The Budget disappoints on both increase in public investment and fiscal consolidation. A more calibrated approach to reforms is needed
There was a considerable build-up of expectations leading to Budget FY16. This is the first full-year budget of the NDA government and, apart from a number of slogans raised to the effect, the finance minister had repeatedly stated that the Budget will unleash the reform agenda which will usher in the promised acche din (good days) for the common man, revive the investment climate and remove the hardship of the poor and vulnerable. Unfortunately, what was delivered in Parliament yesterday was not very different from the past and does not infuse much confidence.
Of course, the government had formidable challenges—the most important of which was the increasing of the devolution to the states by the 14th Finance Commission. But, this also provided a great opportunity to overhaul the centrally-sponsored schemes and vacate the space in the state list. In fact, the low commodity prices, particularly that of the crude oil, provided substantial fiscal space to the government. But the government failed to live up to the expectations. It was hoped that the government would budget to conform to the revenue and fiscal-deficit targets laid down in the medium-term plan. In the past, it was routine for finance ministers to change the targets, change the definitions, undertake creative accounting by allowing a spillover of the subsidies to the next year and, when all failed, simply state that the targets cannot be conformed with due to some exogenous factor. This time, it was hoped that the government would at least conform to the deficit targets. The Economic Survey released on Friday makes a feeble case for postponing the targets, on the plea that we need to incur more capital expenditure to revive the economy. If at least the capital expenditure was increased, some justification for breaching the target could have been given. Unfortunately, the capital expenditure, as a ratio of GDP for FY16, is budgeted at just about 1.7%, which was more or less the same in the budget estimate for FY15. In fact, even the conformity to the fiscal targets in FY15 was achieved by cutting investment expenditures, as the revised estimate of capital expenditure was lower than the budget estimate by about R30,000 crore. Both on fiscal consolidation and increasing public investment, the Budget is disappointing.
A seminal issue of concern is the credibility of the Budget itself. The mid-year review of the economy, presented by the chief economic advisor in December, referred to the overestimation of revenues and spillover of subsidies. On gross tax revenues, the Budget shows the difference between the revised estimate and budget estimate to be at over R1.13 lakh crore. For FY16, the growth rate is assumed at 15.8%, which implies a buoyancy of 1.34. More important, personal income tax is assumed to grow at 17.5% and Union excise duties and customs are assumed to grow at 24.8%. It is fervently hoped that the government will not compress capital expenditures towards the end of the year when there is a shortfall. On subsidies, although the mid-year review stated that the spillover was in the range of 0.3-1% of the GDP, the revised estimates are close to the budget estimates. Although this is possible, one hopes that there is no spillover this year.
The Finance Commission’s recommendation resulted in a significant increase in tax devolution to the states. How has it been absorbed? The Finance Commission had taken into account both non-Plan and Plan revenue expenditure requirements of the states and, thereby, its recommendations subsume the block grants given by the Planning Commission. In addition, this was a golden opportunity to pass on the centrally-sponsored schemes, particularly those on subjects in the state list. Accordingly, the budget for central assistance for state Plans has been reduced from R2.6 lakh crore in FY15 (RE) to R1.84 lakh crore in FY16. The reduction of R80,000 crore was on expected lines. The lower transfers are on account of all block transfers given by the Planning Commission—which included central assistance for Plan (R26,814 crore), special central assistance (R10,150 crore), special Plan assistance (R7,666 crore), the Backward Region Grant Fund (R2,837 crore) and a few small central schemes. In addition, a reduction in allocation was made in the Rashtriya Krishi Vikas Yojana (of R5,000 crore), elementary education (of R9,000 crore) and integrated child development services (R8,000 crore).
On the whole, the budget does not instil much confidence. In any case, reforms are a process, not an event. We hope to see more calibrated approach to reforms in the coming days.
M Govinda Rao, Former member, 14th Finance Commission