THE BLOG

Jaitley Is Repeating Chidambaram's Mistakes

28/02/2015 3:18 PM IST | Updated 15/07/2016 8:25 AM IST
NEW! HIGHLIGHT AND SHARE
Highlight text to share via Facebook and Twitter
Bloomberg via Getty Images
Arun Jaitley, India's finance minister, third right, Rajiv Mehrishi, finance secretary, third left, Jayant Sinha, junior finance minister, second right, and other members of the finance ministry stand for a photograph outside the North Block of the Central Secretariat building before leaving to table the budget in parliament in New Delhi, India, on Saturday, Feb. 28, 2015. Prime Minister Narendra Modi diverged from a previously announced path to narrow India's budget deficit in an effort to spur faster growth in Asias third-biggest economy. Photographer: Graham Crouch/Bloomberg via Getty Images

Much is expected from the annual budget of the government of India every year. This year was no different to that extent. But ultimately, the budget is the annual financial statement of the government, and that's how it should be looked at.

On the face of it, the numbers projected by the finance minister Arun Jaitley for the next financial year look very credible this year. In fact, like a good accountant Jaitley looks like he has been very conservative with the numbers this time around.

Let's start with tax revenues. The tax revenues have been assumed to grow by a minuscule 1.25% to Rs 9,19,842 crore, during the course of the next financial year. This looks like an impact of making a very aggressive assumption in the increase in tax revenues during this financial year. The total expenditure of the government has been assumed to grow at 5.7% to Rs 17,77,477 crore.

During this financial year, the expenditure was assumed to grow at 12.9%. It finally grew by 7.8%, which is a clear impact of tax revenues not growing at as fast a rate as they were expected to. Jaitley had assumed that tax revenues will increase by a whopping 16.9% during the course of the year. They ultimately increased by only 11.3%.

Let's look at the tax revenues projected for the next financial year in a little more detail. If we look at direct (personal income tax and corporation tax) and indirect (service tax, customs duty, central excise duty) taxes separately, what do we get? Jaitley has assumed that direct taxes during the course of the next financial year will grow at 11.6% to Rs 7,97,995 crore. This looks like a reasonable assumption to go with, given that direct tax revenues during the first ten months of this financial year between April and January 2015, grew by 11.4%.

The indirect tax revenues on the other hand have been assumed to grow by 19.5%. This is where things get tricky. The indirect tax revenues during the course of this financial year had been assumed to grow by 20.3%. For the first ten months of the financial year between April 2014 and January 2015, the total amount of indirect tax collected went up by only 7.4%, in comparison with last year. So what this tells us is that Jaitley has made the same over-optimistic assumption when it comes to indirect taxes, as he did last year. While some optimism is necessary, excessive optimism hurts.

The question is why are total tax collections of the central government expected to grow up by only 1.25%, when the both direct as well as indirect taxes are expected to grow in double digits? The answer lies in the fact that the states' share of central taxes has gone up dramatically by 55% to Rs 5,23,958 crore. This is clearly a good move, because economic growth is faster when state governments spend money rather than when the central government does the same.

Getting back to the issue at hand--Jaitley will have a tough time meeting the indirect tax collection target that he has set. This is primarily the problem that the government has faced over the last three budgets. At the beginning of the year very aggressive tax collection targets are set, and these targets are then not met during the course of the year.

The finance ministers (Jaitley and Chidambaram before him) then manage to meet the fiscal deficit target by dramatically cutting down plan-expenditure. Fiscal deficit is the difference between what a government earns and what it spends.

The government expenditure is categorised into two kinds--plan and non-plan. Plan-expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. In short, it is asset-creating expenditure.

In 2013-2014, Chidambaram slashed plan-expenditure by 14.36% to Rs4,75,532 crore. He had followed a similar strategy even in 2012-2013 (the period between April 1, 2012 and March 31, 2013) when he slashed the plan expenditure by 17.6% to Rs4,29,187 crore, to balance the budget. Jaitley has done the same this year. He has cut plan expenditure by 18.6% to Rs4,67,934 crore. The original number was at Rs5,75,000 crore. Chances are he will have to do the same next year as well, given that the indirect tax collection numbers are again extremely over-optimistic.

Interestingly, the plan-expenditure target for this year has been set at a much lower Rs4,65,277 crore. In order to understand why plan expenditure gets slashed, we need to understand what exactly non-plan expenditure is. Non-plan expenditure is an outcome of plan-expenditure. For example, the government constructs a highway using money categorised as a plan expenditure. But the money that goes towards the maintenance of that highway is non-plan expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.

As is obvious, a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government needs to keep paying salaries, pensions and interest on debt, on time. These expenses cannot be postponed. Hence, the asset creating plan expenditure gets slashed.

To conclude, Jaitley could have done better, by not going overboard with the nearly 20 percent jump he has assumed in indirect tax collections. Chances are he will have to slash the plan-expenditure again during the next fiscal. And to that extent, he will be no different from his predecessor Chidambaram.

Finance Ministers Since Independence

More On This Topic