India’s budget exercise is different this year; new political and economic hurdles make it more difficult

India budget exercise for the fiscal 2021-22 is different this year, not only because our Prime Minister has involved himself in the exercise, but also due to multiple new political and economic challenges that enforced him to come into the picture.

The focus is on avoiding a turbulent fiscal ahead by resorting to a realistic budget at the time when economy is performing at a low growth rate of 4.8 per cent with huge shortfall in revenue under sweeping reform of GST, recommendations of 15th Finance Commission for revenue sharing with states which is binding on the government from the fiscal 2021-22, mounting inflationary pressure, rising oil prices, distortion in trade balance, deficit, and the political unrest in most of the states which are now ruled by opposition parties depending largely on revenue sharing and grants-in-aid from the Centre.

Our country is not only the centre but also the states and we have a federal structure. Before the implementation of the GST, states did have power to raise taxes and the proceeds thereby was used for their expenditure. At the midnight of July 1, 2017, State’s power to collect taxes was done away with the GST after its launch. Since then our states were made dependent on revenue share to be made by the Centre, which they never get in time. It has resulted into worsening state finances.

Under authoritarian rule of the BJP led government at the centre, barring a few, most of the states ruled by BJP or its alliance partners kept silence. The political situation since March 1918 has now been reversed. Barring a few, most of the states are now ruled by other political parties opposing tooth and nail the authoritarian policies of the BJP led government of the centre. States have become vociferous in their demand for timely transfer of revenue share, not only as per their share in the GST collection, but also as per the commitment made by the centre at the time of launching the GST to compensate the loss incurred by the state, if any, due to implementation of the new tax mechanism. A huge shortfall in the tax-revenue this year has presented an unprecedented problem to meet even the requirement of the centre, how can the Union government fulfill its commitment on revenue share to the states? The question haunts the budget makers, because share of the states in the GST has considerably fallen and there is a commitment that revenue share to the states will be set off against any loss to them.

Moreover, states are suffering from non-transfer of their share in time at a time when they are increasingly dependent on share of central taxes and grants-in-aid. After Modi’s coming to power, especially after taking over the power to tax under GST regime, States are increasingly dependent of the mercy of the Centre. Only a few years ago, central tax share and grant in revenue receipt of the states was around 38 per cent which has risen to 47.75 per cent in the current fiscal. This level of dependence is of course alarming and is against the principle of economic federalism. It indirectly means, the performance of the states are increasingly depending on the mercy of the centre’s transfer of funds in time. It is why, most of the states are financially in bad shape. Additionally, there is an issue of share in GST in which most populous states will get most of the share, and the least populous will get the least. It is indirectly penalizing the states that have implemented the national population control programme more successfully. It goes without saying that southern states are to get lesser share in GST for their performance, which has to be compensated otherwise.

One of the major problems with the Ministry of Finance this time is the setting of GST rates on their own. Earlier, government used to decide the rates of goods and services on their own whims and fancies. However, under the new GST regime, neither the States, nor the Centre has power to do so. The taxes are being decided by GST councils. This has limited the government’s power of raising more tax revenue through goods and services for majority of items, except for a few articles such as petroleum products. Therefore, to enhance the revenue, the officials are doing great efforts to widen the tax bases, which is the only hope left for the government.

Fair distribution of the GST proceeds has additional difficulties due to recommendation of the 15th Finance Commission submitted to the centre last month and will be binding for the Centre from the year 2020-21. Its recommendation are therefore impacting the budget exercise. The actual recommendations will be known only after presentation of the budget on February 1. The 14th Finance Commission had recommended 42 per cent to be transferred to states from Centre’s divisible pool of taxes. Since the 15th Finance Commission has understandably calculated it with especial consideration for two new factors– the Census 2011, and the new GST regime, its recommendations has new bearings on the way the budget is being prepared. Any reduction in transfer will curtail the spending power of the states needed to discharge their constitutional responsibility on the one hand, and the revenue shortfall tend to restrain the Union government to curtail their own expenditure on the other.

In this backdrop, worries are writ large on the officials of the Finance ministry. Not only the Union government, but also states are worried over their finances. People have high expectations from this budget because they have been greatly suffering from severe economic crisis which is most likely to deepen further on account of a range of domestic and external crises. However, much will depend on the assumptions underlying GDP growth and revenue and expenditure projections for the next fiscal. Even GDP growth rate assumption at 8 per cent is being considered ambitious while actual performance is about 4.8 per cent in the current fiscal, but there was a dominant view in the ministry for making the budget on an assumption of a growth rate of 9.5 per cent.