Opinion: Time to reinvent the budget

  • From a central budget, it has become a Union of states budget. Now, let us take it to the next level: a federation of economies budget

The soul of all the five budgets presented by the National Democratic Alliance (NDA) government from 2014 to 2018 has been federal. The federalist spirit was an outcome of the implementation of the 14th Finance Commission’s recommendations of a 55% hike in the devolution to states and 228% increase in the grants-in-aid to panchayats.

Notwithstanding the desperate attempts by the central government to exorcise the ghost through regressive terms of reference for the Fifteenth Finance Commission (FFC), the structure of the Union budget has changed forever, for good. This, along with the long-delayed introduction of the goods and services tax (GST), has meant that while tax decisions (through consensus with states) will be uniform across the country, spending allocations have to allow local preferences to prevail.

This is a far-out change from the centrist mindset of all the earlier Union budgets. There is no denying the fact that finance minister Arun Jaitley has made the Union budget irreversibly a ‘Union of states’ budget. It is only appropriate that the last budget in this series carries forward this legacy by laying down a framework which takes the concept to the next level: a ‘federation of economies’ budget.

The way forward is to provide the budget a budgetary framework for the federation of 30 economies with different levels of development, fiscal balance, growth strategies, resource endowments and skill profiles. For this, the ritual needs to be reinvented and a conceptual and directional change made to the Union budget.

Here are five ingredients for a recipe for a budget for new India:

Institutional Restructuring

There is need for institutional restructuring with the GST Council, India’s first genuinely federal and fully functional institution, as a model.

The new fiscal federal architecture has to be based on pooling of sovereignty, consensus-based policymaking and participative law-making.

With 60 trillion being raised and spent by the centre and the state governments annually, there is need for an institution, wherein expenditure priorities, not allocations, are decided for a period of five years and put up for legislative approval of Parliament. Based on this, the Union budget and the state budgets can be formulated. This will provide a direction with flexibility, but not tied financing. To rephrase a cliché, it will be unitary in form and federal in spirit.

The NITI Aayog experiment hasn’t worked. It is time to look at reviving the dysfunctional National Development Council. Given its composition, the Union cabinet and chief ministers, it could provide the right forum to lay down agreed benchmarks for public expenditure, which will synergize the national priorities and local needs.

Maximize sharing, minimize underwriting

The budget must be formulated on the basic principle of maximizing revenue sharing between the centre and states, and minimizing expenditure underwriting of states by the centre. The FFC had actually laid down the basis for this transition when it cut back on grants and bumped up the share of states and, in the process, giving states greater flexibility to design programmes.

The objective is to increase untied transfers to the extent that resources of states and cost of funding their responsibilities match on a normative basis. And leave the management of actual gaps to them. This will make the existing system of vertical transfers neater, focusing almost entirely on revenue sharing. This will sow the seeds of a new fiscal federal system.

 Haseeb Drabu, Former finance minister of Jammu and Kashmir
 Haseeb Drabu, Former finance minister of Jammu and Kashmir


Giving primacy to revenue sharing over expenditure underwriting will strengthen the new ecosystem of federalism emerging under the aegis of the GST Council. Post-GST, the entire criteria of horizontal distribution will need to be changed. The existing system of fiscal transfers in a production-based tax system will be altered under a consumption-based tax regime like the GST. Indeed, the approach of “gap-filling" through Article 275 transfers or the “deficit grants" will have to be redesigned in light of the compensation law brought in by the GST Council.

Sharing resource income

In the overall context discussed above, a major move will be to increase the ambit of revenue sharing from only taxes to resource incomes. In a raw material deficit economy, natural resources such as minerals, oil, natural gas and hydropower are major revenue drivers. Yet, state governments are restricted from exercising policy and benefiting even as the central government extracts substantial share of revenue directly and indirectly by milking its PSU minerals cows through dividend and monetization of its stake. In the extant system, resource aspect is peripheral if not absent from the scheme of federal transfers.

The budget must design a framework for “resource revenue" sharing in addition to the “transactional revenue" sharing that has been traditionally done so far. In other words, fiscal federalism must now be linked to resource federalism in India.

Even as FFC may deliberate on the alternative framework, this budget should revise and restructure the royalty system, which at present is an ad hoc mix of unit-based and ad valorem-based approaches. A move towards a non-discretionary and automatic system of indexed ad valorem rates, which moves in line with the price movements of commodity markets, needs to be made. The Union government has not revised the coal royalty since 2015.

An energy budget

After biting the bullet by pooling its tax sovereignty with the states, the need and scope for the dreaded “Part II" of the finance minister’s budget speech is a vestige. It will be useful to recast it in line with what is important for the macro-economy today: proposal on energy economy and security. Indeed, there are compelling reasons to have a separate energy budget along the lines of the earlier railway budget.

If there is one number that can make the edifice of budgetary arithmetic collapse and impair the growth prospects, it is the movement of crude oil prices. If for nothing else, but simply reduce the vulnerability of the fisc, this should be done. For, it is the “resource deficit" of the country which is the single biggest threat to sustained growth of 9%.

The energy budget should be all about public investments, investments in partnership with private sector, a counter-cyclical (in relation to prices) cess and duty policy, contours of systemic support to the private corporate sector to shop abroad for resource acquisition and an overall enabling policy. To start with, setting up of a natural resource investment trust with a mandate to own a portfolio of natural resource assets across the world can be announced.

A Panchayat Bank

Finally, despite serious political commitment, Panchayati Raj Institutions (PRIs) haven’t acquired the status and dignity of financially empowered responsive people’s bodies. In most states, in respect of functional and fiscal assignments, the functioning of the PRIs is hampered by unfunded mandates. In order to empower panchayats financially, the existing network of 53 regional rural banks (RRBs) covering 525 districts with a network of about 15,000 branches should be converted into a Panchayat Bank with a branch in every panchayat.

The ongoing process of amalgamation and consolidation of RRBs can be tweaked by amending the Regional Rural Banks Act, 1976, appropriately. The centre, with its shareholding of 35%, and state government with its holding of 15% can jointly drive this exercise of linking panchayats with financial institutions in a commercially viable way. This will become the centrepiece of the financial architecture for the third tier. It can leverage the large banking network available in rural India for financial intermediation of grassroots developmental initiatives.

The Panchayat Bank can be designated as an exclusive banker to PRIs. To start with, it will have captive business of nearly 3 trillion of assured grants in aid from the centre government. Also, it will give access benefits of government schemes such as pensions and Mahatma Gandhi National Rural Employment Guarantee Scheme (MGREGS) payments.

Most importantly, the Panchayat Bank will identify and build on the inherent strengths of our sub-national economies and link them with modern financial instruments through specialist financial institutions.

Additionally, of course, the Panchayat Bank will provide rural citizens with improved access to a range of government schemes as well as financial services, allowing them to carry out basic financial transactions.

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