by
Suyash Rai.
This budget was unique in the scale and intensity of anticipatory anxiety. With prior assumptions about possibilities of policymaking in India unsettled, many were worried about government's next move. Could the government add two-three percentage points to the fiscal deficit to launch a spending spree? Could there be a loan waiver, Universal Basic Income, or Massive tax cuts? It turned out to be a textbook case of workmanlike budget-making - not dazzling, but reasonably prudent. It is heartening to see that our politics can produce this budget in such a situation. One hopes that the government works consistently to reduce policy uncertainty. The budget is a step in that direction.
A budget should be judged primarily on fiscal management, and how it links to larger policy priorities. Each budget tells a story about government's priorities. However, since most of budgeting is not zero-based, important reforms tend to span several budgets. It is important to consider the budget in the context of medium-term fiscal strategy of the government, and the fiscal issues that need to be addressed in medium term. Changes to the systems of raising, allocating and spending resources are also relevant for evaluating a budget. Further, since the budget is made within a fiscal responsibility framework, changes to the framework are also pertinent. Finally, changes to the formats of reporting and accounting are also relevant.
The budget scores reasonably well on fiscal prudence, changes in the reporting formats, and reform of the budget process. It signals good fiscal marksmanship, but we cannot know this for sure until the data on actuals becomes available. As budgets in India go, this is a good housekeeping performance. However, if we take a medium-term perspective, we see that the budget indicates progress on some fronts, but does not do much to address most of the persistent fiscal issues in India. Further, some of the proposals in the Finance Bill raise worries about the future of tax administration.
Reform of reporting formats
This is the first budget without the plan-non plan expenditure distinction. The reporting formats no longer include this distinction. The government has used this opportunity to change the reporting formats. New statements have been added, annexes have been done away with (most of them are included as statements now), some statements have been omitted, and the formats of certain statements have been changed. Here is a summary of the key changes in the reporting format of Volume I (now-called "Expenditure Profile") of the Expenditure Budget:
- Changes in reported categories of expenditure: at summary level (Statement 1), the expenditure is now disaggregated into six categories:
- Establishment expenditures of the Centre: this category includes salaries, medical expenses, wages, allowances, travel expenses, office expenses, training, professional services, rent paid, taxes, pensions, etc. This is expenditure that is incurred for maintaining the administrative entity, as opposed to expenditure incurred on programme and schemes.
- Central Sector Schemes: these are schemes for which the central government provides the entire budgetary support, and most of them are implemented by the central government.
- Transfers under centrally sponsored schemes: for these schemes, the central government shares the budgetary support with State or Union Territory government (based on a sharing pattern determined by the central government). These schemes are implemented by the State/UT governments.
- Other central expenditure: this category includes expenditure on CPSEs and Autonomous Bodies.
- Finance Commission Transfers: these are grants given under Article 275(1) of the Constitution to urban and rural local bodies, grant-in-aid to State Disaster Response Funds (SDRF), and post-devolution revenue deficit grant. The revenue deficit grant is meant to cover gap in revenue expenditure after taking into account all the sources of revenue for states. Based on 14th Finance Commission's recommendations, 11 states receive these grants, and about a third of the grant goes to Jammu and Kashmir.
- Other transfers (to States): this mainly includes additional central assistance for externally aided projects (given as grants or block loans), and special assistance to states.
In the summary statement, these six categories replace the categories of "plan", "non-plan" and "central assistance for state/UT plans". Continuing with the previous budgets, the "resources of public enterprises" are also reported. These include internal resources (accruals), bonds/debentures, external commercial borrowings/suppliers credit, and other resources, but do not include budgetary support to these enterprises.
- Statements based on categories of expenditures: probably the most useful inclusions in the new format are separate statements on centrally sponsored schemes (Statement 4A) and central sector schemes (Statement 4B) under various ministries, as well as a statement summarising the scheme category-wise expenditure for each Ministry (with aggregates given separately for centrally sponsored and central sector schemes). There is also a statement on allocation for important schemes (Statement 4C), which includes the major allocations under all the expenditure categories - this information was earlier scattered across various budget statements. Further, multiple statements (statements 4, 5 and 6) from the old format have been consolidated into one statement on subsidies and subsidy-related schemes (Statement 7).
- Statements on transfers to States/Union Territories: there is a statement on Transfers to Union Territories with legislatures (Statement 5), whihc includes Ministry/Department-wise information on transfers to these UTs. Earlier, this information was spread across multiple statements. Statement 18 provides information on "Transfer of Resources to States and Union Territories with Legislatures". These statements are consolidated. Earlier, this information was also spread across several statements covering plan and non-plan expenditure/outlay.
- Statements on public sector enterprises, autonomous bodies, and departmental commercial undertakings: the statements on "Assistance given to Autonomous/grantee bodies", "Resources of Public Enterprises", and "Investment in Public Enterprises" have been retained, as statements 30, 31, and 32, respectively, without change in format. The statement on "Grants-in-aid Salaries", which shows salary grants for autonomous bodies and schemes, has been made into Statement 29. This was an annex in the old format. The statement on departmental commerical undertakings, which was Statement 7 in the old format, is now Statement 8. It gives information on net budgetary support for revenue expenditure in these undertakings, after deducting the receipts of these undertakings.
- Statements on allocations for certain beneficiaries: These statements mostly remain the same, but some of them have been renamed:
- The statement on Budget Provisions for Schemes for the Welfare of Children (Statement 22 in the old format) has been renamed "Allocation for the Welfare of Children" (Statement 12 in the new format).
- The Gender Budget is Statement 13 in the new format.
- In the old format, Statement 21 and 21A provided information about schemes under scheduled castes sub-plan and tribal sub-plan, respectively. These have been renamed as "Allocation for Welfare of Scheduled Castes" (Statement 10A) and "Allocation for Welfare of Scheduled Tribes" (Statement 10B)
- Statement on "Budget Allocated by Ministries/Departments for the North Eastern Region" has been renamed "Allocation for the North Eastern Region" (Statement 11).
The opportunity of removing plan-non plan distinction should be used to make these statements more comprehensive. Earlier, only plan expenditure towards welfare of these beneficiaries was captured in these statements, and it seems that the same expenditure is being captured in the renamed statements. Even the expenditure that was earlier classified as non-plan had components that benefited these beneficiary groups. Those allocations should also be included in these statements. For instance, the share of subsidies going towards these groups should be included in these statements. A beginning in this regard seems to have been made, as the interest subsidy, which was a non-plan expenditure in the earlier scheme of things, has been included in these statements. It wasn’t included in the statements till last year.
- Changes in positions of annexes: the new format contains no annexes. Most of the annexes in the older format have now been converted into statements. Annex 1 (Budget provisions by Heads of Accounts) is now Statement 16. Annex 2(Reconciliation between Expenditure shown in Demands for Grants, Annual Financial Statement and Budget Provisions by Heads of Accounts) is now Statement 17. Annex 4 (Contributions to International Bodies) is now Statement 21. Annex 5 (Grants in Aid to Private Institutions/Organisations/Individuals) is now Statement 9. Annex 6 (grants for creation of capital assets) has been slightly modified and is now called "Allocation under the object head Grants for creation of Capital Assets" (Statement 6). It provides information about grants given to state and UT government for creation of capital assets, and goes into calculating the effective revenue deficit (revenue deficit minus these grants). Annex 7 (Estimated strength of Establishment and provisions therefor) is now Statement 22. Annex 7A (Budget Provisions under "Grants-in-aid Salaries") is now Statement 23.
- Inclusion of statement on "Expenditure charged on the Consolidated Fund of India": a statement on all expenditures charged on the Consolidated Fund has been included. Earlier, this information was not included in the Expenditure Budget, but was provided in the Annual Financial Statement.
- Inclusion of Railways Statements: Five statements from railway budget have been appended to the volume. These include statements on: Overview of Receipts and Expenditure; Railway Expenditure; Railway Receipts; Investment (Part A: Financials; Part B: Physical Targets); and Railways Reserve Funds.
- Omissions: the annex on reliefs provided to CPSEs in the form of waiver, write-off, etc (Annex 2A) has been done away with. It used to give this information disaggregated by type of relief and the name of CPSE. The aggregate number is provided in Statement 17 (Reconciliation between Expenditure shown in Demands for Grants, Annual Financial Statement and Budget Provisions by Heads of Accounts). The decision to discontinue the annex may have been taken because this is a relatively small item of expenditure (budget for 2017-18 is Rs. 255 crore), but this is important for accountability for a type of expenditure that may be a sub-optimal use of public funds. In my view, the annex should have been continued as a statement. The annex on trends in expenditure (Annex 3) has also been discontinued. It used to provide ten-year trends for the major categories of expenditure. It was useful information for expenditure analysis. The statement could have been continued without the plan-non plan distinction.
In my view, the new formats are easier to read and understand. They are more informative. An opportunity that has been missed, and should be considered in subsequent years, is to report consolidated spending on activities, which are spread over various schemes. For example, it will be useful to have a statement that gives information about spending in different areas of activity, such as health, education, skill development. Scheme-wise information is useful, but common citizens will be better able to understand the budget if the information is given in terms of areas of activities. With the removal of plan-non plan distinction this has become easier to do.
Reforms of the budget process
Advancing the budget day and merger of the Railway Budget and Union Budget are significant improvements over practices prevalent earlier. Advancing the budget day would help ensure that implementation of the new schemes can begin as soon as the financial year begins. It gives time to the departments and ministries to prepare for implementation and plan they spending. This is consistent with best practices in other countries.
The practice of presenting the Railway Budget separately was little more than a long-standing legacy. Although it is much bigger than other such enterprises, the Indian Railways is just one of the ten departmentally run commerical undertakings. Now, a single Appropriation Bill, including the estimates of Railways, will be prepared, instead of a separate Bill for Railways. Railways will get exemption from payment of dividend to General Revenues, and its Capital-at-charge would be wiped off. For the rest, things will remain the same. Ministry of Finance will continue to provide Gross Budgetary Support to Ministry of Railways towards meeting part of its capital expenditure, and Railways will continue to raise resources from market through Extra-Budgetary Resources to finance its capital expenditure.
Profile of expenditure and receipts
In 2016-17, government is budgeted to spend Rs. 19.78 lakh crore. Major components of the budget, which comprise about 75 percent of total expenditure budgeted for 2016-17 are (BE: Budget Estimate; RE: Revised Estimate):
Component
| Expenditure (2016-1, BE) (in Rs. lakh crore) | Share in total (2016-17,BE) (in percent) | Expenditure (2016-17, RE) (in Rs. lakh crore) | Share in total (2016-17,RE) (in percent) | Expenditure (2017-18, BE) (in Rs. lakh crore) | Share in total (2017-18,BE) (in percent) |
Interest payments
| 4.93 | 24.8 | 4.83 | 23.98 | 5.32 | 24.3 |
Defence, including defence pensions
| 3.4 | 17.2 | 3.45 | 17.13 | 3.6 | 16.76 |
Food subsidy
| 1.34 | 6.8 | 1.35 | 6.7 | 1.45 | 6.75 |
Finance Commission transfers to states and local bodies
| 1 | 5.1 | 0.99 | 4.9 | 1.03 | 4.8 |
Fertilizer subsidy
| 0.7 | 3.5 | 0.7 | 3.47 | 0.7 | 3.26 |
Roads and highways
| 0.58 | 2.9 | 0.52 | 2.6 | 0.65 | 3.02 |
Central armed police forces
| 0.5 | 2.5 | 0.52 | 2.6 | 0.55 | 2.56 |
Railways
| 0.45 | 2.3 | 0.46 | 2.29 | 0.55 | 2.56 |
MGNREGS
| 0.38 | 1.9 | 0.47 | 2.36 | 0.48 | 2.24 |
Petroleum Subsidy
| 0.29 | 1.5 | 0.27 | 1.37 | 0.25 | 1.16 |
Pensions
| 0.29 | 1.47 | 0.3 | 1.5 | 0.32 | 1.49 |
National Education Mission
| 0.27 | 1.36 | 0.27 | 1.34 | 0.29 | 1.37 |
National Health Mission
| 0.21 | 1.06 | 0.23 | 1.14 | 0.27 | 1.26 |
Pradhan Mantri Awas Yojana
| 0.20 | 1.01 | 0.21 | 1.04 | 0.29 | 1.35 |
Total Expenditure
| 19.78 | 100 | 20.14 | 100 | 21.47 | 100 |
For most of these, the revised estimate of expenditure during 2016-17 is quite close to the budgeted expenditure. For roads and highways, the revised estimates are about ten percent lower than the budgeted expenditure. For MGNREGS, the revised estimate is about 23 percent higher than the budgeted expenditure. Being a demand-driven scheme, this is not unusual for MGNREGS.
For 5 of these, the shares in budgeted expenditure for 2017-18 are stable. For defence, fertilizer subsidy, MGNREGS and petroleum subsidy, the share of expenditure is significantly lower. The share is significantly higher for Pradhan Mantri Awas Yojana, National Health Mission, Railways as well as Roads and Highways.
Fiscal marksmanship on expenditure side significantly depends on receipts. If receipts fall short, expenditures are cut or fiscal deficit target is not achieved. In 2016-17, the expenditure is budgeted to be financed by the following receipts (numbers in brackets are percentages of total receipts:
- Tax revenues, net of transfers to states: Rs. 10.54 lakh crore (53.31 percent)
- Non-tax revenues: Rs. 3.23 lakh crore of (16.34 percent), about two-thirds of which were budgeted to be from proceeds of spectrum auctions, and dividends from PSUs, banks, and the RBI)
- Non-debt capital receipts: Rs. 0.67 lakh crore (3.39 percent), which include disinvestments of shares and recovery of loans.
- Borrowings from various sources: Rs. 5.33 lakh crore (26.96 percent of expenditure). This is the fiscal deficit, which is budgeted to be 3.54 percent of the estimated GDP for 2016-17.
The revised estimates suggest that the government is likely to collect about 3 percent higher tax revenues than it had budgeted. While the revised estimates of direct tax collections are very close to the budget estimates, those for the indirect tax collections are different. Customs collections are estimated to fall short by 5.6 percent; excise duty collections are estimated to be 21.6 percent higher than budget estimates; and service tax collections 7.1 percent higher. The government may have set a modest target for growth in collection of excise duty, in anticipation of increase in crude oil prices. If crude oil prices had indeed risen sharply, government would have had to cut the excise duty on petroleum products, and that would have led to a smaller increase in collections. Fortunately for the government, this did not happen.
The non-tax revenue collections are estimated to be 3.7 percent higher than budgeted. This is primarily on account of 43 percent higher collection of dividends from CPSEs. This is estimated to more than make up for the shortfall in collections from spectrum auctions and interest receipts. In non-debt capital receipts, while the overall receipts are estimated to be close to the budgeted amount, proceeds from disinvestments are expected to fall short by about 20 percent. So, while a lot is going on in the components, the overall receipts are better than budgeted.
On fiscal marksmanship, three significant caveats are in order. First, the government's reported numbers sometimes turn out to be quite inaccurate. Recently, a CAG audit concluded that the fiscal deficit in 2015-16 was 4.31 percent of GDP, and not 3.9 percent, as was reported by the government. It is a cause for concern that the government's reporting of actuals was off by 0.41 percent of GDP (Rs. 53,146 crore). Second, due to advancement of the budget day, this year's revised estimates were prepared using lesser amount of data on expenditure/receipts, because of which the probability of actual expenditure/receipts being different from revised estimates is higher. Third, due to uncertainty created by demonetisation, it is difficult to make good GDP and revenue estimates for this year. The budget has taken the GDP number from the economic survey, which differs considerably from the advance estimates put out by the CSO in January. Any numbers reported as percentage of GDP are subject to changes in GDP estimates.
Fiscal prudence
According to the revised estimates, the government is expected to achieve its fiscal deficit target (3.5 percent of GDP) for 2016-17, and has set a fiscal deficit target for 2017-18 (3.24 percent) that is close to the roadmap given in the Medium Term Fiscal Policy (MTFP) statement two years ago (3 percent). The fiscal deficit target for 2018-19 and 2019-20 is 3 percent. In a rare instance, government is expected to do better than its target for revenue deficit (difference between revenue expenditure and revenue receipts). The target was set at 2.3 percent of GDP, but the revised estimates suggest that the revenue deficit this year will be 2.1 percent. This is because of higher tax and non-tax revenue collections, while the revenue expenditure is estimated to be along the budgeted lines. For 2017-18, the target is set at 1.9 percent, which is slightly higher than 1.8 percent target laid down in last year's MTFP statement. The primary deficit (fiscal deficit minus interest payments - shows whether we are borrowing to pay interest on borrowings) is estimated to be the same as budgeted (0.3 percent of GDP), and is budgeted at 0.1 percent in 2017-18.
The GDP estimates suggest that government expenditure is the main driver of growth in 2016-17, while growth in other types of expenditure is likely to be sluggish (private investment is estimated to fall). The strategy of using public investment to crowd in private investment was launched about two years ago, and it seems to have yielded underwhelming results. Perhaps the government did not consider it wise to continue down this path for more time, and is now keen to use other instruments to encourage private investments. It will have to undertake a sustained reform programme to boost private investments in the next few years.
There are several pathways to fiscal consolidation. Fiscal consolidation may involve a combination of: cutting expenditure, increasing tax revenues, increasing non-debt capital receipts (especially disinvestment and privatisation), and raising non-tax revenues (especially through user charges). The fiscal consolidation budgeted for 2017-18 is 0.3 percent of the GDP projected for the year, or about 0.5 lakh crore. How is this being achieved?
On the receipts side, the budgeted increases in net tax and disinvestment receipts are far smaller than the budgeted fall in non-tax revenues. Non-tax revenues are budgeted to fall because of lower collections from spectrum sale, and because Railways is no longer required to pay interest to government (since the budgets have been merged). So, in 2017-18, the receipts (excluding borrowings) are budgeted to be 9.5 percent of GDP - lower than they were in 2016-17 (9.82 percent). With these budgeted receipts, if expenditure grows at the rate at which GDP is projected to grow, the fiscal deficit in 2017-18 would be about 3.9 percent.
The government has bet on cuts in expenditure to achieve fiscal consolidation. This means that central government expenditure, as a percentage of GDP, is budgeted to shrink from 13.3 percent in 2016-17 (revised estimate) to 12.7 percent (budget estimate). Some of the areas where expenditure, in terms of percentage of GDP, has been cut are: defence (0.15), MGNREGS (0.04), fertilizer subsidy (0.04), food subsidy (0.04), petroleum subsidy (0.03), agriculture (0.02), and Pradhan Mantri Gram Sadak Yojana (0.02).
If most of these cuts were coming from expenditure reforms that improve efficiency of expenditure, i.e. get the same or better outcomes for smaller expenditure, they would hurt less. However, it is not clear if that is the case. Moreover, there is no significant change in the budgeted revenue-capital ratio of expenditure (from 86.1:13.9 to 85.6:14.4).
Since the economy seems to be in doldrums, a less contractionary consolidation pathway would have been more appropriate. The strategy should have comprised of substantive subsidy reforms (discussed later), an aggressive privatisation/disinvestment programme, raising non-tax revenues through user charges, and, to a lesser extent, other expenditure cuts. The budget targets for disinvestment are aggressive, but the targets for privatisation are lower than they were in 2016-17. This year, the government should have built the systems and processes for privatisation transactions, and reaped much higher receipts in 2017-18.
The deficit targets for 2017-18 must be considered in the context of fiscal uncertainties. The uncertainties of GST rollout, consequences of demonetisation, and external circumstances make it difficult to project macro indicators for 2017-18, and to achieve the targets. Government may need to review its strategy during the course of the year.
In summary, while the deficit targets are prudent, the strategy for achieving them seems sub-optimal, and due to uncertainties, it will take considerable dexterity to achieve them.
Medium-term fiscal issues
Much has been written about the specific expenditure decisions in this budget. Except in a few areas, there is not much change in allocations this year. There are certain fiscal issues that need to be addressed in medium to long-term. Let us consider some of them and what this recent budgets has done about them:
- Declining share of capital expenditure in defence budget: a problematic trend in defence expenditure in India has been the declining share of capital expenditure. Capital expenditur is incurred on building the "material" component of India's defence capabilites. The share of "Capital Outlay" in the total defence budget has fallen from about 33 percent in 2006-07 to 20.8 percent in 2016-17 (RE). This year also seems to have followed the trend, and the share fell from 24.36 percent in 2015-16. The FM has announced a 20.6 percent increase in 2017-18 over revised estimates for 2016-17, to take the share of capital outlay to 24.03 percent. However, about half of this increase is because capital outlays on "research and development" and "Defence Ordinance Factories" have been moved from the demand titled "Ministry of Defence (Misc)" to the demand titled "capital outlay on defence services". Without these, the increase in capital outlay is just 9 percent, which is quite normal, and would take the share of capital outlay to 21.7 percent of the total defence budget. A problem in recent years has been that capital outlays have only been partially utilised, and a significant part of the allocation lapses.
The One-Rank-One-Pension (OROP) decision has exacerbated the trend towards more revenue expenditure. The decision is quite consequential, and in my view, it was not a wise decision from a public finance and pension policy perspective. It increased the pension outlay, and because of the way it is designed, it has also introduced considerable uncertainty in budgeting for pensions (see my column on some of the problems with the OROP decision).
Most of the modern restructuring of defence organisations in other countries has focused on trimming the forces of personnel, while building up and modernising the weapon system. China has reportedly completed an exercise that left its armed forces with 300,000 fewer personnel. The expenditure pattern in India may point at larger problems of procurement systems, policy priorities, and even our grand strategy. Since more than 70 percent of revenue expenditure in defence is incurred on pensions, pay and allowances, changing the pattern of expenditure will require some difficult strategic decisions that will have human resource consequences, which no government appears keen to take.
- Poor outcomes of social sector schemes and the shrinking role of central government: Since the 14th Finance Commission recommended sharp increase in sharing of central taxes with states, the allocations to several schemes had to be cut. Also, the sharing patterns for centrally sponsored has been changed to reduce central government’s share in expenditure on these schemes. The role that the central government plays in designing the schemes now appears anachronous.
The biggest challenge across social sector schemes has been: how to shift away from a focus on inputs, and (to a lesser extent) outputs, and focus on achieving outcomes. Take the example of school education. While we have done reasonable progress on improving inputs (building schools, hiring teachers, etc) and outputs (enrolments, access to schools, etc), India's performance on learning outcomes, as measured through learning tests, has been abysmal. In school education, central government spends just about 15 percent of the total expenditure (with sub-national government putting in the rest). It is now a marginal player in financing the sector, but continues to occupy the commanding heights on scheme planning and design. The challenge of improving outcomes varies from one context to another. Central government will need to rethink the way it uses its funds to drive change towards better outcome. States need to be given much more flexibility to innovate than they presently enjoy in practice.
Although the FM did touch upon the issue of outcomes in education, a concrete proposal has not been forthcoming. This is the situation across various social sector schemes. Government seems intent on continuing with the set ways, without doing the needful to reorient the programmes towards achieving outcomes. Each sector poses its own unique challenges, and will have to find innovative ways to deal with this challenge.
- Distortions in major subsidies: In 2004-05, subsidies were 12.56 percent of non-plan expenditure, and 9.22 percent of total expenditure. In 2013-14, subsidies were 23 percent of non-plan expenditure and 16.3 percent of total expenditure. In last three years, there has been some decline in the share of subsidies in expenditure (estimated to be 12.9 percent in 2016-17). This is mainly because of the favorable effect of benign crude oil prices, and savings from the direct benefit transfer programme. However, most of the substantive issues of subsidy reform remain. Let us consider the top three subsidies.
Food subsidy:Food subsidy is the difference between the economic cost of food grains and the price that government charges for them. Economic cost includes the cost of procurement, transportation, storage, etc. Till 2001-02, the issue price at which food grains were sold to those above the poverty line was close to the economic cost. The price for households below the poverty line was about half of the economic costs, and Antyodaya households (poorest of the poor) were charged a nominal price (less than a quarter of the economic cost). Since then, the subsidy regime has changed. In 2002-2003, the price for grains supplied to households above the poverty line was reduced (from Rs. 8 to Rs. 6.1 per kg for wheat; from Rs. 11 to Rs. 7.95 per kg for common paddy), while prices for Antyodaya and below poverty line households were not changed. The prices for all categories of beneficiaries have remained the same since then. In these 15 years, the economic cost for wheat has increased by 163 percent, and for common paddy by 190 percent. This has led to a massive increase in food subsidy bill. The Food Security Act had frozen the issue price for food grains for certain beneficiaries for three years, but that window is now open. It is time the government reviewed the rationale for keeping issue prices frozen for so long. Subsidy should ideally be set as a percentage of economic cost, and therefore, the price should be revised annually to track the economic cost. At the same time, reforms should be undertaken to improve efficiency to keep economic costs in check.
Fertilizer subsidy: since 2010, the gap between the subsidy for urea and that for other fertilizers has widened significantly. This is because urea was not included in the nutriend-based subsidy scheme that started in 2010. There is evidence to suggest that this distortion has led to excessive use of urea, which has hurt the nutrient balance of fertilizers being used. The proportion of nutrients in actual usage is now far from the ideal proportion (see Chapter 2 of the Economic Survey, 2013-14 for a discussion on this issue). Further, the subsidy regime in urea does not discourage inefficiency, as the subsidy amount varies from one manufacturer to another. These and other problems need to be addressed to develop a reasonable fertilizer subsidy regime. Many people have proposed good ideas, such as bringing urea into the nutrient-based subsidy regime, increasing the price of urea, moving towards direct transfer of subsidy, changing the urea subsidy regime to encourage efficiency, and so on.
LPG subsidy: Although the direct benefit transfer programme is reported to have reduced the leakages from this scheme, the substantive issue of the reducing the amount of subsidised LPG sremains. There is significant evidence to show that most of the LPG subsidy goes to the non-poor. The poor use smaller amount of subsidised LPG, and therefore avail of smaller share of subsidy. Therefore, this is appropriately called a "middle class subsidy". The government had tried introducing a cap of 6 subsidised cylinders (about 85 kg of LPG) per annum, but this was later withdrawn, and the cap of 12 subsidised cylinders was restored. A good step taken last year was that the government has capped the per kg subsidy at a nominal amount, and over time, if this cap is not raised, the subsidy's salience will fall automatically. Government has also taken steps to expand access of LPG to poor households. Now, the government should consider reducing the cap of subsidised cylinders to 6 or 8.
- Freeing up resources locked up in low-priority public sector enterprises: According to the public enterprise survey conducted by the Department of Public Enterprises, there are 298 Central Public Sector Enterprises - 235 active and 63 yet to commence commercial operations (as on March 31, 2015). A larger number of these are in sectors where there is a vibrant private sector, and there is no longer a need for public sector enterprises. However, the agenda of privatising public enterprises has been on the back burner since 2003, and the pace at which sick CPSEs are being closed is very slow. Although shares have been regularly disinvested, there have been no exits from enterprises in almost 14 years. This has meant that a large amount of resources, especially capital and land, are locked up in enterprises that should not be in the public sector at all. These resources could be freed up and deployed in higher priority areas. In each budget, a few thousand crores are allocated for these enterprises, and this money could also be used elsewhere. This is an unfinished agenda of the old industrial policy in India, and it also points at a significant allocative efficiency problem in India's fiscal management.
In the budget speech of 2016-17, the FM had announced a plan for strategic disinvestment (aka privatisation) from certain CPSEs, and set a target of Rs. 20,500 crore. The revised estimates suggest that while the government is likely to overshoot the target for disinvestment by about 11 percent, it will fall short of the strategic disinvestment by almost 75 percent. The target for strategic disinvestment proceeds in 2017-18 has been set at Rs. 15,000 crore. This year, Government also plans to list certain insurance companies, and collect Rs. 11,000 crore from the listing. Further, it has announced "a revised mechanism and procedure to ensure time bound listing of identified CPSEs on stock exchanges". These are steps in the right direction. The system of disinvestment is a well-oiled machinery. However, there is a need to expedite the agenda of closing sick and lossmaking CPSEs, and privatising CPSEs that are in sectors where government ownership is not justified.
- Over-reliance on petroleum products for collection of indirect taxes: in 2015-16, about 68 percent of total collection of excise duty was from petroleum products. This was about 27 percent of total indirect tax collection. In 2013-14, these were 55 percent and 19 percent, respectively. Since the last round of increases in duties on petroleum products happened in late 2015-16, the contribution of petroleum products is likely to have increased in 2016-17. Since the budget seems to have largely postponed the indirect tax decisions, one can only hope that the GST rollout will be such that this risky fiscal strategy of relying on a small number of commodities for so much of tax collection is discontinued, and we are able to build a broad tax base.
- Shrinking sharable pool: States get a share of the central government's tax collection, based on Finance Commission recommendation. This is a share of the sharable pool, which is gross tax revenue minus cesses and surcharges. Between 2011-12 and 2015-16, the sharable pool as a percentage of the Gross Tax Revenues shrunk from 89.8 percent to 82.8 percent. As cesses and surcharges came to comprise a larger portion of tax collections, the amount States received as devolution from the centre was lower than it would have been otherwise. To consider a counterfactual, had the portion of sharable pool in 2015-16 remained the same as it was 2011-12, States would have received Rs. 42 thousand crore more in devolution from the Centre in 2015-16. It is too early to say, but this trend may be halting. In 2016-17 (revised estimate) and 2017-18 (budget estimate), sharable pool as percentage of gross tax collection is expected to be 83.1 percent and 84 percent, respectively. Hopefully, with GST, the cesses and surcharges will become less prominent.
- Medium-term approach in budgeting: the Planning Commission used to make the five-year plans, which used to be the anchors for budgeting decisions regarding a number of areas of expenditure. This brought a medium-term perspective to budgeting. The process had its flaws, and its excesses have fueled urban legends in central Delhi. For better or for worse, the system has been dismantled. The twelfth and last five-year plan ran its course from 2012 to 2017. What we have now is the absence of any clear, publicly available medium-term perspective in budgeting. This has consequences for fiscal management, as many important priorities need to be pursued over the medium-term. Although there are talks about NITI Aayog coming up with Vision and Strategy documents, so far, there is no indication of the government moving towards a formal and comprehensive medium-term fiscal management framework.
The FRBM-mandated Medium Term Fiscal Policy Statement serves only as a basic ingredient for fiscal discipline over medium-term. It includes top-down estimates. Since we no longer have any other medium-term anchor for budgeting, it is important for India to move towards a medium-term budget framework, which would help the government make better forward estimates and think about strategies across areas of expenditure, so that annual budgetary decisions for various schemes and programmes can be reconciled with the medium-term framework. This would require combining a top-down approach and a ground-up, negotiated approach to medium-term fiscal management.
Concerns about tax administration
The Finance Bill proposes certain amendments to the Income Tax Act to change the powers that tax authorities enjoy:
- Under Section 132(1), the tax authorities have the power to conduct search and seizure, if they have reason to believe that the person has not disclosed the information asked for, is not likely be submit the required information, or is in possession of valuables that may have been accumulated from income on which tax was not paid. The proposed amendment says that the "reason to believe" need not be disclosed to anyone, including to any authority of Appellate Tribunal. This amendment is proposed to take effect retrospectively from April 1, 1962, which is the date when the original provision was enacted.
- Section 132(1)(A) empowers the authorities to expand the search and seizure to include locations that are not included in the authorisation for search and seizure, as long as they have reason to suspect that this would yield useful information. This section is also being sought to be amended to include an explanation that the "reason to suspect" will not be disclosed to anyone, including to any authority of Appellate Tribunal. This amendment is proposed to take effect retrospectively from October 1, 1975, which is the date when the original provision was enacted.
- Section 132 is also proposed to be amended to insert sub-sections that will give powers to the authorised officer conducting search and seizure to provisionally attach, for a period of up to six months, property that they find during the course of a search and seizure. This would be done with the prior approval of of senior officers.
- Section 133 empowers income-tax authorities to call for information for the purpose of any inquiry or proceeding under the Income Tax Act. At present, if there is no proceeding pending against a person, this power can only be exercised by senior officers above a certain rank. This section is being sought to be amended to give this power to junior-ranking officers as well.
- Section 133A empowers income-tax authority to conduct a survey at a place where a business or profession is carried on or a place where documents or property relating to the business or profession are kept. This section is proposed to be amended to include places of charitable activities as well.
- Section 133C empowers certain income tax authorities to issue notice calling for information and documents for verification of information in its possession. The proposed amendment would empower the Central Board of Direct Taxes to make a scheme for centralised issuance of these notices.
The amendment to 133C is potentially an improvement, as it might reduce arbitrariness in the issuing of notices. However, the other amendments mentioned above may have unintended negative consequences. There may be arguments in favour of these amendments. For example, it would be easier to protect the identity of whistleblowers if reasons to suspect are not disclosed. Provisional attachment during search and seizure could make it easier for tax authorities to extract revenues from tax evaders. However, the powers being given through these amendments can also be misued to conduct arbitrary searches and seizures, provisionally attach properties, and disrupt people’s lives and businesses, all without having to explain the reasons behind the entire process. Important checks and balances are being proposed to be diluted.
These amendments can be seen in the context of the 25 percent increase targeted for personal income tax collection in 2017-18. Government has proposed changes to tax rates that would lead to Rs. 15,500 crore lower personal income tax collection. Accounting for this, the targeted increase in income tax collection is about 29.2 percent. Between 2010-11 and 2015-16, the average rate of growth in income tax collection was about 15 percent. In 2016-17, because of the one-time collection under the income disclosure scheme, the rate of increase is estimated to be 23.35 percent. An increase of, say, 15 percent can be considered to be normal, and the additional 14.2 percent (about Rs. 50,000 crore) would have to be mobilised through special measures. Given the state of the economy, the only way to get a 29.2 percent increase is to expand the tax base by getting more people to pay taxes, and by making further demands from those who may be under-paying the taxes.
As the Economic Survey, 2015-16 (see page 109 onwards), pointed out, given our level of economic development, India's income tax collection compares favorably with other countries. In fact, the Survey found that income tax collection is significantly better than expected at our level of economic development. For example, India's income tax to GDP ratio is 2.1 percent, while the ratio for Brazil is 2.3 percent. To account for the theory that democracies tend to tax and spend more, the Survey controled for democracy as a variable, and the finding on personal income tax holds, albeit the overall tax to GDP ratio is lower than it should be. While the percentage individuals paying taxes is much smaller than expected, the amount of personal income tax collected is actually better than one would expect at this per capita income. This mismatch between satisfactory income tax collection and low number of income tax payers may be because income is concentrated in a smaller number of individuals, but this requires further research.
There is tax evasion and tax avoidance, but there may not be enough "low hanging fruits" that can be plucked to yield Rs. 50,000 crore of additional income tax collection over and above the normal increase in collections. The important issue is that expanding fiscal capacity is a long-term task that requires building capabilites in the tax administration, while upholding the rule of law and the basic principles of government accountability. In a context where income tax collections are good for the level of development, a target to deliver a huge increase in collections, may tempt the tax administration to use their expanded powers to take draconian measures to extract taxes. In the process, innocent people will get hurt. For example, the tax administration would cast a much wider net to go after those who deposited cash after demonetisation than they would normally have. This is not a good way to build fiscal capacity. Rule of law and accountability of government are as important, if not more important, than collecting more income tax.
Conclusion
This reading of the budget suggests that while the budget has got the basic housekeeping of fiscal management right, it is a middling performance on addressing important fiscal issues that need to be addressed in medium term. Further, the pathway chosen for fiscal consolidation, although not necessarily bad, is sub-optimal because of the state of the economy. Finally, the amendments to the Income Tax Act proposed in the Finance Bill should be reconsidered, because they may harm basic principles of rule of law and government accountability.
The author is a researcher at National Institute of Public Finance and Policy. Views expressed here are personal.
