Mainstream Weekly

Home > Archives (2006 on) > 2015 > Union Budget 2015-16: Continuity with the Past Framework

Mainstream, VOL LIII, No 11, March 7, 2015

Union Budget 2015-16: Continuity with the Past Framework

Monday 9 March 2015, by Arun Kumar

#socialtags

I. Introduction

The Union Budget 2015-16 is in the same mould as the Budgets in the preceding years. The Finance Minister’s speech announces or mentions a whole host of schemes for different sections of the population. With a projected expenditure of Rs 17.77 lakh crores and a GDP of Rs 141.1 lakh crores, the expenditure is slated to be 12.6 per cent of the GDP. This is no small amount and out of this, a few hundred or a few thousand crores can be given to many popular schemes. Say, for women, children, old, marginalised sections, rural infrastructure, irrigation, agriculture and so on.

When massive schemes are announced, like the setting up of five ultra mega power projects of 4000 MWs each, money does not have to be allocated immediately. At Rs 5 crores per MW, it would cost a total of Rs 1 lakh crore to set them up. In the starting year, it may not even require Rs 5000 crores but the impression created is as if a massive outlay is to be incurred. This would also be true of housing for all by 2022 and other infrastructure schemes to be set up over a period of time. But given the history of stalled and delayed projects, often allocations are made but not spent so that delays are the order of the day in most projects.

There is another category of announcements that will lean heavily on the financial sector to provide resources like the pension schemes. The budgetary provisions will be small but the public sector insurance companies will have to carry the burden for implementation. Similarly, many schemes of financial inclusion, like the Jan Dhan Yojana, are dependent on the public sector banks. The contribution of the Budget to these schemes which look grand on paper will be minimal. But this is nothing new since every Budget has resorted to such announcements. It makes the Budget speech of the FM look very promising.

The real problem in India is that announce-ments are easy but implementation is difficult. For instance, while 10 crore accounts are reported to have been opened in a short time under the Jan Dhan Yojana, most have no deposit or are inactive since the genuinely poor have little savings to put into their new accounts. How many overdrafts have been given to the micro-businesses and how much is the cost incurred on such accounts has not yet been revealed. The problem is one of governance. Firstly, most schemes are ill-conceived and, therefore, unimplementable. Secondly, even when designed well, they are not executed properly and, therefore, they do not yield the expected results.

There are, of course, many policy announce-ments in Budgets which are of a general nature and have nothing to do with budgetary allot-ments and the present Budget is no exception. There is a scheme for the monetisation of the country’s considerable holdings of gold. There are provisions for tackling the black money held abroad and in India. There are provisions for making the economic environment business- friendly by introducing a ‘stable tax policy’, likely introduction of the GST next year, deferring the implementation of the GAAR, changes to reduce tax disputes, merger of the Forward Markets Commission with SEBI, proposal to amend the RBI Act, changes in the Permanent Establishment norm to encourage return of fund managers back home and so on.

II. Budgetary Calculus: Playing with Numbers

One of the problems faced by the public sector is that there have been large budgetary cuts in Plan allocations. In 2014-15, the Plan size was designated as Rs 5,75,000 crores but in the revised estimates, it has become Rs 4,67,934 crores. This is a shortfall of Rs 1,07,066 crores and this was realised by cutting expenditures on education, health, infrastructure, etc. Those schemes that are new have to face the biggest cuts but other schemes are also slowed down.

The cuts are not done all at once but over the years. If we look at the data on Plan expenditures for 2013-14, the Budget estimate was Rs 5,55,322 crores but in the revised estimate it was brought down by about Rs 80,000 crores to Rs 4,75,532 crores and now the current Budget reveals that the actual expenditure was Rs 4,53,327 crores. That is a further decline in Rs 22,000 crores and the total shortfall compared to the budgeted amount is Rs 1,02,000 crores. This has become a common pattern in the last decade when the revised estimates are much less than the Budget estimates and then the final actual figures are even lower. The implication is that the government’s announcement of schemes has to be taken with a pinch of salt or often as a window-dressing of the Budget.

These shortfalls in expenditures, apart from reflecting poor governance, are also a result of the macroeconomic problems of Budget-making based on dressing up numbers. At the time of the Budget presentation, the FM is under pressure to announce many things (as in the present Budget speech) and for this purpose, the FM shows higher revenue figures so that she/he can claim a lower fiscal deficit. The pressure for this comes from the IMF and the credit rating agencies. Thus, both the revenue and expenditure numbers are dressed up by the Budget-makers. Since the figures are dressed up, revenue collection falls short and then to meet the fiscal deficit target, the expenditures have to be cut. Since the non-Plan expenditures are hard to curtail as they are committed on the basis of past commitments, it is the Plan size that bears the brunt of the cuts.

In 2013-14, tax receipts were budgeted at Rs 8,84,078 crores but in the revised estimates they are Rs 8,36,026 crores and now the actual figures show them to be even lower at Rs 8,15,854 crores, that is, a shortfall of about Rs 69,000 crores. Capital receipts are short by about Rs 64,000 crores. The, total receipts are, therefore, short of the budgeted amount by about Rs 1,05,000 crores. Thus, to maintain the target of revenue and fiscal deficits at about 3.3 per cent and 4.6 per cent of the GDP respectively, expenditures had to be curtailed by the extent of the shortfall in revenues. Since non-Plan and revenue expenditures are mostly committed ones from the past, it is difficult to curtail them and the burden of cuts fall on the Plan account (as mentioned above) and capital account (about Rs 41,000 crores). Both these have implications for the completion of public sector projects and schemes. The result is losses to the public sector, increased costs of setting up of projects and decline in the government’s prestige and increased pressure for privatisation.

But the real issue is the credibility of the Budget numbers if they repeatedly turn out to be incorrect. Further, what is the meaning of achieving the fiscal and revenue deficit targets if they have to be achieved by cutting back essential expenditures? This is like chopping one’s nose to cure a cold. But in this the present FM is not the only one to blame, the earlier FMs have also resorted to the same devices.

III. Larger Transfers to the States and the Changed Allocations

The larger transfers by the Fourteenth Finance Commission from the Centre to the States from 32 per cent to 42 per cent of the tax pool has led to much confusion for analysts and the public. The amount of tax revenue going to the States has risen from Rs 3,82,216 crores (BE) in 2014-15 to Rs 5,23,958 crores in 2015-16, an increase of Rs 1,42,000 crores or by 37 per cent. That is why the Budget estimate of the Centre’s Net Tax Revenue has hardly risen over the revised estimate for 2014-15 of Rs 9,08,463 crores and is Rs 57,000 crores less than the Budget estimates for last year.

This is the reason that the total estimated expenditure (BE) for 2015-16 is slated to fall compared to 2014-15 (BE) by Rs 17,500 crores. That is why the Plan expenditure (BE) compared to last year is slated to fall by Rs 1,10,000 crores. The Central assistance for States and UT Plans has been cut by Rs 1,30,000 crores. This is roughly of the same order of magnitude as the additional revenue accruing to the States under the devolution of tax revenue to them.

A part of the loss of resources is sought to be made up by forcing the Public Enterprises (PE) to contribute more to the Plan financing under the Internal and Extra Budgetary Resources (IEBR). The figure is to rise by 28 per cent or Rs 70,000 crores. This is unprecedented and unlikely to be achieved given that increased social obligations are sought to be placed on them which will lower their capacity to generate additional surpluses/profits. For instance, the Jan Dhan Yojana cannot but impact the profitability of the public sector banks and the new insurance schemes will dent the profitability of the insurance companies.

Comparisons with the Actuals of 2013-14 are telling. The most savage cuts in Central Plan allocations for 2015-16 have been in Rural Development, Energy and Social Services (consisting of education and health). Rural Development has been cut from Rs 52,000 crores to Rs 3000 crores and Energy from Rs 1,82,000 crores to Rs 1,67,000 crores. Social Services have been cut from Rs 1,51,000 crores to Rs 81,000 crores. The cut for the Department for School Education and Literacy has been from Rs 43,700 crores to Rs 3000 crores and for the Department of Health and Family Welfare has been from Rs 22,500 crores to Rs 6300 crores. The cut in the Ministry of Women and Child Development has been from Rs 18,000 crores to a token Rs 1000 crores and in Ministry of Drinking Water and Sanitation the cut is from Rs 12,000 crores to Rs 230 crores. The only big increase is in the allocation to transport from Rs 1,04,000 crores to Rs 1,93,000 crores. In this, the Ministry of Railways gets a boost from Rs 52,000 crores to Rs.98,000 crores and the Ministry of Road Transport and Highways from Rs 29,000 crores to Rs 83,000 crores. The boost to the Railways and road construction is a reflection of the government’s intention to step up investment in infrastructure. How much of this will ultimately be realised is a moot point since every year the Plan is being pruned and now the big items that can be pruned will be the ones that have big allocations. Other major sectors have any way been drastically cut and the scope of further cuts will be minimal.

The cuts in the social sectors and rural development are a result of the larger transfers to the States and the expectation that they will spend more on these sectors. The States have anyway been the major spenders on these items. The various Central schemes under these categories that were providing funds to the States are being pruned or the States expected to pick up a larger share of the spending out of the additional funds they are to get. Thus, the figures of expenditures by the Centre are not directly comparable with earlier years.

IV. The Macro-dynamics of the Economic Policies and Budgets

The Budget is first an instrument of macro-economic policies and after that only a means for achieving micro-economic goals. If the macro-economic goals of, say, stepping up growth, controlling inflation and providing higher employment are not achieved then the goal of poverty alleviation, benefits to the marginalised sections, etc. will also not be fulfilled.

The macroeconomic problem faced by India in the last 25 years has been that in spite of higher growth, poverty, malnourishment, unemploy-ment, etc., have persisted. This is because govern-ments of all hues since 1991 have ignored distribution of incomes. After the late 1990s they have followed the strategy of ‘growth at any cost’ with all costs falling on the workers and the environment. As the Economic Survey 2015 notes, the employment elasticity of production has been low across all sectors and further there has been a ‘jobless growth’ in the organised sector of the economy which corners a majority of the investment in the economy.

To take care of the problem of the marginalised sections whose economic situation has hardly changed since 1991, safety nets were erected by the UPA in the form of rights to food, employ-ment and education. If the income generation of the marginalised sections had been buoyant and the government had spent enough on education (six per cent of the GDP), health (three per cent of the GDP), etc., they would not have needed these special rights. Those who are market fundamentalists deride these rights and their implementation as a waste of resources and constantly argue for an end to such schemes. They often cite the high degree of corruption and poor governance as a reason for discontinuing these schemes. Alternatively, they have been talking of giving direct benefits to the poor through cash transfer to their accounts via Aadhar, etc., which is now sought to be implemented via the JAM scheme. What is unstated is that if governance is poor, the Jan Dhan Yojana and Aadhar cards can also be fouled up. There are reports of multiple Aadhar cards or errors in the cards being issued, etc. History is replete with examples of how introduction of new technology has often been fouled up by the human element.

The macro-dynamics of the Budget affects prices and output of the economy and in turn it determines the budgetary calculus. Budgets in the last five years have projected a higher real growth rate and a lower inflation rate. This has resulted in lower revenue realisation. That was the problem in 2013-14 and 2014-15. This is also likely to be the problem in 2015-16. Real growth is being projected at about eight per cent and inflation at about three per cent.

The basis of the eight per cent rate of growth is the new series of data for national income that has been put out by the Central Statistical Organisation. However, the Economic Survey and the RBI have expressed doubts about these numbers. Doubts have arisen because other economic data do not support a spurt in growth to 7.4 per cent in 2014-15 and above eight per cent in 2015-16. Data on exports, imports, index of industrial production, tax collection, rate of investment and savings, etc. do not support the idea of a growth rate of 7.4 per cent in 2014-15. The FM put it imaginatively as ‘India is ready to fly’ but others feel that India is flying but may not be soaring.

The inflation numbers are not accurate since the true inflation is not represented by the wholesale price index which is usually used for calculations. (See Kumar, 2013) This index has no representation for the services sector which now produces more than 50 per cent of the output of the economy. For instance, the increase in the tax on services in this Budget would raise prices but this will not get reflected in the inflation index. There are other reasons why our inflation index turns out to be an under-estimate

As argued in Kumar (2013), the problem of the Indian economy is that what is thought to be the solution has been the problem. The rate of investment in the economy has dropped sharply since 2010 because of the uncertainty around the government’s decisions, an uncertain international environment in which all the major economies are growing sluggishly and so on. In such a situation, the private sector is not investing enough and the public sector is hamstrung by the cut in the Plan expenditures to maintain the fiscal deficit targets. Hence, the investment rate has continuously fallen. Thus, maintaining fiscal prudence at the behest of the credit rating agencies has become the problem.

In today’s environment, when the rate of inflation is down because of the fall in the international commodity prices, current account deficit has declined due to fall in the import bill and reserves have been rising, the government could have taken a bold posture to revive the economy by letting the fiscal deficit rise by say 1.5 per cent of the GDP and use the extra resources it would make available (about Rs. 2 lakh crores) to step up infrastructure investment which is woefully lacking and holding back growth. An increase in the rate of growth given the adverse income distribution would also help the poor by generating employment. It would also mean that the credit rating agencies would not down-grade us because our rate of growth is robust.

To conclude, if the Budget continues with the earlier policies, it will also not generate much additional employment. Its focus is largely on the expansion of the large scale sector which generates few jobs and displaces many when it expands at the cost of the small scale sector. This is not to say that there is nothing for the small scale sector. But, the point being made here is that the focus of the Make in India and other such programmes is on the corporate large scale sector.

Another point of macroeconomic caution for the present policy-makers is the continuing low rate of inflation. It is due to a decline in commodity prices, like that of petroleum products. This is signalling a possible slowdown in the world economy. India needs to take precautionary steps to deal with this possibility in 2015-16. Today, there is an arc of instability in the world which stretches from Afghanistan to Iraq, Syria, Libya, Nigeria, East Africa and now Ukraine. This is supplemented by the economic uncertainty introduced by Greece’s election results and the survival of the Euro zone as a viable entity. The Greek situation is having its ring in Spain, Italy and other European countries facing economic crises. Thus, we need to depend more on our internal markets than on the global markets but the Budget has a far greater external orientation than it should.

V. Other High Visibility Schemes and their Import

The Budget contains important tax proposals, like, the introduction of the GST from 2016 but the shelving of the much discussed DTC. It implies that a much greater importance is being attached to indirect taxes than to direct taxes. This is a reflection of regressive thinking.

Introduction of the GST has been a demand of the international agencies, MNCs and our big business. That is why they talk of a unified market being created via the GST. But it is hardly considered that the GST may not be good for the small and medium sectors for whom the local markets are more critical. The GST would require massive computerisation for businesses and that is difficult for small and tiny units. These units may get out competed by the large and medium scale sectors and if so, there could be greater sickness amongst them with adverse consequences for employment generation. The GST also lends itself to black income generation because of its complexity.

With much aplomb, the Budget speech of the FM talked of the several schemes that would help curtail generation of black incomes in the country and force the black money stashed abroad to return to the country. This is a reflection of the pressure on the government to be seen to be proactive on this front. While it is good to tighten the rules and regulations with regard to black income generation, it must be remem-bered that a law on paper may be good but it is its implementation that is crucial. India has failed on this front. There have been dozens of committees in the past 60 years that have analysed the situation and made thousands of suggestions. Of these, hundreds have been implemented but the black economy has continued to grow. The reason is that implemen-tation has been faulty because there is lack of political will.

The schemes/changes announced presently can only work if the will exists to implement the rules. If we do not catch anyone how can we imprison them for 10 years or levy a fine of 300 per cent? In the last 25 years so many Double Taxation Avoidance Agreements (DTAA) have been signed but not one name has come. The information that has come is from stolen data from bankers. Even the latest data to come was released by journalists of the ICIJ and not the government. The governemnt is not proactively seeking information from Julian Assange who claims to have a lot of data.

The abolition of wealth tax would make the fight against the black economy more difficult. It is true that very little (Rs 1000 crores) was being collected under this head. But that is because there are so many concessions and deductions (like ownership of shares and house property) that this tax appears to be redundant. It needed to be made buoyant by removing concessions. It is difficult to hide property; so a lot of tax could be collected as wealth tax and to pay it, incomes would have to be declared. Even if a property is held benami, if concessions are removed, tax would have to be collected and income revealed. (Kumar, 2013)

The Budget has tried to be popular with the middle class, an important constituent of the BJP’s support-base. It has offered various concessions to this category. It was stated that tax need not be paid for incomes of about Rs 4.5 lakhs. The question is: who are the people who constitute the middle class? For one to reduce the tax liability via savings, one should have a high enough income. If one is to save Rs 4.5 lakhs, the income should be at least three times higher or, say, Rs 13.5 lakhs. This is more than 10 times the per capita income. A tiny fraction of the countrymen earn such incomes, say, less than one per cent of the population. Thus, of the middle class of, say, 150 million, only eight per cent would be able to take full advantage of these schemes. The rest have to consume and survive before they can save so much and take advantage of the schemes. In fact, since only about 40 million individuals file tax returns, and effective tax is paid by about 10 million, most of the middle class is out of the tax net and cannot take advantage of the schemes announced.

It is also argued that the country’s savings rate has fallen since 2008, so it needed a boost and these schemes can help. What is forgotten is that concessions only change the form of savings but do not lead to higher savings. For that, incomes have to go up. Finally, much is being made of skill development for the Make in India programme. But can this be achieved if savage cuts are made in the education budgets? In brief, the Union Budget 2015-16 is full of contradictions because the macro-dynamics is not correct.

VI. Conclusion

Any Budget is not just an instrument of economic policy but also a statement of the politics of the ruling dispensation. This Budget is no different. In spite of the change of regime from the UPA to NDA, the political message is the same because both the dispensations differ only on the social plane and not on the economic one. They both have been pro-big business and this Budget reflects that. They are following policies under the direction of international finance capital. So, there has been lack of independent policy space to frame policies beneficial to the common people of India.

Given the analysis of the Budget numbers in the preceding sections, there is need to make Budget-making more realistic and transparent but that has not been done by the FM. The claim that the target of fiscal deficit has been main-tained needs reassessment if it is done through expenditure cuts in essential areas. Conse-quently, the macro-dynamics which needed change to give a boost to the economy continues to be the same as earlier. This could be a huge problem given the arc of instability in the world.

Due to all these reasons, the intended out-comes are unlikely to be realised by this Budget. Consequently, the marginalised sections will have little respite from economic hardships they have been suffering. In this sense, the Union Budget 2015-16 continues the past trends in spite of the opportunities that exist, the many new proposals contained in it and the feeling the FM tried to generate that there is much that is different.

Reference

Kumar, A., 2013., Indian Economy since Independence: Persisting Colonial Disruption. New Delhi: Vision Books.

The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.

ISSN (Mainstream Online) : 2582-7316 | Privacy Policy|
Notice: Mainstream Weekly appears online only.