Mainstream, VOL LIII No 20, May 9, 2015
Modi Government’s Budget sans Destination and Direction
Saturday 9 May 2015
by A.V.V.S.K. Rao
“Striving to better,Oft we mar what’s well.”—William Shakespeare
For a country like India opting for a mid-way path as against the neo-liberal path in the context of globalisation, Budget-making is not an easy task. It requires choosing a new set of objectives, priorities, strategies and resource mobilisation measures.
On March 1, 2015, when the Budget for 2015-16 was presented in Parliament, laymen got the impression that the Modi Government has come up with a historical path-breaking Budget which will at one stroke make India an attractive investment destination not only for its corporates but for foreigners and non-resident Indians as well. However, if one reads between the lines it reveals the real story.
The major thrust of the Budget is on infrastructure with an allocation of Rs 70,000 crores; the setting up of the national investment and infrastructure fund with an annual flow of Rs 20,000 crores; tax-free infrastructure bonds for projects in the rail, road and irrigation sectors; revitalisation of the PPP mode and the Atal Innovation Mission; concession to the IT industry; incubation centres to support start-up corporatisation of ports; monetisation of gold etc. Infrastructure and production sectors have attracted most of the attention of the current Budget. The Budget projected a growth of eight per cent for 2015-16, together with inflation of three-four per cent. The fiscal deficit is targeted at 3.9 per cent of the GDP for 2015-16. It is pertinent to note that additional fiscal space is being used to fund infrastructure investment. The gold monetisation scheme will facilitate individual depositors to earn interest on their gold deposits, and the sovereign gold bonds will serve as a good alternative for the individual investor in place of metal gold. It is estimated that stocks of gold in India are over 20,000 tonnes.
The corporate tax is kept at the present rate of 30 per cent. However, this rate is going to be reduced to 25 per cent in a phased manner over the next four years. The new law on black money stashed away abr oad is expected to bring good results because stringent measures are provided like imprisonment, which should act as a deterrent for people using various routes to keep money outside the country. Deferment of the General Anti-Avoidance Rule (GAAR) by two years should provide solace and relief to international investors.
The Finance Minister announced the creation of a Micro Units Development Refinance Agency (MUDRA) Bank with a fund Rs 20,000 crores and credit guarantee corpus of Rs 3000 crores to refinance micro-finance institutions and increase lending to new and existing entre-preneurs. Priority would be given to SC/ST entrepreneurs by the MUDRA Bank in its lending. These measures would greatly increase the confidence of young, educated or skilled workers who would be able to become first-generation entrepreneurs. It would also enable existing small business to expand their activities. It is a good move forward as it would benefit nearly 58 million small and medium enterprises that did not have access to bank finance.
The Modi Government claimed that accepting the Fourteenth Finance Commission’s recommendation of increasing allocations of Union Funds to States from 32 per cent to 42 per cent is a right step in federalism, though a chunk of 42 per cent to the States gives the perception of greater funds given to the States. However, one has to understand that this has been accompanied by huge spending cuts in social sector spending and leaves no directives on essential services delivery to the States. For instance, expenditure on the Sarva Shiksha Abhiyan has gone down from Rs 28,000 crores to Rs 22,000 crores, the Integrated Child Development Scheme (ICDS) from Rs 16,000 crores to Rs 8000 crores. For Women and Child Welfare the allocation is Rs 10,300 crores against Rs 26,000 crores in the last fiscal year. Allocation for the Health and Family Welfare sector has been pruned to the extent of Rs 5900 crores.
For agriculture, the allocation has been reduced from Rs 19,800 crores to Rs 17,000 crores. Panchayati Raj got a mere Rs 35 crores compared to the previous year’s Rs 3400 crores. For drinking water the cut was Rs 12,000 crores to Rs 6200 crores—almost half. Even funds for school education have not been spared. The cut in this sector is Rs 42,200 crores from Rs 55,100 crores.
Under the influence of Nehruvian Socialism during the first one-and-half decades of planning, stress was laid on creating state investment in infrastructure. Later on the policy continued with some minor changes. Right from 1956 to 1985 heavy investment projects were accorded highest priority. With the result in India, human capital was badly neglected. Noble Laureate Milton Friedman, who came to India (1955), submitted an enlightening memorandum to the Government of India where he warned against “policies that increase physical investment at the expense of Human capital”.1
Narendra Modi’s government is leaving no stone unturned to keep the Indian economy on a higher trajectory of growth. But, one has to remember that growth is not the same as development. Since the 1970s economists are thinking in terms of quality of life, that is, provision of public goods and merit goods like safe water, health care, mid-day meal for children in schools, free primary education, food security, flood control, parks, and low-cost housing.
For the BJP’s 2015-16 Budget, growth is considered as a certain kind of infrastructure that corporates support. Therefore, the Budget is heavily tilted towards infrastructure develop-ment at the cost of human capital.
Budget and Rural Sector
Six decades of rigorous planning in India miserably failed to transform Indian agri-culture, due to semi-feudal and stagnant conditions prevailing in many parts of Northern India, Central India, and Southern India. With the result growth could not make any dent on agricultural development by bringing down the dependence on the rural sector to, say, 35-40 per cent by 2011 and increasing agriculture diversification, productivity and production. The present Budget neglected this key sector totally as part of reforms. Though the Budget set a four per cent target for agriculture, it has not clearly spelt out the strategy for achieving this growth over a period, say, five years. It has not chalked out a concrete programme for further diversification, productivity and produ-ction thereby increasing incomes of farmers in the rural sector.
Another aspect which is neglected in the Budget relates to programmes for improving the skills of the rural youth and giving a new direction to rural India in the context of globalisation and the WTO.
The allocation for major heads of expenditures—like government employees’ salaries, pensions, defence expenditure, subsidies, interest to be paid for the past public borrowing, covering nearly 98 per cent of current and capital account revenues accruing to the government—cannot be reduced all of a sudden without hurting the political clout.
Till the middle of the 1970s the Government of India adopted a deliberate budgetary policy of revenue surplus which meant creating excess of current receipts over current expenditure. This revenue surplus used to be achieved through deepening and widening of the tax base, thereby creating tax revenue on one side and strict control of revenue expenditure on the other. This amounts to keeping unnecessary public expenditure under check. This surplus revenue was to be used to finance economic development. This was a laudable objective. The objective of revenue surplus was gradually eroded because of continuous expansion of current expenditure, particularly of the non-Plan type (general administration, defence, interest payments, and major and minor subsides). Accordingly, revenue deficit became a special feature of the Central Government’s budgeting.
Since the allocations in the current Budget (98 per cent) are revenue expenditures, these cannot contribute to asset-building or invest-ments for development projects. In a developing economy like India, generally in the revenue Budget, the above expenditure far exceeds the revenue. Thus, the revenue Budget has been in huge deficit, and this is covered by taking more loans from the public sector banks and creating a surplus in the capital account by pruning investment allocation.
In the Budget 2015-16, one can find this patt-ern because non-Plan expenditure has risen by 11 per cent while Plan expenditure has been stagnant. In an economy where the macro-foundations are strong, there should be surplus on the revenue account, that is, revenue exceeding expenditure, and a deficit in the capital account, that is, investment exceeding amortisation or sinking fund.
The present situation in India cannot continue for a long time because loans from public sector banks to the government to cover the overall deficit in the Budget have to be paid back. It requires a major recapitalisation of banks or else public sector banks may go bankrupt by the end of this decade. A crisis in the banking sector is looming large.
Budget Estimates for 2015-16
1. Revenue receipts 11,41,575
2. Capital Receipts 6,35,902
a. Loan recoveries and other receipts (80,253)
3. Total Receipts (1+2) 17,77,477
4. Revenue expenditure 13,21,332
5. Capital expenditure 4,56,145
6. Plan expenditure 4,65,277
7. Non-Plan expenditure 13,12,200
8. Total expenditure (4+5) 17,77,477
a. Revenue Deficit (1-4) (-) 1,79,757
b. Budgetary Deficit (3-8) Nil
c. Fiscal deficit (8-1+2a) 7,16,155
Prima facie, capital (infrastructure) spending is good because it delivers higher and better quality economic growth. However, it results in a higher deficit. One can support this expenditure because added expenditure goes to create productive capacity rather than being wasted in higher consumption. However, it is very hard to find any convincing evidence either in India or elsewhere that expenditure on infrastructure causes medium-term growth. The only discer-nible effect is that it raises growth in the year the spending occurs. The same effect can be realized by increased social spending.
Prof Raja Chellaiah is of the opinion that ignoring the (concept of) revenue deficit could lead to serious consequences in conditions of the government’s finances now prevailing in India. At the level of the Central Government a large proportion of the government’s net borrowing is now used to finance the revenue deficit. At the same time the programme of fiscal adjustment requires that the fiscal deficit be cut. If the revenue deficit is not reduced, the reduction in the fiscal deficit can only come about through a cut in the government’s capital formation which would be injurious to growth. The government’s capital formation on infrastru-cture, on schools, hospitals, etc. is vital for growth and welfare. In course of fiscal adjust-ment such expenditure should be protected. In fact, IMF officials have frowned upon attempts of the Government of India to reduce the fiscal deficit largely by cutting down capital formation. Thus, at least implicitly, they are seeking a reduction in the revenue deficit. In developing countries at least it is desirable to postulate a rule that only a small proportion of the government’s revenue expenditure, largely that relating to the provision of additional services in such sectors such as education and health, should be covered by government borrowing.2
On account of the hike in excise duty on cement in the Budget coupled with the increase in rail freight, the retail price of cement may go up by Rs 15-20 per bag. It is decided to double clean energy cess on coal from Rs 100/tonne to Rs 200/tonne which will help mobilise funds for clean energy initiates. This a cascading effect on rail freights.
Products that turn cheaper include leather footwear, locally made mobile phones, tablets, microwave ovens, packaged fruits and ambu-lance services. There is a steep raise in excise duty on cigarettes, pan masala, guthka and certain other tobacco products. The wealth tax, which was introduced in 1957, has been scrapped altogether. Instead, surcharge on individual incomes above Rs 1 crore increased from 10 per cent to 12 per cent. The Budget radically changed the system of service tax and many services have been brought under the service tax net and the rate of tax raised to 14 per cent from the present 12 per cent. There is no change in income tax rates or tax brackets. The government should have abolished income tax on incomes below Rs 5 lakhs.
Another glaring feature of the Modi Budget is an estimated Rs 20,000 crore exemptions and incentives per year to the corporate world, that is, a total of Rs 80,000 crore tax exemptions over the next four years. There is a proposal to reduce direct taxes levied on higher income groups (Rs 8315 crores). There is a steep increase in indirect taxes that will cause a heavy burden on middle and lower income groups to the extent of Rs 23,383 crores.
The non-Plan expenditure rose from Rs 12,13,224 crores in 2014-15 (RE) to Rs 13,12,200 crores in 2015-16 (BE). However, when one takes this increase as a proportion of National Income, it shows a declining trend.
There are many skeletons in the corporate cupboard of the Modi Government’s Budget. Since 2004 many policy-makers have been talking about reforms and higher economic development. Nobody has been talking about what Prof A.K. Sen calls improvement in basic needs, people’s entitlements, capabilities and freedom.
Prof Joseph Stigiltz extensively quotes East Asian economies and the emphatic role of governments in providing universal education which was a necessary part of their transfor-mation from agrarian to rapidly industrialising economies. Universal education also created a more egalitarian society in East Asia, facilitating political stability that is a precondition for successful long-term economic development. In pursuing such egalitarian policies, the economies of East Asia laid to rest the trickle-down theories of development. The East Asian economies showed that high levels of saving could be attained in an egalitarian setting and that human capital accumulation was every bit as important as, if not more important than, increases in physical capital.3
The view that the Budget can be used as an instrument for expanding the capital base of the economy ought to be examined from the point of view of the method of financing. The much-boasted PPP model for expanding infrastructure, in vogue since a decade, has almost broken down. Delay in execution of projects by the public sector due to labour trouble resulted in cost escalation and the private sector is not too willing to join such projects. Public sector commercial banks are now undercapitalised having been pressured to lend to long-gestation projects which they are not suited to do. Growth beyond the anticipated six-seven per cent is needed to fill the underutilised capacities and this takes time. The further levels of seven-eight per cent growth need deep structural reforms which can be realised only in the medium term.
There was mention in the Budget about the establishment of secondary schools for every one kilometre and a college for every 10 kilometres time and again. Let us remember that Sam Pitroda, a self-styled technocrat who headed the Knowledge Commission during late Rajiv Gandhi’s time, recommended the establishment of 800 new universities and a good number of degree colleges in the country. Alas, Sam Pitroda misunderstood knowledge for information and made such a recommendation. As a result we have been seeing for the last 30 years the mushrooming growth of universities and engineering colleges. During the process of development in a planned economy transformation takes place from agri-culture of industry (manufacturing) and then to services. This takes 25 to 30 years. During this time, we need to create an institutional frame-work. Accordingly, we need itis and PHCs for every 10 kilometres and polytechnics, agro-polytechnics, nursing colleges and health-care centres for every 50 kilometres.
The general education, though essential, failed to turn out human power for the requirements of the economy. Therefore, stress should be on training institutions which impart skills in rural and semi-urban areas, Again, the basis should not be population but household. For every 4000 households, there should be primary, secondary and higher secondary schools. For every such cluster of inhabitation there should be health care facilities. For every 10,000 households, besides the above institutions, we need ITI and Plus-two colleges. For every 15,000 households besides the above, polytechnics, agro-polytechnics, if necessary nursing colleges, and for every 20,000 households, to the above model we may add a well-established degree college and also hospital with all facilities.
Prof Joseph Stiglitz talks about creating and maintaining a social safety net, including access to basic health services. They increase the productivity of the labour force and further political stability by reducing the opposition to change.4
The above model improves skills among the youth in rural and semi-urban areas. Our planners failed to link villages to small towns, small towns to medium towns, medium towns to big towns, big towns to cities and perhaps cities to metros. This linkage will prevent outmigration. It will also help to create SMEs and agro-processing units in rural areas and help decentralised development.
Provision should have been made in the Budget by making necessary changes to allow corporate sectors fund research institutions and higher education institutions like the Indian Institute of Science, Indian Statistical Institute, IIMs, IITs and certain leading Universities. Each private corporate entity can do so by funding their laboratories, libraries and research subjects by a minimum of Rs 200 crores in a fiscal year and the same can be allowed to be shown in their balance-sheets to claim tax concession. This change will help private sector participation in higher education indirectly by way of funding. Besides, this funding to the education sector will enable the economy reach the objective of four per cent of the GDP by 2020.
Sixty years of serious development effort could not make any headway in terms of human development-related indicators. Out of 133 countries rated on indicators of well-being such as health, water and sanitation, personal safety, access to opportunity, tolerance, inclusion, personal freedom and choice, India has secured the 101st place. This is lower than India’s rank of 93 for GDP per capita income. Even Nepal and Bangladesh rank higher than India in the Social Progress Index (SPI) ratings.5
From a critical analysis of the Budget, it appears as if oligopolistic forces are reinforcing oligarchical tendencies in the economy moving towards riskless and reckless capitalism. The result is a huge outlay document without a human face.
1. Jean Dreze, “Nehruvian Budget in the Corporate age”, The Hindu, March 2015.
2. Chellaiah, Raja, J., “The Meaning and Significance of Fiscal Deficit” in Bagchi, Amaresh (ed.), Reading in Public Finance, Oxford University Press, 2005, New Delhi, pages 388-389.
3. Stiglitz, Joseph, E. “The Role of Government in Economic Development” in Bagchi, Amaresh (ed.), Reading in Public Finance, Oxford University Press, New Delhi, 2005, page 159.
4. Op. cit., p. 161.
5. The Hindu, April 9, 2015.
Professor A.V.V.S.K. Rao is an economist and analyst. He was formerly Senior Faculty and Head, Department of Economics, Osmania University, Hyderabad.