Union budget’s false dilemma

Live Mint

 

Context

In budgets over the years, there has been a decline in the share of capital expenditure to total expenditure

 

Definitions

 

What is fiscal stimulus?

An increase in public spending or a reduction in the level of taxation that might be performed by a government in order to encourage and support economic growth

 

Two types of budgets

Author has stated that after the budget is presented in India, it is generally clubbed in the following two categories

  • Populist budget
  • Growth oriented budget

 

Questions that remain unanswered

Author then presents us with these questions,

Q: Is such branding the result of a false dichotomy?

Q: Are there fiscal measures that could be populist but still capable of generating long-term investment?

 

Difficult to make a clear distinction

What do we mean by populist measures?

  • Underneath the term “populist” perhaps there is an implicit idea that such policies essentially are schemes that give immediate gratification to the people/electorate

 

From this angle,

Q: Will a “debt relief scheme for the population with loans below a certain income threshold” qualify to be a populist measure?

Q: Are subsidies by their very nature populist?

Q: At the same time, the promise of huge infrastructure expenditure before any election may technically qualify as a long-term investment, but still may turn out to be populist

 

Thus, author states that it is difficult to make a clear cut and straight distinction b/w populist and long-term investment measures

 

Falling share of revenue expenditure

Author states that the share of revenue expenditure in total expenditure has been falling over the years

  • As per the budget estimates of 2016-17, of the Rs100 spent by the Central government, Rs88 went to revenue expenditure and Rs12 went to capital expenditure

Thus, if one measures the extent of “populism” by the share of revenue expenditure in total expenditure, then it will not be an exaggeration to say that over the years, there has been an ever-increasing trend of populism in Indian budgets

 

Trend is unlikely to change

Author states that the above trend is unlikely to change this year also due to the following factors,

  • Demonstrating good effects of demonetization: Due to demonetization additional revenue has accrued to the government and its disinvestment plans are further going to add up to its revenue surplus. However, despite the claims of medium- and long-term gains from demonetization, there is now ample evidence of short-term pains that an average citizen had to bear post-demonetization. In this case, the government has to show some demonstrable good effects of demonetization. An ideal way to do it is either to spend on specific schemes of revenue expenditure for specific lower-income groups or to give some tax sops (maybe raising the exemption limits for income tax) to middle-class Indians

 

Author states that such populist measures could essentially turn out to be in the nature of fiscal stimulus which are very much required in the light of revised the Indian GDP estimates for 2016-17 from 7.6% to 6.6%, by IMF