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Photo: Sam Panthaky/AFP
Photo: Sam Panthaky/AFP

A new basis for the budget

It is not finances that need budgetary planning but natural resources. Their shortage is a binding constraint now

In his maiden budget, Narendra Modi must take three initiatives which will change the budgetary framework as well as the design of fiscal policy.

Replace the railway budget with energy/oil budget:

From 1925, the British presented the accounts of railways as a separate budget. This was to ensure that railways, their single largest capital investment received adequate importance and assured project financing. It accounted for one-third of the overall British budget. What political, economic or military reasons justify the railway budget now?

To align the annual budgetary and fiscal policy with the long-term national economic strategy and bring it in line with the current economic priorities, the railway budget must be replaced by an energy budget or an oil budget.

The raison d’etre for the oil budget is that the key for ensuring economic stability and sustained growth over the next decade lies in how well India’s energy economy and security are managed.

Even arithmetically, if there is one number which by its sheer magnitude decides the fate of the Union Budget it is the estimate of the oil subsidy bill. This one subsidy figure has made the edifice of many a budget collapse.

In the past few years, as a consequence of the dependence on imported crude, India’s macro story has become an inter-play between the twins—fiscal and current account deficits (CAD).

As such for all the play public investments receive or those in partnerships with the private sector, a counter-cyclical taxation policy, systemic support to the private corporate sector to shop abroad for resources, and an enabling policy is what the oil budget should be all about.

Set up a Natural Resources Investment Trust:

Looking beyond oil, the most critical deficit facing the Indian economy is the natural resource deficit and not the fiscal deficit. Besides importing two-thirds of its oil requirement, India is slated to overtake China as the world’s largest coal importer over the next decade, even though China’s coal consumption is over six times that of India’s.

Even in the case of iron ore, India has slipped from being the third largest iron ore exporter globally to being at risk of becoming a net importer soon.

It is also important to realize that this natural resource deficit is the primary source of the macroeconomic vulnerabilities the country is grappling with.

First, the main driver of the current account deficit has been the oil and gold imports. Second, a large element of India’s persistently high inflation has been driven by energy and commodity prices. Third, the fiscal deficit has bloated primarily because of energy subsidies overshooting conservatively budgeted projections.

Thus, there is clearly a need for an innovative structure that can appropriately channel India’s financial savings to physical assets and can use the same to mitigate the macroeconomic issues facing the country. A natural resource investment trust could be one such structure.

Such a trust will own a portfolio of natural resource assets across the world, focusing on those resources which are of critical importance for India.

A well designed natural resource investment trust will:

l Address India’s natural resource deficit which is the most critical deficit facing the economy

l Provide a channel for domestic Indian savings into physical assets

l Address the CAD problem in a structural fashion

l Provide Indians with a naturally inflation-hedged investment avenue

l Put India’s public finances back in shape

Change fiscal federalism to resource based federalism:

During the last few years, many state governments have started imposing entry taxes, extraction cesses or export duty in addition to existing taxes/duties. These protectionist policies are more prevalent among the resource rich states. They are using these as measures to raise some additional revenues as well as prevent the outflow of scare local raw material. There is now an unmistakable trend of rising “regional protectionism" within India.

To address this issue, India needs to change the notion that federalism is only about sharing “revenues"; it is much more about sharing the resources that generate revenue along with the power to raise revenues from those resources.

In the market-led economy, it is natural resources—minerals, oil, natural gas, and hydropower—that are the key revenue drivers of, and major constraints to, growth and its spread across the state and regional economies. This calls for resource revenue sharing.

As such, the terms of reference of the 14th Finance Commission must be changed.

The Commission must be asked to “design a framework for resource revenue sharing" in addition to the “transactional revenue" sharing that it traditionally does. In other words, fiscal federalism must now be linked to resource federalism in India.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice.

Comments are welcome at views@livemint.com. To read Drabu’s earlier columns, go to

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