Will Assam Budget 2020-21 affect the State's financial well-being?

Raktima Kalita, Nibir Deka:

The 5th and last Budget Session of Assam's Finance Minister Himanta Biswa Sarma started with a lot of interruptions. The Assam Budget 2020-21 was scheduled to start at 2pm. Controversy erupted amid the alleged leaking of the Part I of the Budget, which consists of the economic and fiscal data. (Part II focuses on development policies, proposals, taxation etc). It took some time for the Honourable Speaker to restore decorum, as members of the Opposition walked out in protest.

The main question arises: whether the budget is pro-poor or has the BJP government already started gearing up for the upcoming 2021 state polls through the host of sops in the budget?

The Finance Minister in his speech stressed about the “common man from Dima Hasao and Tinsukia” and how the common man is not concerned with economic figures like GSDP numbers, deficits, Public debt or interest payments, and can only relate with tangible benefits. Even before the rollout of the budget, Sarma had said, “If being election centric results in making of couple of roads, what is harm in it, after all it is for the benefit of the people.”  Was it an "emotional" cover for the host of freebies without providing us the financial means through which the govt will back it up?

Himanta Biswa Sarma carefully avoided talking about actual Gross State Domestic Product (GSDP) figures. GSDP is defined as a measure, in monetary terms, of the volume of all goods and services produced within the boundaries of the State during a given period of time, accounted without duplication. He only mentioned that GSDP has increased by 12.38% from 2016-17 to 2019-20. Such a 4 year term shows us the average growth rate, but one still is not privy to the actual GSDP figure in the year 2019-20 and 2020-21. This is contrary to conventions since a budget must entertain the GSDP/NSDP figures.

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The Budget Speech also did not mention whether the fiscal deficit in 2020-21 is under the provisions of the FRBM Act. The Act further requires the government to develop measures to promote fiscal transparency and reduce secrecy in the preparation of the Government financial documents including the Union Budget. On his speech, Sarma has instead cited old fiscal deficit data, "as per the pre-actuals submitted by the AG, our fiscal deficit has reduced significantly to 1.47% of GSDP in 2018-19 as against the FRBM target of 3% of GSDP".

The reason behind avoiding GSDP and fiscal deficit is because they are related: Without the latest GSDP figures it is difficult to ascertain the fiscal deficit. Maybe, the actual figures will be in the Analytical Statement which is not updated as of 7th March.

Till then, upon analysing the Annual Financial Statements of 2019-20 Budget Estimates (BE) 2019-20 Revised Estimates (RE) and 2020-21(BE), the fiscal deficit was found by the author to be 3.1% of the GSDP when considering only the Consolidated Fund, and 3.04% of GSDP when looking at Consolidated Fund+Contingency Fund+ Public Account. [SEE CHART 1] Either way, it is above 3%. Was it an attempt to carefully avoid the figures of fiscal deficit?

After citing old fiscal deficit, later in the speech, HBS himself admits that Fiscal Deficit may rise due to market borrowings. He said, "during the recent past, market borrowing has been a major source of financing the fiscal deficit in our state and accordingly open market borrowing is likely to edge up marginally during 2019-20.”

Macro-economic factors

The government had spent more than it had planned to in the last fiscal year, if we look at the 2019-20 BE and 2019-20 RE. [SEE CHART 2] It had to resort to borrowings, which is harmful for the financial stability of the economy. Therefore, this year they have planned to slightly reduce their spending (in comparison to last year). And the existing spending they will do this year is not going to be financed by revenue generation (like corporate tax, tariffs) but from capital receipts (borrowings). Is this an attempt to balance between catering to the industry friends and the common man alike?

Usually fiscal expansion or public spending is desirable, but the govt has to be careful as to how the State is financing those spending. Are they taxing the rich or taking back alley solutions that will be harmful for the financial positioning of the economy in the long run?

Privy to every election year, govts usually resort to spend more by tabling freebies under the garb of fiscal expansion. That's a trend of every incumbent govt. Along with that, here, the Assam govt is borrowing from the capital market, rather than meeting those spending demands from revenue generation. So on one hand, they spent a lot last year and this year also they plan to spend a lot. This is done without relevant clarity on how that capital expenditure would affect the state finances and will that affect the debt-to-GDP ratio of Assam? Debt-to-GDP ratio is the ability to continue paying interest on its debt without refinancing and hampering economic growth. The debt-to-GDP ratio across all states and union territories is estimated at 24.9 per cent for FY20. According to RBI, India has the highest sub-national debt as compared to other BRICS countries.  Assam although a small economic state in contrast to the behemoths of Gujarat and Maharashtra has always had a lower debt-to-GDP ratio, estimated to be around 18.9 in FY20, according to BloombergQuint report.

Going Forward

The Assam Budget 2020-21 needs to be appreciated for the flagship programmes attempt to deal with the industry as well as for its labours. The Agricultural Income Tax holiday for Tea Industry aims to help the tea industry coupled with the benefits under Chah Bagicha Dhan Puraskar Mela for the workers. Whether it will benefit tea estate owners rather than labourers will depend on implementation.

The Rs 1500 Crore allocation to acquire 13.65% additional stake in Numaligarh Refinery Ltd (NRL) will ensure that NRL remains a public sector undertaking in the long term and becomes an engine for growth for the State is welcoming. The gender specific budget targeting is a commendable step. A lot will depend on the execution of such policies and whether they can be sustainable for the economy in the coming time.

Meanwhile, the aggregate fiscal deficit of states stand to touch 3% of India’ s GDP in the current fiscal year, against 2.6 RBI estimate because of decline in tax revenue, a lower nominal GDP and higher expenditure, according to a Business Standard report. Thus, the incentives in Assam Budget done with "good intentions" might still prove to be counter-productive for the greater Indian economy as the fiscal deficit of the states stands to affect the GDP. How will the “common man from Dima Hasao and Tinsukia” then cope up if the national economy is affected further?

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