The budget presented by Finance Minister Arun Jaitley on February 1 was closely watched as it was the last full-year budget of the NDA government before the 2019 general elections. So, the critical question was whether the budget would be populist or pragmatic? And, could the finance minister achieve the perfect balance between the objective of boosting growth, maintaining macro stability and remaining on the fiscal consolidation path?
While the budget smartly balances populism with prudence, the fiscal deficit target slips from the budgeted number, as expected. The government could have completely moved away from fiscal consolidation, given that this is an election-heavy year, or it could have continued on the pre-announced fiscal ‘glide path’ by aggressively cutting expenditure. Instead, a middle path has been chosen as suggested in the Economic Survey. The revised estimate for fiscal deficit for FY2018 has risen to 3.5% from the budgeted 3.2% of GDP due to lower-than-budgeted indirect tax collection following the roll-out of GST, a shortfall in non-tax collection, and revenue lost from a small excise duty cut on petro-products. In hindsight, it is obvious that the tax estimates were optimistic as those were based on the assumption of an ambitious nominal GDP growth rate of 11.8%, which slowed to 10.2%.
The government did not give in completely to the temptation of populism. The FY2019 fiscal deficit is estimated at 3.3%, just a 30-basis points deviation from the recommended glide path.
From the next fiscal, the government will do away with the announcement of Revenue Deficit targets. It is argued that the expenditure on education and health are not considered capital expenditure but is necessary for human capital formation in the country. Moreover, infrastructure expenditure is being met through off-budget borrowings. This makes the budgeted numbers of capital expenditure misleading.