might see improvements, any changes to subsidies seemed unlikely and investment in human capital might remain minimal. She closed with an open-ended question asking if the tomorrow’s voters will pick welfare over subsidy when choosing the next government.

(Authored by Vihang Jumle, Associate with inputs from Tuhina Joshi, Policy Associate, Ikigai Law).

Originally published at https://www.ikigailaw.com on August 20, 2019.