1. Reforms: Must tread cautiously in face of big budget changes

Reforms: Must tread cautiously in face of big budget changes

Reforms from advancing the budget to merging rail and Union budget along with doing away with plan and non-plan expenditure may not be as easy as they sound

By: and | Published: November 17, 2016 6:14 AM
arun-jaitley-reu The proposal to advance the presentation of the Union Budget by a month, to February 1, will be a welcome move. (Source: Reuters)

The finance minister has announced three significant reforms in framing of the Union Budget. These relate to advancing the date of presentation of budget by one month, to February 1, merger of the Railway Budget with the Union Budget, and doing away with classification of plan and non-plan expenditure and instead classifying all expenditure only on capital and revenue account. What impact will these changes have on the ground? Will they make the budget a better tool for financial management of the affairs of government?

The proposal to advance the presentation of the Union Budget by a month, to February 1, will be a welcome move. This proposal, as also a proposal to change the fiscal year, has been discussed by the finance ministry in the past but could not see light of the day. Budget-making and its parliamentary approval is currently not synchronised with the start of the fiscal year, as budget is presented to Parliament in end-February and parliamentary approval process is completed by mid-May. In between there is a parliamentary recess during which Demands for Grants of Ministries are scrutinised by respective Standing Committees. This requires the government to seek a Vote on Account for a period of three months starting April 1. After the approval, the finance ministry issues expenditure sanctions to other ministries, states and other spending agencies. Soon thereafter, the monsoon starts setting in different regions of the country. This curtails the working season for implementing programmes and projects on the ground. If the budget-making and approval process can be completed before the start of the fiscal year, many of these problems will be resolved and it will also do away with the need to seek a Vote on Account.

There are, of course, some real issues that need careful consideration. Budget-making involves estimating expenditure and receipts for the coming year. Estimating them two-three months in advance, as against the current one month will have additional uncertainities about their robustness. This is more so because government expenditure is back-loaded in the last quarter. GDP growth rate forecasting will suffer from similar uncertainities. GDP numbers are critical for budget-making especially on the tax receipts side as estimation of tax receipts is based on projected growth rates and inflation deflators. There will be similar issues in forecasting fiscal deficit numbers. Government will need to factor in these uncertainties and take needed mitigation measures, to the extent feasible.

The proposal to do away with the distinction between plan and non-plan expenditures will have far reaching implications. Apart from a host of reasons which we mention below, this change is a natural corollary to the abolition of the Planning Commission and replacing it with NITI Aayog. The Twelfth five-year plan was also for the period 2012-17. Thus, by March next year, the plan period will be over. The government has not been working on any new plan for the next five years. It was, therefore, necessary to abolish this distinction as there were no plan outlays to be reflected.

A High Level Expert Committee on “Efficient Management of Public Expenditure” under C Rangarajan had given a report in July 2011 and recommended abolishing of plan and non-plan distinction in the budget apart from a number of other suggestions for better tracking and linking expenditure by government to outcomes on the ground. Their argument was that the distinction between plan and non-plan expenditure had got blurred over the years. While non-plan was basically revenue expenditure for running of administration and maintenance of assets, development was identified with capital expenditure in annual plans. In earlier years of planning, when one capital project was completed, others were taken up. On completion of a plan, the committed staff and other expenditure would become part of non-plan. In recent years, a lot of revenue expenditure was part of plan and these liabilities unlike capital projects would continue beyond the plan periods. Also, plan expenditure was only 30% of the total and measuring full impact of government expenditure required considering it in totality.

The plan has been the development face of government and the quantum of plan expenditure signifies the development dimensions of the budget. Budget -making involves balancing of conflicting claims on government resources. The erstwhile Planning Commission was the development voice in budget-making and the finance ministry had to balance the demand for higher Gross Budgetary Support (GBS) for the plan with competing demands for subsidies, defence, security and other forms of expenditures. Often, prime ministers had to intervene to ensure that GBS got its legitimate share. Classification of expenditure in only capital and revenue categories will also mask the development nature of many types of revenue expenditures. For example, expenditure in social sectors on hiring of teachers, doctors, equipments, medicine, etc, is classified as revenue expenditure. Similarly, grants to states is shown as revenue expense but on the ground it may be investment-related.

In the new expenditure classification, government will need to ensure that the development orientation of budget does not suffer. Most new projects, new development initiatives have been part of the plan. The government will need to ensure that many flagship programmes like Swacch Bharat , MGNREGA, rural roads, rural housing, drinking water in rural areas, Sarva Shiksha Abhiyan, infrastructure development,etc, are adequately funded in the budget.
Also, multi-year projection and planning will be required so that projects, once started, do not languish for want of funds. A minimum of three years commitment would be needed if states are to undertake projects on assurance of central funds.

A very careful review and limiting increase in what was earlier termed as non-plan revenue expenditure would need to be done so that such expenditure does not crowd out development expenditure whether on capital or revenue account.

Central assistance for state plans is another area which will need to be carefully handled in the new dispensation. By the very nature of their functions the states operate closer to the ground and short-term consumption expenditure tends to crowd out medium-term development expenditure. The Planning Commission’s Central Assistance for State Plans was a good way to balance the short-term and medium-term perspectives. It also provided a means for fostering balanced development across states.

Indian Railways is the largest infrastructure sector in India and plays an important role in our growth and development. Efficiency of the Railways impacts significantly on our growth outcomes. To what extent can the merger of the Railway budget with the general budget help in reforming the functioning of the Railways? At one plane, it can be argued that Railways is a ministry and Railway revenues and expenditure are incorporated in the Annual Financial Statement of the government and merger of the two budgets is a mere accounting exercise. But, this view would be very superficial.

Budget-making is a basic tool for financial management both on the expenditure and revenue sides. For revenue receipts, parliamentary approval is required only for taxation proposals. In case of Railways a convention has evolved that fare and freight rates, which are basically user charges, are included in the budget which requires implicit parliament approval. This has made decision-making in areas of fares, freight, and new projects highly populist and non-commercial.

Because of over-politicisation of budget-making and approval process, Railways have not been able to keep fares and freight in tune with rising costs. This, coupled with rising inefficiencies, has led to goods-traffic subsidising passenger-traffic. With increasing competition from road traffic, Railways are being gradually priced out. In addition, railways are left with hardly any resources for expansion or modernisation of existing tracks. Today, Railways have a shelf of unfinished projects of more than R200 lakh crore and an operating ratio of around 97%. This situation is hardly sustainable.

Merger of the Railway Budget with Union Budget cannot of course solve all these problems. But it can provide a framework that will, to some extent, depoliticise the process, make it more commercially tuned and make budget-making a more efficient tool of financial management. Railways will also get some fiscal benefits. The budgetary support currently provided to the Railways is treated as a loan in perpetuity with a liability of dividend payment representing interest on this loan. Capital at charge of Railways currently stands at nearly R3 lakh crore and annual dividend liability is around R10,000 crore. With merger of the budgets this liability will vanish and Railways will have these resources for investment. Railways share of GBS for investment will also become more predictable and in line with allocations to other infrastructure areas.

There are some who feel that merger will be a retrograde step because Railways will lose its commercial character and that may be a setback for future reforms which have the objective of greater private sector competition. These fears are not entirely misplaced. To guard against these and to fully benefit from the budgetary merger, the government will need to follow-up in many areas for structural transformation of Railways. A critical priority creation of a Rail Development Authority for fair pricing, promotion of competition, protection of consumer interests and laying down efficiency standards.

All in all, the budgetary reforms unveiled by government are positive. They have the potential of making the Union Budget a tool for more efficient financial management. But there are many pitfalls and unless they are carefully resolved there is a danger that we may end up throwing the baby out with the bath water.

CM Vasudev is former secretary, Expenditure and Economic Affairs, while BK Chaturvedi is former member Planning Commission and
cabinet secretary. Views are personal

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