Making sense of the Budget: Here are 10 charts that will help

File photo of finance minister Arun Jaitley with the Union Budget papers last year.

The union budget is the most awaited economic exercise of the year. Thursday’s budget will be the last full budget of the Narendra Modi government before the 2019 elections. This also increases its political significance. Here are 10 charts which can help you understand the budget better.

What do BE, RE and AE figures mean?

The budget is not just about what the government is going to spend in the coming year. It also gives an account of government’s incomes and accounts in the last two years. This year’s budget will give Budget Estimates (BE) for fiscal year 2018-19. But it will also give us Revised Estimates (RE) for 2017-18 and Actual Estimates (AE) for 2016-17. The present government has managed to increase its receipts above budgeted estimates in last two fiscal years.

Three are three kinds of government deficits

Everybody is talking about whether or not the government will overshoot its fiscal deficit targets. What does this mean? Fiscal deficit is the difference between total expenditure of the government and sum of its revenue receipts, recovery of loans and other receipts. There are two other deficit measures as well. Revenue deficit is the difference between total expenditure on revenue account and revenue receipts of the government. Primary deficit is fiscal deficit minus interest payments.

Revenue and capital expenditure

In the Planning Commission era, all government spending was classified into two heads: plan and non-plan expenditure. With the dismantling of the Planning Commission, this practice has been discontinued. We now have two different heads: revenue and capital expenditure. The latter is more useful from the viewpoint of reviving investment in the economy, which is a matter of great concern right now.

Will petrol, diesel prices increase even more?

The present government enjoyed a windfall in terms of declining petroleum prices. This led to both fiscal gains and lower inflation. Now that oil prices have started reversing, the government will be under pressure to forego high petroleum taxes and increase its petroleum subsidy (rather than cut prices fuel prices sharply when oil prices fell, the government increased the tax on fuel, shoring up its own finances). If the budget does not suggest this, petroleum prices could rise even more in the coming days.

Direct and indirect taxes

A disturbing feature of the Indian economy has been the rising share of indirect taxes in the recent years. This is a retrogression from the change which happened after economic reforms. Policies such as demonetisation and GST are expected to force tax-evaders to become a part of the tax-net. It remains to be seen whether more people will be forced to come under the direct tax-net. (Chart: % share of direct and indirect taxes)

Budgetary decisions need to keep the larger economic context – both domestic and global – in mind. Here are some things which would have weighed on the mind of the finance minister while making this year’s budget.

The main economic challenge

The Economic Survey has predicted a revival in economic growth. But it also points out several concerns. Agriculture seems to be missing the tailwinds to growth. Private investment is still sluggish. These two constitute the biggest challenge to achieving sustainable and equitable growth at the present juncture. A stimulus to revive these two will would have to keep in mind potential inflationary and fiscal risks.

Inflation and bond yields are rising

After going down for a considerable period, inflation has started tightening once again. While a pick up in farm prices would be good news for farmers, a sharp spike in inflation can trigger urban anger. Rising inflation is also likely to douse hopes of any more rate cuts in the near future. Even the Chief Economic Advisor noted this in his press conference after the Economic Survey was released. This could hamper investment growth. A rise in government deficit can further increase bond yields, and add to government’s borrowing costs.

Exchange rate and forex reserves

Exports were an important engine of India’s growth during the United Progressive Alliance boom years. The chief economic advisor has pointed out the loss in export competitiveness due to appreciation of the rupee. This is a result of rise in foreign capital inflows in the country, which has also helped us increase our foreign exchange reserves. Balancing out these two contradictory objectives would be an important economic policy challenge.

How will markets react?

The Indian stock market has been enjoying a prolonged rally. A sharp correction due to any reason can create major problems on both the domestic and external front in the economy. Given the fact that mutual fund deposits have a much bigger role in the stock market boom this time, any stock market crash would also have a larger than earlier effect on middle class incomes. It remains to be seen how the markets react to the budget.


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Loknath Das

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