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Mainstream, VOL LIV No 11 New Delhi March 5, 2016

Union Budget 2016-17:: Budgetary Calculus: How Real is the Pro-Poor Bias?

Wednesday 9 March 2016, by Arun Kumar


All budgets are not only economic but also political instruments for the party in power. The Union Budget 2016-17 is no exception. Its message is that the NDA Government is strongly in favour of the marginalised sections. Expendi-tures are planned at Rs 19,78,060 crores or 13.1 per cent of the GDP projected to be Rs 150,65,010 crores in 2016-17. This per cent has declined since 2009-10 from a peak of 15.8 per cent. Interestingly the Fiscal Deficit and Revenue Deficit have also been cut by roughly this per cent from 6.5 per cent to 3.5 per cent and 5.2 per cent to 2.3 per cent respectively.

The implication is that the governments are not making greater effort at resource mobili-sation for development. And, that the present government is making the least amount of effort. This is particularly troubling at a time when the economy has been facing difficulties for the last five years and in spite of the government projecting a higher growth rate in the last three years.

If the government does not mobilise additional resources, then its capacity to deliver to the marginalised sections is truncated or there would be a zero-sum game, that is, at the expense of the other sections of society. The latter seldom happens. Usually, the government facing shortage of resources cuts expenditures on what are called the soft areas, the social sectors and expenditures for the marginalised sections.

For instance, the Plan expenditures for 2015-16 on Agriculture and Allied Activities were to be Rs 11,657 crores but are Rs 10,942 crores. Rural Development was allotted Rs 3131 crores and Rs 3027 crores was spent. These sums are very small compared to the overall Plan expenditure of Rs 5,82,707crores and even then there was shortfall in expenditures. This indicates a low priority for these sectors in policy-making.

I. Pro-Marginalised Focus?

The Budget for 2016-17 talks of a substantial step-up in expenditures on Agriculture and Rural areas. This is a part of the strategy of a thrust on the pro-marginalised sections. The Finance Minister stated that the Budget is ‘built on a transformative agenda with nine distinct pillars’. These include:

(i) Agriculture and Farmers’ Welfare: with focus on doubling the farmers’ income in five years;

(ii) Rural Sector: with emphasis on rural employment and infrastructure;

(iii) Social Sector including Healthcare: to cover all under welfare and health services;

(iv) Education, Skills and Job Creation: to make India a knowledge-based and productive society;

(v) Infrastructure and Investment: to enhance efficiency and the quality of life;

(vi) Financial Sector Reforms: to bring trans-parency and stability;

(vii) Governance and Ease of Doing Business: to enable the people to realise their full potential;

(viii) Fiscal Discipline: prudent management of government finances and delivery of benefits to the needy; and

(ix) Tax Reforms: to reduce the compliance burden with faith in the citizenry.

Agriculture, farmers and the rural sector are mentioned right on top. These are to be aided by emphasis on the social sector, health, education, skill development, job creation, rural infrastructure, financial inclusion via JAM and so on. Whether or not there is a political motive for this new emphasis, there is a need to analyse how far these promises are likely to be fulfilled via the Union Budget 2016-17.

The Finance Minister has talked of doubling the farmers’ incomes in the next five years. A laudable goal given the crisis in the farm sector but most analysts are skeptical about it. This would require an impossible almost 15 per cent average real rate of growth in agriculture whereas it has grown at an average of about 2.5 per cent for most of the last 25 years. The step-up required is only possible with a structural change which cannot take place even in a decade, much less in five years.

A sum of Rs 2.87 lakh crores is to be given as Grant in Aid to Gram Panchayats and Municipalities as per the recommendations of the 14th Finance Commission. This, according to the FM, is a quantum jump of 228 per cent compared to the previous five-year period. Under this, each Gram Panchayat will get Rs 80 lakhs while each Urban Local Body will get over Rs 21 crores. But where is the money coming from? A 228 per cent increase would imply an increase from about Rs 85,000 crores to Rs 2.87 lakh crores—an increase of Rs 2.02 lakh crores. State and UT Plan Outlay by Ministries/Departments is increased by Rs 26,000 crores. The break-up of this allocation in the relevant categories is given as:

1. Ministry of Road Transport and Highways from Rs 2810 crores to Rs 10,833 crores.

2. Ministry of Rural Development from Rs 72,922 crores to Rs 79,776 crores.

3. Ministry of Urban Development from Rs 3855 crores to Rs 6668 crores.

Thus, the total increase under these heads will amount to about Rs 18,000 crores.

As for the total transfers to the States, their share of the Tax Revenue is going to increase from Rs 5.06 lakh crores to Rs 5.70 lakh crores. This is also nowhere close to the figure of Rs 2.02 lakh crores. Only the increase in the total expenditure in the Budget comes close to this figure at Rs 1.93 lakh crores. So, the entire increase in the Union Budget would have to go to this one item if it is to come from the Budget.

There are two implications. First, the government is overstating the figure for effect and it is likely that this increase in expenditure is to be over five years and not one year. Second, the funds are not to come from the Budget but from other sources—the private sector and borrowings. In either case, it should not have been projected as a huge increase.

To conclude, the above examples point to the attempt of the government to project a pro-marginalised sections image, but adequate resources from the Budget are not being allotted. As such, these targets however desirable, are unlikely to be achieved. There is a further problem: in case the budgetary calculus goes wrong, the expenditures on these schemes are even less likely to be achieved. Let us analyse the figures for the year (2015-16) to understand if the goals are likely to be fulfilled. These figures form the basis for the projections for the coming year.

II. Budgetary Calculus off for 2015-16

Any budget is made up of proposals for expenditures and revenues in the year that is to come. That is why these numbers are called Budget Estimates (BE). They are in the nature of guesstimates since if the assumptions on which they are based turn out to be incorrect the targets of expenditures and revenues will not be achieved. Of course, outcomes may not be the intended ones even if the expenditure targets are met if there is corruption, poor governance and/or contradictions among policies which undo each other. The success of a budget is judged on the narrow criterion of whether the numbers under the two categories turn out to be correct when the year is over.

On this count the Budget numbers have been often incorrect in the last more than a decade. Tax Revenues have turned out to be often less than budgeted for and expenditures have had to be curtailed so as to not let the deficit in the Budget go out of line with the initial targets. This has resulted in a variety of problems for the economy, like shortage of demand and lowering of the growth rate of the economy.

In 2015-16, the year which is now coming to an end, the aggregate numbers (called Revised Estimates or RE) are quite close to what the BE numbers were. But as one disaggregates the RE numbers, they turn out to be at variance with the BE numbers. So, the total expenditures were slated to be Rs 17,77,477 crores and they turn out to be Rs 17,85,391 crores, that is, off by 0.44 per cent. The Non-Plan Expenditure was slated to be Rs 13,12,200 crores and is Rs 13,08,194 crores—a minor deviation. The Plan Expenditure was to be Rs 4,65,277 crores and is Rs 4,77,197 crores. But Non-Plan Capital Expenditures are less by about 11 per cent while the Revenue Expenditure under this category is not off by much—only Rs 6000 crores out of Rs 12 lakh crores.

Going deeper into the disaggregated figures, major categories like interest payments and Defence services are down while subsidies and pensions are higher. Under the Non-Plan Capital Expenditure Defence Services are off by a substantial amount.

Since the government has maintained the level of expenditure and the fiscal deficit is less by Rs 19,559 crores less, the aggregate Revenue targets have been more or less achieved—they are off by about Rs 8000 crores. But the disaggregated figures are off by a substantial amount. Revenue receipts are higher by about Rs 65,000 crores. Tax Revenue is higher by Rs 27,500 crores and Non-Tax Revenue is higher by Rs 37,000 crores.

Further disaggregation shows even larger deviations. Corporation Tax is less by 9 per cent and Taxes on Income are less by 18 per cent. So, Direct Tax Collections are short by Rs 45,000 crores. Union Excise Duties are higher by Rs 54,000 crores and have compensated for the loss of revenue under Direct Taxes. This is a direct result of the increase in Excise Collections on account of petroleum goods whose international prices have been falling but the government has not passed on the entire fall to the consumers. Transfers to the States are less by Rs 18,000 crores and this has boosted the revenue availability with the Centre.

The Centre has gained on the Non-Tax Revenue front due to higher dividends and profits by 17 per cent and Other Non-Tax Revenue increasing by 19 per cent. These are a result of the pressure on the PSUs to declare higher dividends (also RBI) and the increase in revenue from auction of natural resources.

Capital Receipts are less by about Rs 56,000 crores, substantially due to the disinvestment programme not yielding the expected receipts.

The Direct Tax Collections being short of expectations by about Rs 45,000 crores suggests that the growth target set by the government has not been achieved. The government had assumed a nominal growth of 11.5 per cent for the economy but the data in the 2016-17 Budget suggests that it is likely to be seven per cent. A very large error. That is why the lower fiscal deficit figure (by Rs 20,500 crores) still translates to the 3.9 per cent of the GDP target.

In brief, the gap between the targeted figures and revised figures for 2015-16 are alright at the aggregate level but at the disaggregated levels they are off by substantial amounts. Fortuitous circumstances like fall in petro goods prices internationally and the increased excise collection due to not passing on this fall to the consumers, spectrum auction, lower subsidy on petro goods and lower expenditures on Defence Services have helped the government get the aggregate figures correct. Such things are unlikely to be repeated again. In fact, things could go wrong and lead to errors adding up rather than cancelling each other as in the Budget for 2015-16, unless due care is taken. Success in the current year should not be taken as a reason for expecting that things would go right next year also.

III. Budgetary Calculus for 2016-17: Likely Shortfalls

Given that the figures for the current year are in error, the chances of allocations turning out to be incorrect in the coming year are subs-tantial. This is more so because the government is assuming an 11 per cent nominal growth for the economy. Given that the international economy is mired in difficulties and the rate of growth of the world economy is likely to remain low, this order of growth is unlikely. Commodity prices are unlikely to rise much, if at all. Further, if the wholesale prices continue to fall, as they have done in the last eight months, are we expecting a 14 per cent rise in real GDP? If the economy is expected to grow at eight per cent and WPI falls at three per cent, the Budget figures should have been based on a five per cent rate of nominal growth and not 11 per cent.

Corporation Tax is supposed to rise (over RE) by nine per cent and Income Tax by 18 per cent. Given the stagnant profits of the corporate sector in 2015-16, this seems unlikely. Customs Duties are expected to rise by 10 per cent , but given the decline in exports by about 15-24 per cent in the last 14 months, how is this likely to fructify? Excise duties are expected to rise by 12 per cent which again could be a problem. Service tax is expected to rise by 10 per cent. Regarding the Non-Tax Revenue, the expected increase is more than 40 per cent for Other Non-Tax Revenue. This would possibly depend on auction of natural resources. Disinvestment is again expected to rise by more than 100 per cent but is this likely if the stock markets remain subdued and unstable as in the current year?

In a nutshell, the expected increase in Revenue receipts of Rs 1.93 lakh crores or 11 per cent of the achieved figure (RE) in 2015-16 depends on many factors working out just right. The various figures could be over-estimated. If the revenue figure goes wrong, either the deficit will be higher or expenditures will be required to be curtailed.

The government could get more resources if it could check the growing black economy and bring some of the incomes from there into the tax net. Unfortunately, the government’s various attempts in this direction in the last two years have not yielded the expected results. The amnesty announced now is also likely to meet the same fate. Checking the black economy is a political decision. One has to be tough with those committing illegality of a variety of kind. The government has not shown the political will to do that since that would make it look anti-business. The government is trying to avoid that image at all costs. It has gone slow on the various scams, like VYAPM and DMAT. It has not acted against its own people while targeting the Opposition. The message is that the govern-ment is playing politics and is not serious—one can get away if one is close to the powers that be; the same as in the earlier regime.

Will investments suddenly rise and give a boost to the economy? This would depend on increase in demand in the economy and not the incentives to invest. With rising inequity this is unlikely to happen. Increased expenditures on the Plan, social sectors, physical infrastructure and rural areas will certainly help. But this would depend on achieving the Revenue targets. A catch 22 situation.

Given the fiscal fundamentalism characte-rising the government, the deficit targets are likely to be adhered to so that the expenditures will have to be curtailed and most likely they would be on the social sectors, agriculture and rural areas—precisely the priority areas spelt out in the Budget. Also, these are the areas that would boost demand and employment.

The NDA Government also faces the problem of concentration of decision-making in the PMO. Thus, businesses are complaining of slow decision-making. This has led to a policy paralysis of a different kind (compared to the UPA regime). There is also the problem of lack of coordination of policies which used to take place in the Planning Commission. No such umbrella body exists that can coordinate among the various Ministries and this task is also centralised in the PMO. Thus, there is a structural problem with accelerating investments in the economy.

IV. Budget-making under Uncertainty

The economy faces large uncertainty; so the Budget must be formulated keeping this in mind. If not, the budgetary calculus can go wrong. The uncertainties emanate from both global and internal factors.

The external factors may be listed as a) slow global economic growth with some major economies either growing slowly or in recession, b) there is an arc of instability all around which keeps destabilising the world economy from time to time, and c) commodity prices are declining leading to the threat of deflationary conditions in major economies like Eurozone and Japan. The global financial markets have suffered bouts of sharp fall repeatedly. This is not conducive to investments. In a period of uncertainty, firms tend to remain liquid rather than take on fresh investment. This would be true of India as well even though it seems to be doing better than the other economies.

The internal aspects leading to growing uncertainty are severe. They emanate from economic, political and social factors. Inequity has been rising, leading to shortage of demand for mass consumption items. Exports have been declining so that external demand is slack. Both these factors make the economy dependent on investments and government expenditures. But, there has been a problem on both these fronts. The Industry’s rate of growth has been slow, credit offtake has also been slow and there have beendroughts in Agriculture. The Services sector has also faced higher taxes and not done too well. Banking has been in a crisis due to the NPAs and debt write-off. Real Estate has been facing a crisis due to vacant properties. Investment has been low due to excess capacity.

Youth Unemployment has led to violent agitations of Patels and Jats. Gujjars and others have also demanded reservation even though this is not the solution to the problem. Very few jobs are available under reservation while there are a large number of underemployed. Shortage of good jobs coupled with poor skill levels due to poor training has led to this crisis but the government is not tackling it head-on. Even though programmes for skill creation and higher education are mentioned, they do not touch the real problems even marginally.

The problem is further aggravated by the attack on the best universities and institutions in the country. The atmosphere for developing skills is deteriorating in the long and the short run instead of improving. All this is leading to social instability in the country. There is growing political instability with political parties attacking each other. India is heterogeneous in the extreme and one cannot impose a uniformity. So, the will to build a consensus is weak because the ruling party is pushing a narrow agenda which does not find favour with many. Unfortunately, the NDA is implementing a divisive programme to push its agenda. This is leading to growing instability and diversion of the attention of the nation from the urgent tasks it faces. The result is a deterioration in the invest-ment climate with foreign countries and investors also asking questions.

V. Conclusion

The way things are going at present, uncertainty will continue in the foreseeable future. The Budget speech flags these issues but it does not tackle them even on the economic plane. These factors need to be taken into account in the Budget-making but are not. For instance, a high growth rate and a rise in investment are assumed without there being any evidence of those.

The first thing that planning under uncer-tainty requires is caution and not overconfidence. It is important to plan based on realistic figures and not assume too much as the present Budget does. There is need for flexibility, need to boost internal markets and flexibility in fiscal policies. Internal markets are in the control of the government and can be boosted by its efforts independent of the external situation. Decision-making needs to be quick and, therefore, ought to be decentralised and not concentrated in the PMO.

In brief, the resources for the pro-marginalised sections bias of the Budget 2016-17 are not in sight. Further, the targets will only be achieved if all the assumptions turn out to be right. But, given the huge uncertainties globally and nationally, this seems unlikely. The political advantage for the ruling dispensation that would come through this Budget’s supposed pro-poor bias may quickly dissipate with the rapid failure of expectations and deeper problems in the coming times.

The author is a retired Professor of Economics, Jawaharlal Nehru University, New Delhi. He can be contacted at arunkumar1000@hotmail.com