The major national dailies have hailed Budget 2017 as a ‘safe’, ‘no-nonsense Budget’ that is also ‘wooing have-nots, hitting have-notes’. But how can a Budget be ‘prudent’ and ‘populist’ at the same time? The mainstream media is unwilling to independently analyse the economic situation and assess the Budget. It is neither looking at the numbers carefully nor asking the obvious questions. Spin doctors of the government are holding sway.

Budget 2017 has come in the backdrop of demonetisation, which invalidated 86% of India’s currency in circulation in one stroke, ostensibly to unearth ‘black money’ and nullify counterfeit currency. The question that naturally arises is, how much ‘black money’ has been unearthed and confiscated? In other words, what is the magnitude of the fiscal gain from demonetisation?

Nominal estimates

Finance minister Arun Jaitley’s Budget speech provides some figures through which he showed how “we are largely a tax non-compliant society”. The big data collated by the government on millions of deposits through which nearly Rs 15 trillion was deposited between November 8 and December 30, 2016, is supposedly going to help the government in “expanding the tax net as well as increasing the revenues”. The figures provided in the Budget documents, however, do not reflect any substantial revenue gain, either in the current or the next financial year.

The table below provides the nominal estimates of revenues, public expenditures and fiscal deficit for all the Budgets presented under the present government. Three facts are particularly noticeable. First, while gross tax revenues have grown by around 37% between 2014-15 and 2016-17, in those two years excise duties have grown by a whopping 104%, service tax by 47%, income tax by 33% and corporate tax and customs duties each by 15%. Thus, the growth in gross tax revenues under this government has occurred mainly on account of indirect taxes. Non-tax revenues, which include profits/dividends from CPSEs and economic services, have also grown at 69%, which is much higher than the growth in direct taxes.

Second, the corporate and income tax numbers for the Budget estimates and revised estimates of 2016-17 are almost the same. Given that the Union Budget was brought forward this year, the government may not have been able to provide proper revised estimates of direct tax collections for the full financial year. But this does raise serious doubts regarding revenue gains accruing to the government following demonetisation, plus the two income disclosure schemes that were announced in the current financial year. The first income disclosure scheme has reportedly yielded over Rs 30,000 crore to the government. Demonetisation and the second disclosure scheme were expected to bring in another sizeable windfall. Why then has income and corporate tax collections in 2016-17 not surpassed the Budget estimates by an indicative margin? It is clear that official expectations in this regard have been belied for the current financial year.

The third noteworthy fact is that the Budget estimates for 2017-18 reflect a shift in the revenue mobilisation strategy of the government. Growth rates of excise duties and service tax, which have yielded the lion’s share of revenue growth till 2016-17, are projected to slow down considerably to 5% and 11% respectively in 2017-18. The Budget has also given tax breaks on income and corporate taxes. On the basis of the expected widening of the direct tax base in the next financial year, income tax collection is projected to grow by 25% and corporate tax collection by 9%. Not only does this reflect the very limited extent to which the government expects the direct tax base to expand, the projected nominal GDP growth of 11.75%, on which direct tax growth will depend, also seems to be on the higher side.

Nominal GDP growth has ranged between 10% to 10.7%, from 2013-14 to 2016-2017. If the Budget’s optimism regarding a global growth recovery pulling up India’s exports and the digitisation drive spurring domestic investment fails to materialise in 2017-18, the direct tax projections can also turn out to be overestimates.

Real estimates

Even if the Budget estimates of direct tax revenues for 2017-18 materialise, can it be considered as a fiscal windfall which can justify the economic costs of demonetisation? From the table below, which provides real estimates of revenue and expenditure figures of the Budget (nominal estimates deflated by current GDP), it can be seen that the Budget estimates of gross tax revenues for 2017-18 are the same as the revised estimates for 2016-17; 11.3% of GDP.

Direct tax revenues are projected to increase from 5.6% to 5.8% of GDP, while indirect taxes are to fall from 5.7% to 5.5% of GDP. Non-tax revenues are also projected to fall from 2.2% to 1.7% of GDP. Thus, the revenue gains the government is expecting out of the demonetisation exercise in the next financial year would be barely enough to compensate for the declining growth in indirect taxes (excise duties) and would fail to compensate for the decline in non-tax revenues.

The latest Economic Survey has admitted that nominal GDP growth in 2016-17 would be lower by upto 1% due to the impact of demonetisation. Can this loss of economic activity be justified against a mere 0.2% of GDP gain in direct tax revenues in 2017-18?

The real expenditure figures also reveal that this government is following a contractionary fiscal path. The Budget deficit has been brought down from the average of 5.3% of GDP under the UPA-II regime to 3.5% of GDP in 2016-17 and is projected to fall further to 3.2% in 2017-18. Deficit reduction has been achieved through compression of revenue expenditure, which has fallen from 13% of GDP under UPA-II to 11.5% of GDP in 2016-17. Notably, this expenditure compression is projected to continue in 2017-18, not only vis-à-vis revenue expenditure, but also capital expenditure.

The Economic Survey has noted the sharp decline in real investment rate, both private and public, in the first half of 2016-17. The private corporate sector is faced with a debt overhang, with bank NPAs reaching 8.4% of GDP. Compressing public expenditures and reducing the fiscal deficit in such a backdrop can only hurt economic activity and reduce growth. Unfortunately, the policy establishment as well as the mainstream media is so enchanted with the narrative of India being ‘the fastest growing major economy in the world’, that such fiscal conservatism is being celebrated, even after the deflationary shock delivered by demonetisation.

Government’s oil revenue bonanza

While demonetisation has failed to generate any fiscal bonanza, this government has already enjoyed the fruits of substantial revenue gains, cashing in on the sharp fall in global oil prices. The increase in gross tax revenue-GDP ratio under the present government, compared to the UPA-II regime, is mostly attributable to increased revenues from excise duties till 2016-17 . This increase in excise duties has mostly accrued from the petroleum sector.

The table below shows that central taxes and duties on crude oil and petro-products rose from 0.9% of GDP in 2013-14 to reach 1.6% of GDP in the first half of 2016-17, with excise duties on petro-products alone rising from 0.7% to 1.4% of GDP. Together with dividends and direct taxes, the petroleum sector contributed almost 1.9% of GDP in revenues to the central exchequer in 2015-16 and 2016-17. It is also noteworthy that while the sector’s contribution to the central exchequer grew dramatically from 2015-16, its contribution to the state governments’ treasuries has fallen as a ratio of GDP. It is the central government that has milked the petroleum sector over the past three years through indirect taxation.

This could be done without causing inflationary pressures in the economy because global oil prices fell quite sharply. The chart below shows that while annual average price of crude oil sharply fell from $105 per barrel in 2013-14 to around $46 per barrel in 2015-16 and 2016-17, the retail price of petrol and diesel (in Delhi) came down slightly from around Rs 73 and Rs 55 per litre respectively in March 2014 to Rs 60 and Rs 48 per litre in March 2016, and has once again risen to Rs 71 and Rs 59 per litre respectively by end-January 2017.

Since 2014, excise duties on petro-products have been increased nine times by the government. The central government currently charges Rs 17.33 for every litre of diesel and Rs 21.48 for every litre of petrol as excise duty. The successive hikes in excise duties on petro-products have resulted in a fiscal windfall, which has been used to gradually reduce the fiscal deficit, without resorting to drastic reduction of real government expenditures compared to level of the UPA-II regime. However, with global oil prices already firming up with a revival of growth in the advanced economies, this revenue mobilisation strategy has become unsustainable.

The price of imported crude has already crossed $54 per barrel. Continuation of this upward trend in oil prices will not only have ramifications for the Indian economy in terms of inflation and widening current account deficit, but will severely affect the tax revenues of the government. This realisation must have played a role in the shifting the resource mobilisation strategy of the government, from indirect to direct taxes. However, it should be amply clear from the nominal and real revenue estimates provided above that there is practically no possibility of a direct tax windfall from ill-conceived measures like demonetisation.

Prasenjit Bose is an economist and political activist.