(This note has been written jointly with Mala Lalvani, Professor, Department of Economics, University of Mumbai)
The Budget 2016-17, presented by the Finance Minister, has been hailed, not quite as a game changer, but certainly as one which deserves high marks.[i] Some of the announcements relating to agriculture,[ii] rural development,[iii] MGNREGA [iv]and infrastructure[v] have caught the attention of analysts and we will evaluate the budgetary provisions for these in this note. However, before we do that, we take a quick look at what was achieved by Budget 2015-16.
Looking Back: Budget 2015-16
We first consider the purpose-wise classification of government expenditures as announced in Budget 2015-16 and compare these to what was achieved over the year. Table 1 provides these details.
Table 1: Purpose-wise expenditures during 2015-16
|
|
2015-16 (BE)
(Rs. Billion)
|
2015-16 (RE)
(Rs. Billion)
|
Change: 2015-16 (RE) over 2015-16 (BE) (%)
|
|
PUBLIC GOODS
|
5372.19
|
5421.40
|
0.92 %
|
|
EDUCATION
|
714.34
|
694.20
|
-2.82 %
|
|
WELFARE
|
1031.09
|
1119.67
|
8.59 %
|
|
INFRASTRUCTURE
|
1081.29
|
1040.59
|
-3.76 %
|
|
TOTAL
|
8198.91
|
8275.86
|
0.94 %
|
|
Note: BE = Budget Estimates; RE = Revised Estimates
The Ministries covered under the items listed above will be noted in the figures presented below.
|
|||
The overall comparison between the Budget and Revised estimates of Budget 2015-16 hides important differences across budget-heads covered under each item listed in Table 1. Figure 1 gives details of the budget-heads covered under Public Goods.
Figure 1 seems skewed due to the massive percentage increase of expenditure for Panchayati Raj institutions. However, it should be remembered that actual amount of expenditure for Panchayati Raj institutions is quite small: Rs. 0.95 billion (BE) and Rs. 2.22 billion (RE). It is disconcerting that budget heads like New and Renewable Energy, Agriculture Research and Education, Agriculture, Cooperation and Farmers Welfare and Urban Development have suffered a decline as compared to their budgeted amounts.
Figure 2 gives details of budget-heads covered under Education.
Given the emphasis on Skill India[vi] and the importance attached to it by Prime Minister Modi,[vii] it is quite a surprise that Skill Development and Entrepreneurship has suffered a massive decline of 32%. The fall in Ayurveda etc. (AYUSH) and Higher Education is also in excess of 5%.
Figure 3 provides details of the item Welfare.
The two extremes in Figure 3 are Housing and Poverty Alleviation with a fall of -62% (from Rs. 51.7 billion to Rs. 19.6 billion) and Women and Child Development with an increase of 69% (from Rs. 100.8 billion to Rs. 170.8 billion).
Finally, Figure 4 presents details of Infrastructure.
Railways have suffered a sharp fall of -20% mainly on account of the fact that investments have fallen from the budgeted level of Rs. 400 billion to Rs. 320 billion. This is a shocking under-achievement given the NDA government’s emphasis on infrastructure. This shortfall does make the proposed Rs. 450 billion worth of capital expenditure for 2016-17 highly suspect. The significance of this shortfall in capital expenditures of railways should not be underestimated. It is quite unprecedented as Figure 5 shows.
Figure 5 shows that actual capital expenditure in railways has never fallen short of the budgeted amount till 2015-16. A question worth pondering over is whether capital expenditures on railways were sacrificed at the altar of fiscal discipline, in order to meet the target of Gross Fiscal Deficit to GDP ratio of 3.9%?
Evaluating Budget 2016-17
The Finance Minister, in his Budget 2016-17 speech, listed out nine pillars for the transformation of India. These are:
Agriculture and Farmers’ Welfare: with focus on doubling farmers’ income in five years;
Rural Sector: with emphasis on rural employment and infrastructure;
Social Sector including Healthcare: to cover all under welfare and health services;
Education, Skills and Job Creation: to make India a knowledge based and productive society;
Infrastructure and Investment: to enhance efficiency and quality of life;
Financial Sector Reforms: to bring transparency and stability;
Governance and Ease of Doing Business: to enable the people to realize their full potential;
Fiscal Discipline: prudent management of Government finances and delivery of benefits to the needy; and
Tax Reforms: to reduce compliance burden with faith in the citizenry.
This note will seek to examine some of these pillars, especially those which have budgetary implications. A few others such as, Financial Sector Reforms, Governance and Ease of Doing Business and Tax Reforms, while undoubtedly important, do not have direct budgetary implications and it seems unlikely that the process of implementing these reforms will be completed in the financial year 2016-17.
Agriculture and Farmer’s Income
At a farmer’s rally in Uttar Pradesh, the Prime Minister announced that incomes of farmers would be doubled by 2022.[viii] The Finance Minister gave expression to this announcement of the Prime Minister with what is, essentially, a vacuous statement in his Budget Speech. We call it vacuous because it is not clear what exactly is meant by farmer’s income: is it real income or nominal income?[ix] Does one obtain it by dividing the GDP produced in agriculture by the number of persons employed in agriculture or the number of persons dependent on agriculture? The problem is that we could not find a source which would give information on farmer’s income. In what we present below, we use GDP from Agriculture and allied activities at 2011-12 prices.[x]
Figure 6 below shows the data of GDP from Agriculture and Allied Activities from 2011-12 till 2015-16 and projections beyond 2015-16.
The compounded annual growth rate of GDP from Agriculture and Allied Activities has been less 3.5% from 2000-01 to 2015-16 with the highest rate of growth being recorded in 2010-11 of 8.6%. The Finance Minister’s announcement expects the sector to grow 12.25% per year from 2016-17 till 2021-22 which is almost triple the rate that has been achieved in the last 15 years. One caveat to be borne in mind while considering Figure 1: it is possible that the number of persons involved with agriculture would come down over the years and the doubling of per capita incomes might require a slower rate of growth of GDP from Agriculture and Allied Activities. Despite this caveat, the proposals detailed in the budget do not provide any confidence that the announcement of doubling farmers’ incomes by 2022 is anything other than wishful thinking or, worse, it amounts to mere sloganeering, not unlike the “Garibi Hatao” slogans of Indira Gandhi.
Farmer Welfare
The way in which data have been reported in the Budget 2016-17 leaves a lot of room for confusion, especially since budget heads are no more comparable with those in previous budgets. We have not been able to find any rationale in the budget papers that explains the change in the budget heads. This lack comparability has made some of the announcements in the Budget seem grander than they actually are. The Finance Minister declared, to a lot of applause, the following:
“Special focus has been given to ensure adequate and timely flow of credit to the farmers. Against the target of Rs. 8.5 lakh crore [Rs. 8,500 billion] in 2015-16, the target for agricultural credit in 2016-17 will be an all-time high of Rs. 9 lakh crore [Rs. 9,000 billion]. To reduce the burden of loan repayment on farmers, a provision of Rs. 15,000 crore [Rs. 150 billion] has been made in the BE 2016-17 towards interest subvention” (Budget 2016-17 Speech, paragraph 30).[xi]
The summarized accounts of the Ministry of Agriculture and Farmer’s Welfare look as in Table 2.
Table 2: Ministry of Agriculture and Farmers Welfare
(Rs. Billion)
|
|
2015-16 (BE)
|
2015-16 (RE)
|
2016-17 (BE)
|
Rate of growth in 2016-17 over 2015-16 (RE)
|
|
Total Allocation
|
170.04
|
158.09
|
359.84
|
127.6%
|
|
Modified Total Allocation
|
300.04
|
288.14
|
359.84
|
25%
|
|
Source: Expenditure Budget, Vol. II, p. 1
|
||||
Consider first the row titled "Total Allocation". The impression created by the amount budgeted for 2016-17 is one of a massive increase in allocations for the development and welfare of agriculture. However, the reality is that budget heads have been changed. Interest subvention for farmers mentioned above in the quote of the Finance Minister is included in the allocation listed in Table 2. However, till 2015-16, this item was listed under the Department of Financial Services, Ministry of Finance (see page 161 of Expenditure Budget Volume 2). As per the revised estimates of 2015-16, the amount spent on interest subvention was Rs. 130.05 billion. Hence, the interest subvention has increased by Rs. 20 billion, that is, by 15%.
To make the numbers comparable, consider the row titled “Modified Total Allocation” in Table 2 where we have added the 2015-16 (BE) of interest subvention of Rs. 130 billion to Rs. 170.04 billion and added 2015-16 (RE) of interest subvention of Rs. 130.05 billion to Rs. 158.09 billion. Now, the modified rate of growth in the last column comes down from 127.6%, which challenged credulity, to a more modest 25%. We would like to note that a rate of growth 25% is still impressive but is not as good for dramatic effect as 127% is!
Infrastructure
The Finance Minister states in his Budget Speech (paragraphs 73 and 74) that “Thus the total investment in the road sector, including PMGSY[xii] allocation, would be Rs. 970 billion during 2016-17…Together with the capital expenditure of the Railways, the total outlay on roads and railways will be Rs. 2,180 billion in 2016-17.”
The Rs. 2,180 billion mentioned above is inclusive of Rs. 450 billion capital expenditure of Indian Railways. As we evaluate the allocations for transport, it is important to keep in mind the shortfall in capital expenditure of Indian Railways in 2015-16 that was pointed out above. Hence, there is no certainty that the budgeted amount will, in fact, be spent on railways for 2016-17. It should also be pointed out that the amount allocated for transport includes allocations for the National Highway Authority of India (NHAI) but not all of it is routed through the budget. See Table 3.
Table 3: Allocations to National Highway Authority of India
(Rs. Billion)
|
|
2015-16 (BE)
|
2015-16 (RE)
|
2016-17 (BE)
|
|
Budget Support
|
294.20
|
294.21
|
196.53
|
|
IEBR
|
426.95
|
280.00
|
592.79
|
|
TOTAL
|
721.15
|
574.20
|
789.32
|
|
IEBR = Internal and Extra-Budgetary Resources
|
|||
The Planning Commission describes IEBR as “IEBR comprises of internal resources, and extra-budgetary resources. Extra-budgetary resources are the sum of domestic and foreign loans raised directly by [Public Sector Organizations]. Broadly, the internal resources comprise retained profits…”[xiii] As this description makes clear, how much IEBR can be raised cannot be controlled by the budget and, hence, there is no guarantee that the amounts allocated to the NHAI (as given in Table 3) will, in fact, be raised. If the past is any indication, the performance with respect to raising IEBR has not been very good as Figure 7 shows.
Over the last three years, performance in raising IEBR has been under 66%. Once again, our issue with the budget announcement is that nowhere in the Budget Speech is this dependence on IEBR made clear. It is only when one reads the fine print of the budget documents do these details come to light.
Rural Development
The MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) was the NDA’s bête noire. The quote of the Prime Minister regarding the scheme has been repeated often enough now for all to know the disdain he felt for it.[xiv] And yet, the Ministry of Rural Development, despite the many flaws of the scheme, has hailed it as a success.[xv] Surely, it must have been galling for the NDA to embrace the UPA scheme as means of overcoming rural distress[xvi].
The Finance Minister has allocated a total of Rs. 877.65 billion to for Rural Development, of which Rs. 385 billion has been allocated for MGNREGS. Does this represent a serious attempt to alleviate rural distress? Table 4 gives details.
Table 4: Allocations Rural Development
(Rs. Billion)
|
Demand
No.(Department)
|
2015-16 (BE)
|
2015-16 (RE)
|
2016-17 (BE)
|
|
75 (Rural Development)
of which
MGNREGS
|
716.95
346.99
|
777.00
369.67
|
860.55
385.00
|
|
76 (Land Records)
|
16.37
|
15.78
|
17.09
|
|
TOTAL (Rural Development)
|
733.32
|
792.78
|
877.65
|
|
Total Expenditure of government
|
17,774.77
|
17,853.91
|
19,780.60
|
|
Rural Development as % of Total Expenditure
|
4.1
|
4.4
|
4.4
|
|
MGNREGS as % of Rural Development
|
48.4
|
47.6
|
44.7
|
|
MGNREGS as % Total Expenditure
|
1.95
|
2.1
|
1.95
|
Despite much talk regarding enhanced attention of Budget 2016-17 for rural development, the information in Table 4 does not bear this out. Expenditure for Rural Development as percentage of Total Expenditure for 2016-17 has stayed stagnant at 4.4%. Expenditure on MGNREGS as percent of expenditure on Rural development as fallen from 47.6% in 2015-16 (RE) to 44.7% in 2016-17 while expenditure on MGNREGS as percent of Total Expenditure has declined from 2.1% to 1.95%. Hence, despite much bluster, the actual response of Budget 2016-17 to rural distress has been very disappointing. The grandstanding has not been backed up by meaningful allocations.
Fiscal Discipline
The Finance Minister has deservedly received praise for maintaining fiscal discipline and keeping deficits in check. Even though there were fears that the fiscal deficit target for 2015-16 might be missed, such fears were misplaced. Gross Fiscal Deficit (GFD) as percent of GDP is expected to fall to 3.5% in 2016-17 from the level of 3.9% that was achieved in 2015-16; Revenue Deficit as percent of GDP will be 2.3% as compared to 2.5% in 2015-16.
Despite this commendable commitment to meeting GFD targets, things could go wrong. To understand why this might happen, consider the computation of GFD:
GFD = Total Expenditure of the Government minus Total Revenue of the Government
(Note: Total Revenue includes Tax & non-tax revenue, recoveries of loans and disinvestment proceeds)
If there is a shortfall in Total Revenue, the GFD target is likely to be missed unless total expenditure can be reduced. An important component of Total Revenue is investment proceeds which, for 2016-17, account for almost 4% of the total. How has been the performance, over the years, with respect to disinvestment proceeds? Figure 8 provides some details (amounts are measured in billion rupees).
Figure 8 makes clear that actual amount collected from disinvestment as compared to budgeted amount has not crossed 50% in the last three years. Successful disinvestment requires the stock market to be buoyant in order to garner the required amount of revenues. But, with stock markets currently exhibiting substantial volatility and likely to remain so for much of 2016, the government’s disinvestment target of Rs. 565 billion for 2016-17 may be too optimistic.
In the event that disinvestment proceeds are below anticipated levels and the Finance Minister wishes to adhere to the fiscal deficit target, then total expenditures have to be cut. The question is which expenditures will be cut? This is where political economy comes into the picture. Expenditures which are targeted at vested interests are difficult to cut but those which are targeted at electorate with low bargaining power or low political clout will be sacrificed. In fact, this is exactly what happened in 2015-16 when disinvestment proceeds were only 36% of the budgeted level. See Table 5 for details.
Table 5: Cutbacks in Expenditures
|
Budget Head
|
Reduction in expenditure as compared to 2015-16 Budget (%)
|
|
Housing and Urban Poverty Alleviation
|
-62.16
|
|
Tourism
|
-40.62
|
|
Skill Development and Entrepreneurship
|
-32.78
|
|
Railways
|
-20.00
|
|
Development of North Eastern Region
|
-19.13
|
|
New and Renewable Energy
|
-13.57
|
|
Earth Sciences
|
-12.45
|
|
Agriculture Research and Education
|
-11.61
|
|
Youth Affairs and Sports
|
-9.82
|
What is noticeable is that most of the budget heads that have been cut, though important from welfare and growth point of view, do not wield any political clout and these have been sacrificed in order to meet deficit targets. This is a danger that must be guarded against in 2016-17.
Summing Up
The Budget for 2016-17 was presented amid great anticipation. It was expected that the budget would boost the reforms process; that it would be a path-breaking; and that it would put forward a grand idea. We had far more modest hopes: we were hoping for a solid workmanlike budget which would not try to play to the gallery i.e. the stock market. We were hoping that the budget would give agriculture and rural distress the attention it so badly required. In the process, what has emerged is a budget that is not path-breaking, it does not put forward a grand idea and it does not address the crucial issues facing the country. Alarmingly, Arun Jaitley’s budget appears so much like P. Chidambaram’s budgets which used to indulge in much grandstanding but would be short on substance.[xvii], [xviii] As far as agriculture, farmer’s welfare, rural development and infrastructure are concerned, the Finance Minister has made all the right noises but the actual delivery has been very lackluster. The political party, which came to power with promises of rejuvenating the economy, has, despite its massive majority in Parliament, continued to exhibit surprising timidity in economic matters.
[i] http://economictimes.indiatimes.com/markets/stocks/news/gamechanger-or-not-analysts-give-4-out-of-5-to-arun-jaitleys-budget-2016/articleshow/51195518.cms
[ii] http://www.livemint.com/Politics/T3pDBIVQPF6Ri6MnyEEeBK/Union-Budget-201617-Govt-gives-Rs36000-cr-to-farm-sector.html
[iii] http://www.hindustantimes.com/union-budget/arun-jaitley-s-budget-2016-focuses-on-agriculture-social-sector/story-sqJUXM9pa0yPiuJc8XtXfJ.html
[iv] http://www.deccanchronicle.com/nation/current-affairs/010316/u-turn-mgnrega-gets-rs-38-500-crore-in-budget-2016-17.html
[v] http://www.thehindu.com/business/budget/union-budget-2016-infrastructure-gets-the-much-needed-push/article8297228.ece
[vi] http://www.nsdcindia.org/our-role
[vii] http://www.narendramodi.in/pm-s-remarks-at-the-launch-of-skill-india--206106
[viii] http://indianexpress.com/article/india/india-news-india/farmers-rally-bareilly-target-to-double-farmers-income-by-2022/
[ix] http://www.firstpost.com/business/budget-2016-jaitleys-promise-of-double-income-for-farmers-in-five-years-is-next-to-impossible-2651358.html
[x] Before the change in methodology of computing GDP, it was possible to get GDP from agriculture separately from GDP from agriculture and allied activities. Note any more. See: http://mospi.nic.in/Mospi_New/upload/nad_PR_8feb16.pdf
[xi] For those unfamiliar with Indian terminology: 1 crore = 10 million.
[xii] PMGSY = Prime Minister’s Gram Sadak Yojana (Prime Minister’s Rural Roads Programme)
[xiii] http://planningcommission.nic.in/aboutus/committee/wrkgrp11/wg11_frcg.pdf
[xiv] http://www.moneycontrol.com/news/politics/budget-2015-16-will-retain-mnrega-as-memorial-to-upa%E2%80%99s-folly-says-pm-modi_1315711.html
[xv] http://indianexpress.com/article/india/india-others/despite-narendra-modis-criticism-of-scheme-rural-ministry-lists-nregas-success-stories/
[xvi] http://www.business-standard.com/article/opinion/10-years-of-mgnrega-how-the-modi-government-was-forced-to-adopt-the-scheme-116020200266_1.html
[xvii] See my article at: http://www.epw.in/journal/2005/14/budget-specials/impressive-grandstanding-empty-coffers.html
[xviii] Maitreesh Ghatak has labelled the budget as a “UPA 3 Budget”. http://profit.ndtv.com/news/budget/article-opinion-modi-government-presented-a-upa3-budget-1283502
