The budget for 2015-16
paints a wonderful vision for India which, it is hoped, will become a reality
by 2022. Some elements of this vision are:
- A roof for each family in India. This would require building 6 crore houses in India
- Each house in the country should have basic facilities of 24-hour power supply, clean drinking water, a toilet, and be connected to a road
- Electrification, by 2020, of the remaining 20,000 villages in the country
- Connecting each of the 178,000 unconnected habitations by all-weather roads
- Providing medical services in each village and city
- Upgrading over 80,000 secondary schools and adding or upgrading 75,000 junior/middle schools to the senior secondary level
- Bringing the Eastern and North Eastern regions on par with the rest of the country
Obviously,
the items listed above are unexceptionable and there can be no disagreement
about the desirability of bringing about these changes. However, unless there
is a concrete course of action regarding how this vision is to be realized, it
remains a fairy tale of the “Garibi Hatao” kind that we had witnessed during
Indira Gandhi’s regime. Arun Jaitley’s strategy for achieving these objectives
is enhanced investments leading to high rates of growth. But the Finance
Minister is a realist and clearly recognizes the challenges facing the economy.
These are spelt out in his Budget Speech (paragraphs 18-22):
- Reviving agricultural incomes
- Increasing investment, especially public investment in the short run
- Boosting the manufacturing sector
- Maintaining fiscal discipline
Of course, Jaitley is
not obsessed with growth alone and pays due respect to social security. In a
sense, he straddles the philosophies of both Amartya Sen (with emphasis on
social security) and Jagdish Bhagwati (with prior emphasis on growth).
The NDA government has
been dealt a wonderful hand in the first year of its rule and it is like manna
from heaven: it can claim very little credit for it. But then, to be
successful, the government has to make best use of lucky breaks. The Central
Statistical Organisation (CSO) has handed the NDA government a miraculously
revived economy. The change of base for measuring the GDP has led a sudden
increase in the growth rates for the past few years.[i] As
per the earlier methodology, the rate of growth of GDP in 2013-14 was 5.1%,
which has now been revised upward to 6.9%. We still don’t know what revisions
might yet take place for the data in the years prior to 2013-14. But an
interesting question remains: Is it possible that the performance of the UPA
was not as bad as the old methodology made it out to be? We will not know the
answer to this question till the CSO goes back and revises historical data as
per the new methodology. This upward revision of 1.8 percentage points in the
growth rate of 2013-14 has suddenly offered the NDA government a much higher
base to work from. Given this, the rate of growth for 2014-15, at 7.8%, looks
very impressive indeed. The other lucky break for the NDA government has been
the dramatic decline in world oil prices since June 2014. Alongside this, the
various measures that the RBI has been implementing for the last 18 months have
begun to yield fruit and inflation has come down dramatically. This now opens
up the possibility of interest rate cuts by the RBI[ii] which
will further add to the growth momentum. It is important to see how the NDA
government builds on these lucky breaks.
Investment
Expenditures
To take the tide at the
flood, the Budget has pushed hard on the investment front. The following major
proposals have been put forward:
- Rs 5,300 crore support for micro-irrigation, watershed development and the Pradhan Mantri Krishi Sinchai Yojana (Budget Speech, paragraph 29)
- Bankruptcy law reform (Budget Speech, paragraph 36)
- Increase in investment for infrastructure (mainly roads and railways) to rise by Rs. 70,000 crore in the year 2015-16, over the year 2014-15 (Budget Speech, paragraph 46)
- Establishment of a National Investment and Infrastructure Fund (NIIF) with an ensure an annual flow of Rs. 20,000 crore to it (Budget Speech, paragraph 47)
- Tweaking the PPP mode of infrastructure development (Budget Speech, paragraph 47)
- Setting up 5 new Ultra Mega Power Projects, each of 4000 MWs (Budget Speech, paragraph 54)
Many commentators have
hailed these investment proposals of the Finance Minister and taken it as proof
of his commitment for re-booting the investment activity in the economy. Two of
the above proposals have an institutional dimension to it, namely, the
bankruptcy law reform and the reform in the PPP mode of infrastructure
development. Certainly, these are very important initiatives but only time will
tell how crucial they are likely to be in boosting investment. Right now these
two proposals should be viewed as showing the right intent. The other items in
the list are more concrete and a more tangible evaluation is possible.
Let us consider the
budgeted additional Rs. 70,000 crore
to be spent 2015-16 as compared to 2014-15 for infrastructure investment in
roads and railways. The Finance Minister has made it clear that this would come
from budgetary outlays. As far as the Ministry of Road Transport and Highway is
concerned, the budget allocation for 2013-14 on the capital account was Rs.
16,770 crore while for 2015-16 it is Rs. 33,049, which is an increase of Rs. 16,279.
The allocation on the capital account for railways in 2013-14 was Rs. 30,100
and, in 2015-16, it is Rs. 40,000, an increase of Rs. 9,900. Hence, for
roads and railways, the combined additional capital expenditure for 2015-16 is
Rs. 26,179 crores which is only 37% of the additional Rs. 70,000 crores
mentioned by the Finance Minister. This implies that the remaining 63% will
have to be funded from additional Internal and External Budgetary Resources
(IEBR) which is made up of profits, loans or equity of PSUs. How likely is it
that the required IEBR will be forthcoming? Considering the budgets from
2010-11 to 2014-15, actual IEBR have been about 74% of the budgeted amount. Given
this uncertainty associated with respect to IEBR, one cannot be confident that
the target for additional infrastructure investment will be met.
As far as the National Investment and Infrastructure
Fund is concerned, no allocations have been made for it. In fact, the FM quite
honestly states that he will now go about finding the required funds. The 5 Ultra
Mega Power Projects are at the moment mere wishful thinking. As the FM states,
there is no government involvement here, and neither is any time frame stated
regarding when these power projects will start nor when they will be completed.
Rs. 5,300 crores have been allocated to minor irrigation, watershed development
and Pradhan Mantri Krishi Sinchai Yojana (PMKSY). Very little of this is
towards capital expenditure: Demands for grants numbers 1, 85 and 107
(Expenditure Budget Vol. 2) which deal with these items have allocated less
than Rs. 200 crores towards capital expenditure. While some allocation for
expenditure on the revenue account is required to run these schemes, the
distribution between revenue and capital expenditures seems particularly adversely
skewed.
Also
consider the FM’s promise of building 6 crore houses by 2022 so as to put a
roof over the head of each Indian family (Budget Speech, paragraph 16). No
doubt the objective is laudable but it is necessary to get some idea about the
magnitude of the task. Just to put matters in perspective, during the decade
2001-2011, India added 6.5 crore residential units to its housing stock.[iii]
As per the vision of FM, almost the same number of units is to be added in the
next 7 years. It is not clear where the funding for this is to come from. Apparently,
‘Team India’ led by the States and guided by the Central Government (Budget
Speech, paragraph 16) is supposed to be in charge of this. The guidance of the
Central government, at the moment, seems perfunctory. The allocation to the
Ministry of Housing (Demand for Grant No. 58, Expenditure Budget Vol. II) for
2015-16 is Rs. 5634.47 crores but surprisingly all of it is on the revenue
account. I would have expected at least some allocation on the capital account
of the Budget. Leave alone a credible commitment, this is not even a signaling
of credible intent.
Social
Security Expenditures
For a government that was
supposed to be the anti-thesis of what Amartya Sen stood, the Budget has given
a lot of attention to social security. Almost Rs. 35,000 crore has been allocated to
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which is more
or less on par with what was allocated during the UPA regime. The FM has stated
that “Our
government is committed to supporting employment through MGNREGA. We will
ensure that no one who is poor is left without employment” (Budget Scheme, paragraph 32).
This is an amazing turnaround from the earlier views which had called MGNREGA a
glorious failure.[iv]
In fact, the Economic Survey 2014-15 is even more effusive in its endorsement
of the employment guarantee scheme “The MGNREGA program has the virtue of being
reasonably well-targeted” (Volume 1, p. 18). Critics of the programme had
blamed it for the rise in rural wages which had made it expensive not only to
hire labour in rural areas but also created a shortage of labour for industry
since labour, “pampered” by high rural wages, had turned “lazy”. Incidentally, this is so reminiscent of Mitt Romney contemptuous comment about the "lazy" 47% Americans during the last US Presidential elections! In any case, Raghuram Rajan
has rubbished these claims stating that MGNREGA contributed only about 10% of
the rise in rural wages.[v]
Three schemes for insurance and pension have
been announced. The Pradhan Mantri Suraksha Bima Yojna will cover
accidental death risk of Rs.
2 lakh for a premium of just Rs. 12 per year. How realistic is this? A quick
check on the Life Insurance of India premium calculator[vi] is quite instructive. The Jeevan Rakshak
product covers accidental death. For an adult aged 27 years (this is the median
age in India), for a term of 10 years and to receive a cover of Rs. 2 lakh, the
yearly premium is Rs. 16,275. Sure, the product that will be offered by the
government will be quite different from the example I have used, but the
difference in the two premiums indicates the subsidy component that is implied
by this proposal. The situation with respect to the other two products - Atal
Pension Yojana and Pradhan Mantri Jeevan
Jyoti Bima Yojana - is similar.
Fiscal
Consolidation
Fiscal
consolidation has been the Achilles’ Heel of Indian public finances. These
finances took a big hit especially after the onset of the worldwide recession
in 2008. The Economic Survey notes “failure to control expenditure, … combined with excessive
counter-cyclical policies in the second phase (2009-12) led to a loss of fiscal
control that contributed to the near-crisis of 2013” (Economic Survey Vol. 1,
p. 20). Even though fiscal policy is supposed to be counter-cyclical (i.e.
lower budget deficits or even budget surpluses when the economy is doing well),
there is general criticism that Indian fiscal policy has been pro-cyclical (higher
budget deficits when the economy is doing well). The Economic Survey seems to
suggest that the fiscal policy after 2008 was correctly counter-cyclical even
though excessively so. This is similar to the position I had put forward in an
earlier post.[vii]
The Fiscal
Responsibility and Budget Management (FRBM) Act was passed in 2004-05 with a
target for Gross Fiscal Deficit (GFD) of 3% of GDP and a target for Revenue
Deficit (RD) of 0%. The laudable objective behind these targets was that, if
the RD were confined to 0% of GDP, then any borrowing arising due to the
presence of GFD would be only for capital expenditures leading to increase in
investments.[viii]
Of course, any value of RD which raised its ratio to GDP above 0%, would imply
that borrowings would be used for financing RD and that much less would be
available for capital expenditures. The chart below gives the pattern of
deficits over the last few years:
The gap between the GFD
line and the RD line shows the quantum of borrowings required to bridge the gap
which should ideally be used for capital expenditures. However, since RD is not
at 0%, at least some part of the borrowings goes towards funding the revenue
deficits.
The Finance Minister
has stated that he has relaxed the schedule for achieving the targeted GFD of
3% of GDP and that instead of the ratio being 3.6% of GDP for 2015-16, as
announced in the previous budget, it will now be 3.9% of GDP. This implies a
budgeted GFD of Rs. 555,649 crore instead of the planned GFD of Rs. 512,907
crore (i.e. 3.6% of the predicted GDP for 2015-16). Thus, the FM has a leeway
of Rs. 42,742 crore which, it is hoped, will be used for capital expenditure. Many
of these estimates will have to be amended if the projected growth rate of GDP
for 2015-16 is not realized. In nominal terms, the rate of growth for 2015-16 is
projected to be almost 14% (Rs. 14,247,410 crore in 2015-16 as compared to Rs. 12,503,122
crore in 2014-15). Assuming a rate of inflation of between 5% and 6%, the rate
of growth of real GDP would be between 8% and 9%. Is this growth rate
realistic? Given the 7.4% rate of growth estimated for 2014-15, a rate of
around 8.5% seems within reach. The only concern that I have is the recent
change in methodology for measuring GDP, which as stated earlier, led to a
sudden jump in the growth rate of 2013-14. It is still not clear why that jump
took place but I do hope it is not a statistical anomaly which might have an
impact of the growth rate being projected.
The focus on cutting
and/or targeting subsidies is a major step that has been taken in the budget.
Once again, a programme that was much reviled has made this targeting possible.
I refer to the Aadhar project which was in the process of being wound up by the
NDA government but better sense prevailed. The FM has stated that Rs. 6,335 crore have so far been
transferred directly, as LPG subsidy, to 11.5 crore LPG consumers. For 2015-16,
the total LPG subsidy amounts to Rs. 22,000 crore (Demand No. 75, Expenditure
Vol. 2) of which Rs. 21,140 will now be under Direct Benefit Transfer for LPG
(DBTL) scheme.[ix] Assuming
that these subsidies are well-targeted, this represents only about 8.5% of the
total subsidies bill of Rs. 243,811 crore. Plugging leakages and targeting the
remaining 91% of subsidies is going to be a daunting challenge given that
interests of major groups/lobbies are involved in the continuance of fertilizer
subsidy, food subsidy inclusive of support prices for farmers and interest
subsidies.
Conclusion
The expectation from the 2015-16 Budget was that it would
usher in Big-Bang reforms and that it would be as path-breaking as the 1991 Manmohan
Singh budget that brought in economic reforms. That budget did change the
direction that the Indian economy had followed up until 1991 and hence it was,
indeed, path-breaking. There was no need for such a radical budget at the present time. True, the budget needed to show a sense of purpose; and it needed to
halt the drift in policy making that had set in; also true that it needed to give
growth an impetus; and yes, it needed to signal to the Indian economy and to
the world that there was a strong and sure hand in charge at the government. I
would say that the Finance Minister’s Budget Speech has done all that. The
importance of investment and growth has been brought to centre-stage but, despite
this, the commitment to social security has not been abandoned. Both, the
Budget Speech and the Economic Survey, have recognized the benign environment
facing the Indian economy and both documents have emphasized the importance of
taking advantage of this. My critique of the budget has been that the actual
actions (in the form of allocation of funds) had not matched the words. This is
a trend that I have observed over the last few budgets: impressive
announcements have been made in the budget, huge sums of money have been
dangled before the public, but the fine print in the other budget documents has
not matched up to these grandiose announcements. This raises doubts whether
budgets have become elaborate smoke and mirrors exercises which do not follow
up with credible commitments in the form of assured funding. I have similar
doubts about Arun Jaitley’s 2015-16 budget as well.
[viii] This is an approximation. Capital
expenditures could be more than the level of borrowings since other receipts
such as recovery of loans and disinvestment proceeds could also be used for
capital expenditures.
