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Union Interim Budget 2019-20: A Sustained Deflationary Approach?

Fiscal policy is a very important component of economic policy to drive the economy for a better performance. Budget is an important document which carries the account of components of fiscal policy which are expenditure and receipt policies. John Maynard Keynes, who led the foundation of macroeconomics, strongly advocated counter cyclical fiscal policies. India is a country of second largest population in the world. The welfare of the people largely depends upon how the economy has performed. Chart 1 shows the deflationary situation that has gripped the economy during the current political regime and it goes much opposite to the promises which were made during the run up of the parliamentary election of 2014. The economy’s GDP growth rate definitely witnessed improvement till 2015-16 as it increased from 5.46 percent in 2012-13 to 8.15 percent in 2015-16 based on optimism of economic reforms due to the decisive leadership with clear majority. But this business optimism turned opposite during the post-2015-16 period even though that the world economy recovered from sub-prime crisis setback and improved in terms of annual GDP growth rate from 3.3 percent in 2015-16 to 3.7 percent 2016-17 onwards.

One of the incident which characterises the Indian economy since 2015-16 is demonitization of currencies with Rs. 500 and Rs. 1000 denominations in India. The post-demonitization period has witnessed dramatic fall of the GDP from 8.15 percent annual growth rate during 2015-16 to 6.68 percent during 2017-18 (see Chart 1). Such slowdown of economic performance has been attributed to demonitization by many economists of international repute. However, the trend of GDP growth rate, even though we have adopted new way of measuring GDP clearly reflects the deflationary trend in the Indian economy.

The actual GDP growth rate for the year 2018-19 is yet to arrive, though existing estimates project GDP growth rate to be around 7 percent.  The deflationary trend in the economy is clearly observable also by looking at annual growth rate of nominal GDP. The fall of nominal GDP growth rate can happen either due to slowdown of the production of goods and services or the fall in the prices. We observe both here as growth rate of real GDP is falling accompanied by the fall in the prices which is being reflected in the form of lower inflation rate at around 4 percent during 2018-19. Fall in the inflation rate can happen either due to rise in the supply of goods and services or fall of the demand for goods and services. The first possibility can be fairly ruled out in the light of slowdown of the GDP growth rate. It is the fall of the effective demand which can explain the fall of inflation rate, which is a contrast signal of aggravation of demand deficiency in the economy. Such demand deficiency can also be observed by looking at the Gross Capital Formation as percentage of GDP over last few years. Gross Capital Formation has declined from 37.53 percent in 2011-12 to 30.62 percent in 2016-17 (see Chart 2).

The fall of economic activities is bound to cause the problems of unemployment in Indian economy as direct reflection of economic slowdown. It has been reflected recently by the Business Standard, which has brought out an analysis about the unemployment rate based on unpublished the NSSO’s quinquennial round survey report. According to the news report the unemployment rate has touched the highest in the last four decades. According to the report overall unemployment rate has touched 6.1 percent in 2017-18 as compared to 2.2 percent in 2011-12. The deceleration is also observable from the data of the Centre for Monitoring Indian Economy (CMIE) on unemployment rate (https://unemploymentinindia.cmie.com/). According to the CMIE the unemployment rate has reached to 7.1 percent in January, 2019. This is the typical case of jobless economic growth of Indian economy during the period of current political regime, which has further potential to aggravate economic slowdown.

Such slowdown of the Indian economy has dented into the dream of growing at double GDP growth rate and potentially has caused greater opportunity cost due to higher unemployment rate. The observed slowdown of the Indian economy is rooted in the economic approach which believes in the fiscal conservatism apart from the sudden break imposed on the functioning of the cash oriented informal economy by illegalizing 86 percent of medium of exchange in November, 2016.

The trend of fiscal conservatism in the budgetary policy of the Government of India is clearly observable as the budget deficit has declined from 5.9 percent of GDP in 2011-12 to 3.4 in 2018-19 (see Chart 3). As far as achieving the target of lower fiscal deficit is concerned the current regime has been more pro-active in promoting the fiscal conservatism on the cost of masses who are under the serious grip of the problems of unemployment. The average fiscal deficit during the NDA-2 regime is 3.5 percent of GDP, which is much lower (30 percent) than average fiscal deficit of 5 percent of GDP during the UPA-2 regime. In the interim budget of 2019-20 also the current Government has continued the fiscal conservative approach to sustain the slowdown of the economy and cause higher unemployment rate.

The fiscal deficit for the year-2019-20 has been targeted at 3.4 percent of the GDP. This clearly shows why the market sentiment stands in favour of the BJP led alliance. BJP having full majority and its head claiming to be the champion of working classes and down trodden segments of the society would have done much for the benefits of the economy and unemployed forces if it was not under the trap of fiscal conservatism or market fundamentalism, given the fact that it has also experienced rise of Tax-GDP ratio from 10.7 percent in 2014-15 to 11.9 percent in 2018-19. The rise of Tax-GDP ratio should have been taken as ground to disburse the greater amount of government expenditure to boost the economy in the light of falling gross capital formation and lead towards the possible double GDP growth rate. Sadly that has not happened in last four years. On the other hand the Central Government has promoted the philosophy of deflationary fiscal policy.

Another sign of aggravated fiscal consolidation is the fall of total budgeted government expenditure as percentage of GDP. It has been continuously declining since 2011-12 and has been accentuated during the current regime as the total budgeted government expenditure has fallen from 13.88 percent in 2013-14 to 12.77 percent in 2018-19. The percentage figures of the share of total government expenditure has been calculate on the basis of actual values. We need to understand that under such fiscal conservatism, even though as per market principles the fundamentals are good, the GDP is not growing as it was expected and the country is grip of unemployment problems.

This analysis clearly shows that the government at the centre is under grip of market fundamentalism and philosophy of fiscal consolidation and is pursuing fiscal policies which are detrimental to the vast majority of the country as market has been unable to generate matching jobs. The economic policy makers at the centre must believe in what J.M. Keynes described in his principles of macroeconomics that it is the government which carries the tools of turning the business cycle of the economy towards boom by following counter-cyclical expansionary fiscal policies. Counter-cyclical expansionary fiscal policy becomes more pertinent at this juncture as the monetary policy has turned out to be an instrument of maintaining the interest rate on higher side and therefore it is unable to boost the capital formation at desired level.

The trend of fiscal consolidation in the interim budget of 2019-20 is a step in the direction which has been followed in previous four years. Not even single budget has been prepared which could have compensated to the loss of GDP growth rate and loss of employment due to the demonitization in 2016. The tax concessions offered in the current interim budget is too late and too little to result in immediate turnaround of the GDP performance towards potential level and also to reduce the joblessness in the Indian economy. Any government must keep the larger interest of the society in mind rather than market fundamentalism as the market is not perfect entity and has no concern towards society except making profits.

The AuthourDr. Santosh Kumar is Assistant Professor, Shri Ram College of Commerce, University of Delhi.  He can be contacted at: sksultanpuri@gmail.com

Views expressed are personal and not of the institution

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