Financing Expenditure 2016
There are new extra-budgetary avenues for infrastructure financing. Some of these involve innovative partnerships within and outside the public sector
There are very many good initiatives within the Budget, but the extra-budgetary vehicles for market borrowing lack transparency.
Union Budget 2016 has stayed with pre-committed deficit targets even after taking on board almost the entire impact of the Seventh Pay Commission hike in salaries and pensions for Central civil servants. However, this is merely the direct impact. There will be a further round of salary hikes for employees in schools, universities and hospitals funded by the Centre. Then of course the new salary scales will whistle through all state governments. From a purely financial stability perspective, nothing else matters quite as much as how this process is handled, since it will determine the trajectory of consolidated public debt to GDP. I have made some suggestions earlier (“Fiscal Path 2016", 1 March) on how the Pay Commission impact can be mitigated.
That said, there is a lot else of consequence for growth and stability, in a Union Budget as dense with promises and proposals as this one.
There are new extra-budgetary avenues for infrastructure financing. Some of these involve innovative partnerships within and outside the public sector, without any alarming implications for financial stability. Others call for extra-budgetary market borrowings which, even if not explicitly underwritten by government, will carry an implicit public guarantee.
The National Investment and Infrastructure Fund (NIIF) announced in last year’s budget has been registered with Securities and Exchange Board of India (Sebi) as a trust, and carries a budgetary allocation of ₹ 4,000 crore for 2016-17. The NIIF will reach into domestic (and external) bond markets, with borrowing targets that will only become known once the governing council is constituted.
Then there is approved market borrowing of ₹ 31,300 crore by financial intermediaries like the National Highways Authority of India, Power Finance Corp., Rural Electrification Corp., Indian Renewable Energy Development Agency, National Bank for Agriculture and Rural Development (Nabard) and the Inland Water Authority. Such additional reach is fairly routine, and not very alarming, since these institutions have a long record of borrowing, and successful servicing. It is not clear whether that aggregate includes Nabard market borrowing to fund a new Long Term Irrigation Fund (LTIF), which targets a corpus of ₹ 12,517 crore in 2016-17. I could see no further details on how much of this will come from budgetary support, and how much from Nabard bonds. Then there is a Higher Education Financing Agency (HEFA), with budgetary support of ₹ 1,000 crore (announced in the speech but not visible in the Expenditure Budget), which will also be permitted to borrow an unspecified amount from financial markets.
These new extra-budgetary, yet partially budget-funded, avenues for infrastructure funding are not spelled out in any detail. Does the LTIF replace the Rural Infrastructure Development Fund (RIDF), which loaned to state governments (with assured servicing tantamount to an escrow)? If not, to whom will the LTIF lend, and how will those loans be serviced? Likewise, who will be authorized to borrow from HEFA? Any mis-steps in the set-up and functioning of these could have grave contagion effects in a domestic financial market already threatened by non-performing bank loans, and global volatility.
Other efforts to secure extra-budgetary funding are less threatening. Public-private partnerships are the traditional source of co-funded infrastructure investment, but have been dogged by design defects. A new Public Utility (Resolution of Disputes) Bill is proposed to reactivate projects grounded by disputes. Corporate Social Responsibility (CSR) will feed into HEFA, but as mentioned above, the objectives of that fund are not clear. There will be co-funding between centre and states of the Pradhan Mantri Gram Sadak Yojana (PMGSY), where state governments will contribute 3 of every 10 rupees spent. The PMGSY is one of the most successful initiatives towards growth and spatial equity, and the allocation of ₹ 27,000 crore in aggregate is one of the excellent features of this budget. Another very good co-funding move is the targeting of 500,000 wells and ponds for collecting water in rain-fed areas, and 1 million compost pits, within the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). This is the first such nationally co-ordinated initiative for constructing productive assets with MGNREGS funding.
In tax funding, this budget gives us a cess overload. At the same time, the budget has swept away 13 cesses with poor revenue yields, to “reduce multiplicity of taxes, associated cascading and to reduce cost of collection". To use the language of the young, I am like-hullo?
We have a new Krishi Kalyan Cess to fund agriculture and farmers’ welfare, at 0.5% on the service tax (with tax credit just like the basic service tax). Then there is the infrastructure cess on motor vehicles ranging from 1-4%, which does not carry tax credit. This cess is justified on the grounds of pollution and traffic congestion in cities, but does not explicitly feed into anything (my guess is that it will fund the ₹ 4,000 crore contribution to the NIIF). These come on top of the pre-existing Swachh Bharat cess on services. It is hard to imagine how these cesses can survive transition to a Goods and Services Tax (GST). Let us say the GST standard rate is 18%, 9% for the centre, 9% for states. GST discipline will be hard enough to sustain even if all central cesses were collapsed into a single add-on to the central rate. But if these partial incidence cesses (on services or particular types of goods like motor vehicles) were attempted, GST will simply collapse under the weight of its complexity. Coming to think of it, GST is nowhere mentioned in the budget document.
Cesses do not promote simplification of the tax structure, one of the nine stated objectives of reform in the Budget.
There is the additional wrinkle of cesses not being part of the divisible pool shareable with states. The only justifiable cess was the pre-existing Clean Energy Cess on coal (which has been doubled from ₹ 200 to ₹ 400 per tonne in this budget). I see this cess as stand-in for a carbon tax, which alone could survive the GST as a non-offsettable overlay.
There is one indirect tax imposed where none existed before, which is actually a wholly justified levelling of the playing field. I was astonished to discover that defence imports carried no tariffs or countervailing equivalent of domestic taxes. This now stands corrected, and with that the tax disadvantage of domestic defence producers goes away.
Moving on to direct taxes, there are some good moves. The relief for individual tax payers on income below ₹ 5 lakh, and the hike in house rent deduction up to ₹ 5,000 monthly rental, are all important moves towards making the direct tax structure more fair. There is the larger task ahead of taking on the real estate lobby which holds up the price of land and housing for all, but that battle has to be fought elsewhere. As an early advocate of presumptive taxation, I was gratified to see the net extended to business turnover of ₹ 2 crore, and extension of the scheme to professionals with income up to ₹ 50 lakh. For such professionals, the presumption of profit at 50% of gross receipts is more than fair. All these are compliance inducing moves.
The phase-out of corporate tax exemptions has begun, and the immediate reduction to a base rate of 25% for new companies incorporated after 1 March 2016, shorn of exemptions, encourages new entrants and lodges them within the new low-rate exemption-free framework. However, the reduction of the base rate from 30% to 29% for companies with a turnover not exceeding ₹ 5 crore in the current year is one of those twists that use up the time of assessing officers and confer no special advantage.
On funding from disinvestment, the changed strategy towards monetization of specific assets like land and manufacturing units is in line with the recommendations of the Thirteenth Finance Commission, and is an excellent departure from traditional practice.
There are other policies in the Budget, not having to do with financing but with directions of expenditure and incentivisation, which are most commendable. I will mention just three. ₹ 1,000 crore from the general exchequer towards the employer’s contribution of 8.33% for all new employees enrolling in the Employees’ Provident Fund Organisation for the first three years of their employment, is designed to formalize informal employment, and is capped at a salary of ₹ 15,000 per month so as to benefit the low skilled. A token maybe, but important. The scope of the employment generation incentive under Section 80JJAA of the income tax act, whereby 30% of the salary paid to new regular workmen earning less than ₹ 25,000 per month is tax deductible for three years, has also been extended to all assessable enterprises to encourage job creation. We need more evidence however on whether this merely results in revolving door hiring.
Finally, we have a new provision of ₹ 2,000 crore to cover the initial cost of providing cooking gas connections to women members of poor households. The scheme is to be continued for two more years, and targets eventual coverage of 50 million poor households. A small but great beginning.
Indira Rajaraman is an economist.
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