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The finance minister is to be complemented for a blunt and honest admission at the outset of his budget speech. The people of India have voted for change. However, delivering that change, using public resources, is not going to happen overnight. This bluntness, shorn of oratorical flourishes, is important and welcome. Do not read this budget as a reform agenda. Rather, it signals areas of continuity and areas of change.
The big continuity
The medium-term macro-fiscal framework is exactly the same as that set out by the previous regime. The revenue and fiscal deficit aspirations for 2014-15 remain unchanged. So is the commitment to reduce the revenue deficit by 1.7% and the fiscal deficit by 1.6% of gross domestic product (GDP) over the next three years. Hence, central public investment financing is envisaged to go up by just 0.1% of GDP in 2015-16. Even if we achieve 8% growth over the next three years, this will not significantly add to the central government’s public investment outlays.
This has an important policy implication. The ambition of securing zero revenue deficit—which would mean that the government of India would, for the first time since 1981, stop using national savings for consumption—will not be achieved for at least the next three years.
Thus, this government, in continuity with the previous administration, will use central government resources to largely fund revenue expenditure. The proportion of the budget devoted to capital expenditure will stay more or less where it was in 2012-13. Public investment by the central government will, therefore, continue to rely heavily on private financing, whether through the public-private partnership route or in other ways. This means that the heavy lifting in terms of publicly financed investment will continue to have to be done by the states, across the lifetime of this government.
Yet, there was another way forward, set forth in the Prime Minister’s vision of co-operative federalism. Recognize that the states, with a few exceptions, are in much better fiscal health than the Centre. Recognize that they are closer to the ground and, therefore, more effective at delivering public services like health, education and sanitation. Therefore, divest the central government of its onerous public spending responsibilities for these things that have been so ineffectively discharged. Devolve these responsibilities to the states.
This would be budget-neutral. The Centre would reduce its plan revenue outlays on these areas of spending. To discharge these responsibilities, the states would receive an appropriate increase in the fiscal devolution, by an increase in their share of the divisible pool recommended by the Fourteenth Finance Commission. This would end the Planning Commission’s role as a fiscal agent responsible for doling out resources through centrally sponsored schemes.
This intention has not been signalled. This would have been a truly radical institutional reform, a grand bargain with the states to improve governance. This would have improved the focus of central government spending on things that cannot be devolved, such as investment in the railways, ports, national economic infrastructure and the development of backward and remote areas.
Spending money badly: continuity or change?
India’s failure to improve its poor track record on value for money in public spending and poor development results is linked with the fiscal story in two dimensions—we spend too little on development and what we spend, we spend badly. To tackle the latter challenge, the government intends to set up a time-bound commission to suggest concrete improvements “in the allocative and operational efficiencies of government expenditure”. I resist the urge to ask: “another commission”? I optimistically hope that for the first time in the history of India, such a commission’s recommendations, however fundamental, will be implemented in the teeth of bureaucratic and vested interest resistance. Even in this best-case scenario, improvements in public spending efficacy will kick in only over the medium term as the painful and acrimonious process of reforming an outdated, unaccountable, inefficient public service delivery mechanism is negotiated and implemented. Until then, the central government will continue to spend resources badly and in an unfocused way, which will not help the cause of fiscal consolidation.
More immediate measures to control public spending and thereby improve its efficiency were not signalled in this budget. For instance, pending expenditure reforms, freezing plan revenue spending at 2012-13 RE (revised estimate) levels and demanding the delivery of the same (poor) quality of public services with less money could have been one such game changing measure. Such measures have, with unavoidable pain, secured spending improvements in other emerging economies.
Good continuities
The previous administration commenced the task of designing foreign direct investment (FDI), financial sector, tax and monetary policy reforms, but it failed to walk the talk. This budget has begun the walking on three fronts.
First, it signals a regime that treats the taxpayer with respect and not as an adversary. This has meant a short term revenue loss of ₹ 22,000 crore but has not deterred the government. The tyranny of advance tax rulings has been reduced. Exemption limits have been raised. Overseas borrowing and the treatment of foreign institutional investors have been rationalized. Investment trusts for real estate and infrastructure have been proposed. Accounting standards are to be consistent with best global practice. Transfer pricing provisions are now comprehensible and more logical.
There is still a lot of tinkering and fiddling with rates of duty and onerous demands for taxpayer compliance. The commitment to goods and services tax (GST) implementation should reduce the first. A speedy decision on implementation of the Direct Taxes Code (DTC) would go a long way in reducing the second. In the interim, the minister has had to let the bureaucrats have their obstructive day, but he has signalled light at the end of this tortuous tunnel.
Second, important steps have been taken to allow FDI in insurance, in defence and in e-commerce. In addition,there are concrete actions to implement financial sector reforms, including rationalizing and liberalizing capital market regulations, signalling the first steps in recapitalization of nationalized banks, and encouraging long-term financing for infrastructure.
Third, the government has clearly signalled its intention to enact a suitable Indian Financial Code and to agree on a modern monetary policy framework with the Reserve Bank of India.
Bad continuities
The government has persisted with two undesirable features of Indian budgeting.
First, it has continued with the practice of making opaque and trivial changes in tax rates and exemptions that lay it open to the charge of being influenced by vested interests. The budget speech has devoted the same number of pages to this fiddling as to the important reforms mentioned above. This goes completely against the spirit of the “minimum government, maximum governance” slogan.
Second, it has increased the number of central schemes with trivial financing. This is surprising given the intention expressed in the Economic Survey (2013-14) to curtail the role of the Planning Commission as a budgetary actor. The spirit of that sentiment is lost when the budget includes 28 national allocations for projects of less than ₹ 100 crore. Surely, it is not fiscally sensible for the central government to be in the business of developing 1 MW Solar Parks on the banks of canals or a “good governance fund” of ₹ 100 crore, with no objective specified? The issue here is not the money. It goes against a proclaimed fundamental principle of this government, which is not to micro-manage initiatives through handouts from the all-knowing Centre. It is, perhaps, politically expedient but, nevertheless, disappointing that even a government with a clear majority continues to succumb to this temptation. It detracts from the significance of innovative national public initiatives announced in this budget on inland waterways, roads, agricultural credit and the Pooled Municipal Debt Facility. Again, it fails the “minimum government, maximum governance” test.
Perhaps this is a necessary political manoeuvre to align national human development policies with the priorities of the new administration. I hope, then, that the 2015 budget will announce the devolution of the resources to deliver on these policies (and the choice of which policies to deliver and how much to spend on them) to the states.
On balance, the finance minister is to be commended for quickly adapting to his macroeconomic and institutional inheritance. The big picture here is one of continuity and some smart thinking and actions to introduce tax and financial sector reforms and new infrastructure finance initiatives. At the same time, this budget presents no signals that game-changing fiscal reforms are being contemplated. These include radical changes in the balance of responsibility between the Centre and the states, fundamental reforms to improve the quality and accountability of public service delivery, and a more ambitious medium-term macro-fiscal framework in which the government ceases to borrow for consumption. These are essential if the mandate that the finance minister so eloquently outlines in the first paragraph of his speech are to be delivered.
Rathin Roy is director, National Institute of Public Finance and Policy.
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