The 2016 – 17 Budget: A Positive Step in India’s Transformation Process

India’s Railways and Union Government Budgets (hence forth the Budget) for 2016-17 should be assessed as part of a continuing process of transforming India rather than as a stand-alone event (albeit the most important event of the year).

Any budget is constrained by past policies and developments, and it will have impacts which transcend the fiscal year. Broader domestic and global developments, and perceptions and expectations of the stakeholders are also relevant in formulating a Budget.

The current external environment of subdued global growth and global trade, low or negative nominal interest rates, and a pervasive sense of fragility globally are factors which formed a part of the broader context in which the 2016-17 Budget was formulated. The domestic economic environment has also been challenging. There has been a continuing need to contain aftermath of imprudent fiscal policies of the previous government, two continuous years of drought, fiscal impact of the seventh Pay Commission for government employees, and fiscal challenges for the Union government arising from the acceptance of the recommendations of the 14th Finance Commission to devolve higher proportion of sharable tax revenue with the State governments.

Given the above, the trade-offs among different objectives such as fiscal consolidation, growth, sectoral priorities, giving impetus to “animal spirits”, and assigning proper roles to the state-market and public-private-social enterprise sectors were exceptionally difficult to manage in this Budget.

The Budget projects nominal GDP growth of 11 percent in 2016-17. Assessing the Budget involving implicit or explicit trade-offs, therefore requires nuanced judgments and understanding of how and over what period the government measures may translate into desired outcomes. The judgments of policymakers about political feasibility and readiness of the stakeholders to accept proposed initiatives are also relevant in the budget assessment.

As the Prime Minister Narendra Modi led government’s overall aim is to Transform India, the extent to which the 2016-17 Budget constitutes a positive step in transforming India is arguably a sound basis for its assessment.

Three aspects of the Transforming India aim are relevant for assessing the 2016-17 Budget.

 First, does the Budget meet growth diagnostics tests which are relevant for the Indian context?

 Second, does the Budget improve fairness by delivering public services and amenities to help improve quality of living (facilitating day to day activities through easier and wider accessibility and affordability), and quality of life (taking steps to address aspirations of the people for better quality of life)?

 Third, does the Budget help prepare India’s economy, polity, and society for progression from the lower-middle-income to upper-middle-income category of nation?

Assessed on the above three aspects, the Budget, on balance, does indeed advance the Transforming India objective and facilitate India’s progress towards moving up the income category. These are explained below. 

Therefore, the Budget deserves to be welcomed by all stakeholders who desire India to emerge as an important power globally.

Growth Diagnostics Tests

The analogy here is with medicine where a few vital signs are examined to assess health. In growth diagnostics of fiscal health, these signs are: fiscal consolidation as an important element of fiscal and macroeconomic sustainability; investments, both direct, and those that crowd-in private and other investments as a result of public investments; use of knowledge, including when it is embodies in technology; encouraging formation of human skills and generation of livelihoods; and progressing towards cooperative federalism.

In all these aspects, it is essential that large imbalances between demand side and supply side forces should not be permitted to arise, but if they do, they are effectively addressed. In India, too often the demand-side forces have been increased significantly (in some cases through giving statutory power to certain rights), but supply side elements, whether in health, education, power, transport, and other areas have lagged considerably. This has led to significant distortions in the economy, and also in society, which the current government has been attempting to address. The fiscal consolidation and perception that public financial management of the country is sound are especially important in the current global environment.

The budget meets this objective fairly well. This is indicated by the reduction in fiscal deficit (3.5 percent as compared to 3.9 percent of GDP in 2015-16), revenue deficit (2-3 percent as compared to 2-5 percent), and total outstanding liabilities (47.1 percent as compared to 47.6 percent, and projected to decline to 44.4 percent in 2018-19).

These are to be achieved with projected constant tax revenue to GDP ratio of 10.8 percent; (with welcome provisions to reduce compliance costs and burden imposed on the rest of the economy in generating the revenue) and reasonable assumptions of 11 percent growth in nominal GDP (real plus inflation) for 2016-17; 12 percent in 2017-18, and 13 percent in 2018-19.The total government expenditure in 2016-17 is projected to be INR 19.8 trillion.

The budget continues to focus on obtaining fiscal revenue from not just the current year’s income, consumption, and production flows, but also from using state assets more productively. This is indicated by the plan to generate INR one Lakh crore from spectrum sales. The change in the name of Department of Disinvestment to Investment and Public Asset Management also reflects the new mind-set in generating revenue and improving the accountability of state assets.

The Union government is among the largest owner of assets, including land. They can also creat property rights (such as spectrum, air-space rights, airline landing allocation rights etc.) to generate revenue. But this requires a good asset registry and reforms in accounting methods, budget management systems, competency in auctioning in a transparent and accountable manner, and re-skilling of relevant staff. Initiatives by the government to track and reward performance of the officials and of office holders should therefore be welcomed.

The Budget has taken a welcome step to discontinue the practice of classifying expenditure in to Plan and Non-Plan expenditure from 2017-18. The States should be encouraged to follow this practice as well. This is a logical step as the earlier Planning Commission has been replaced by National Institution for Transforming India (NITI) Aayog. The word Transformation is particularly significant in NITI Aayog.

The Budget, particularly the Railway Component, has focused on obtaining better outcomes from budgetary outlays, widening the sources of revenue; using assets of the railways more productively (a neglected area so far); and more competent use of the Public-Private Partnerships (PPPs), including

Indian Railways partnering with the State governments to make railway assets more productive, and thereby crowding-in additional investments by other parties.

In the 2016-17 Budget, the Railways aim to achieve the operating ratio of 92 percent, as compared to 90 percent likely to actually be achieved in 2015-16. This ratio indicates how much Railways as an organization spend to earn a rupee. The lower the ratio, better the financial health exhibited by this indicator.

The increase reflects additional Pension expenditure arising from the Seventh Pay Commission recommendations. Various improvements through savings in real resources such as power utilization have helped in keeping in check the increase in this ratio. In subsequent years, the ration will need to improve further that Railway modernization plans can be better funded.

The Budget’s investment proposals are designed to improve productivity in the use of capital, and to crowd-in private investments from both domestic and global investors. The three schemes for monetizing gold (India’s households and institutions are estimated to hold 22,000 tons of gold, worth about USD 800 billion, equivalent to two-fifth of GDP) launched by the government could also generate resources to support investments.

The above suggests that merely focusing on the level of budgetary capital expenditure and increase (INR 2.18 trillion, growth of 4 percent), as some analysts have done, misses the main thrust of the Budget concerning investments.

As example of low better project and expenditure management can lead to higher output and better outcomes from similar outlays is from the road sector. Road Construction was 2 km per day under the previous Congress Government, and more than 450 projects were delayed or stalled under the current BJP-led government road construction is estimated to be 18 km per day (aim to increase it substantially), and all delayed or stalled projects have been restarted.

The decision to award 10,000 km of highway contracts in 2016-17; higher tripling of allocation to INR 270 billion, for Gram Sadak Yojna with potential for large multiplier effects; connectivity with the northeast, and investment in urban transport systems, with long-neglected in Mumbai receiving priority in capital expenditure of the Railways; and investments in coastal shipping, with huge savings in logistics and transport time and costs; investment in Digital Depository of academic transcripts; investments to provide urban-type facilities in rural areas under the Rurban clusters, are only some of the examples of the growth diagnostics- consistent design of investment proposals in the 2016-17 Budget.

The importance of other growth diagnostics signs is also evident from the Budget. Thus, Start-up India, Mudra (Micro Units Development and Refinance Agency) Bank, Digital India, and combination of Aadhar –Jan Dhan Yojna (involving opening of bank accounts, overdraft, and accident insurance coverage, under which 212.2 million accounts and INR 342 billion have been deposited by members); and use of mobile payment and other technology to directly transfer amount to the bank accounts of the beneficiaries; near tripling of issuing of E-tourist visas on arrival about 120,000 per month, all require significant and skill-mix process improvements, as well as the use of technology.

The cooperative Federalism initiatives of the Budget are exemplified by meeting the commitment to increase devolution to stakes by 55 percent as recommended by the 14th Finance Commission; involving States in recognizing centrally sponsored schemes; and the UDAY (Ujjwal Discom Assurance Yojna) scheme to revive power distribution companies in the States. The Real Estate (Regulation and Development) Bill passed on March 10, 2016 will also positively impact States.

The brief overview of the Budget concerning growth diagnostics strongly suggests the following.

 First, the Budget incorporates insights from modern growth theory and experiences by aiming to generate many growth nodes for the country, to help diversify the economy, and increase its resilience.

 Second, the proposals recognize that a combination of use of ideas and knowledge, process improvements, and reconfiguration of skill-mix (but with requisite certification for signaling) is essential for good quality broad-based growth. Seemingly small measures with disproportionately large positive impact on outcomes, one of the key characteristics of a sound budget, are evident in many proposals in the Budget.

 Third, it is encouraging India’s entrepreneurship and business instincts, facilitating it by better accessibility, affordability, and reliability of basic public amenities, particularly physical and digital connectivity.

Improving Fairness:

It is widely acknowledged that corruption at the higher levels of the Union Government that was previously ubiquitous during the Congress-led government’s tenure has been nearly eliminated, if not completely. As with inflation, corruption hurts the bottom–half of the population particularly hard. This factor has improved the fairness of fiscal operations and enhanced stock of social capital or trust significantly. This aspect has not been sufficiently acknowledged by the commentators.

The 2016-17 Budget also continues the focus of the current government to improve fairness by making basic public amenities more accessible, affordable, while improving their reliability. These in turn will positively impact on the quality of living of India’s households, facilitating their daily lives.

Illustrative examples from the Railway component of the budget include:

 A Centrally managed “Railway Display Network” to provide information

 Addition to seats in general class on busy travel nodes

 Measures to improve cleanliness and hygiene facilities on stations and in trains

 Railways Research centers to continue to improve services.

An example from the Power sector includes the Dean Dayal Upadhyan Gram Jyoti Yojna (DDUGJY) under which 35 percent of 18, 452 currently un-electrified Villages have already been electrified. This in turn will not only improve quality of living, but also widen livelihood opportunities for the villagers, facilitating inclusive broader-based growth.

The transparent nature of this power initiative is exemplified by the continuous updating the progress in electrification of villages by visiting http://garv.gov.in/dashboard . The use of the dashboard as a technique, usually used by effective managers, reflects focus in outcomes of policy initiatives, rather than on government expenditure, which constitute only financial (not even physical) inputs.

The Pratyaksh Hanstantrit Labh (PAHAL) scheme under which subsidies for cooking gas are transferred directly to the beneficiaries, and the accompanying for citizens to voluntarily not avail of the subsidy (6.5 million citizens have already voluntarily given up the subsidy), whose savings are channeled to giving new gas connections for low income families, improves both fairness and growth prospects while reducing leakages, thus improving expenditure management. The use of cleaner energy sources would also potentially improve maternal and child health.

The response of 6.5 million citizens from many diverse groups to voluntarily give up the subsidy also suggests improvement in social capital and trust in India, a significant achievement of the current government.

The focus on outcomes enhances the fairness of the initiatives, a point missed by many analysts who only compare financial inputs, without understanding the processes by which such inputs are to be turned into outputs and then into outcomes focusing on improving household welfare.

The Budget also provides for meeting the pension benefits, including arrears, to the military personnel who, for the first time, were promised “One-Rank-One-Pension” by the current government. This is an issue of fairness as the earlier governments implemented such arrangements only for the civilian, but not for the military personnel.

The Budget and related measures also contain initiatives to address natural and other risks faced by households by specific risk-mitigation and management Programs. These include, the Pradhan Mantri Fasal Bima Yojna (PMFBY) to provide insurance cover and stabilize farm incomes in the event of natural calamities, pests, and diseases (http://pib.nic.in/newsite/PrintRelease.aspx?relid=134432), a dedicated long term irrigation fund, program to make ground-water resources more sustainable; reconfiguring MGNREGA (Mahatma Gandhi National rural employment guarantee act ) scheme to help generate such productive assets as ponds, wells, and compost pits to reduce farm risks and new health insurance scheme.

There are also initiatives to improve quality of life by meeting aspirations of the citizens to significantly improve their economic prospects and social position. Some of the initiatives such as Start-Up India, Mudra Bank have been mentioned.

The proposal to double farm incomes by 2022, an achievable goal, would potentially improve quality of living and of life. Empowering powers through greater economic freedom and access to technology will assist in this goal.

Perhaps bolder measures to reform education and research institutions, with much more accountability for outcomes, could have served this objective to even greater extent.

Preparing India to Progress towards Upper-Middle-Income Category:

The analysis under growth diagnostics and fairness above, attempting to channel energies of the stakeholders into nation building, and efforts being made to shift political accountability based on improving citizen’s quality of living and of life suggest that the Government is preparing the country towards challenges of moving up the income category, particularly by strategic use of knowledge and technology.

Three examples illustrate this point. First, the Indian railways which has entered into an agreement with globally competitive and commercially successful Indian Space Research Organisation (ISRO), another public sector Organisation, for effective use of space-based technology. This collaboration will facilitate better services to stakeholders of rail services, including enabling remote sensing and GIS (Graphic Information System) based applications.

The second example concerns the urgency shown in the Budget and in related initiatives to enhance road connectivity of India, particularly with its coastal areas, Northeastern region, and with the near neighbors. India has already concluded road connectivity agreement with Bangladesh, Bhutan, and Nepal, and at an advanced stage of negotiations with Myanmar and Thailand. A road journey from Delhi to Thailand augurs well for supporting India’s future connectivity an essential aspect of supporting much higher level of economic activities.

The third example concerns the 2016-17 Budget’s ambitions, but achievable goal of doubling farm incomes by 2022. The Budget doubles the allocation for agriculture, irrigations, and farmer’s welfare. As discussed the emphasis by the government on outcomes suggests the actual impact will be even greater.

Around 50 percent of labor force is currently engaged in agriculture and related activities, but agriculture accounts for less than one-fifth of India’s GDP. Accelerating the farm income could therefore facilitate India’s shift towards the upper-middle-income category. The roadmap for this goal involves use of knowledge, and technology, and investments for water conservation, for crop diversification, value added through processing, and through such activities as animal husbandry, and growing timber, and more household production, facilitated by better public amenities, such as power and road.

While this is rarely a linear process, the Budget initiatives do lay solid groundwork for better managing India’s future. The Budget demonstrates how improving efficiency in combining society’s resources in a context-specific manner can be simultaneously combined with improving fairness in several specific areas.

Some Measured Needed Greater Preparation:

There are some proposals in the budget for which better background work were needed. An example includes ill-considered method (but not the intent) of encouraging widening access to retirement income security by levying tax on EPF (Employee’s Provident Fund) accumulations.

The idiosyncrasies of pension economics are subtle, it has tyranny of small numbers where seemingly small changes can have disproportionate impact; and requires long-term policy stability and credibility. A systematic rather than a scheme-based ad-hoc approach to achieve the Budget’s intent is needed.

The Budget’s proposals to make tax treatment of National Pension System (NPS) less uneven as compared to the other retirement products however should be welcomed.

There is an urgency to develop international financial services in India. To achieve this, greater clarity on their tax and other regulatory aspects, and for such products as so-called “Masala Bonds”, INR denominated bonds listed abroad, in which exchange rate risk is borne by the lender not the Indian borrower, could have been forthcoming in the budget. Perhaps as with banking sector reforms, and bankruptcy law reform, these will be undertaken outside the Budget.

There is a need for greater urgency in passing the Constitutional Amendment Bill for GST (Goods and Services Tax). Insistence by the opposition Congress party that the rate of GST be made as part of the Bill should be rejected outright as inimical to the spirit of any tax Bill. The rate of GST should be set on the basis of such factors as what India’s competitors levy for their GST or its equivalent, and maximizing potential for ease of administration and compliance, and not on the basis of static revenue neutrality with respect to revenue generated by current distortive taxes on consumption, and which do not take into account positive dynamic effects of GST on the growth rate, which is a major factor contribution to any tax revenue generation.

The so-called “origin” states must be persuaded to drop their insistence on levying 1 percent additional GST rate on inter-state sales. Such sales should not attract any tax to realize full benefits from GST. States will not lose revenue as the Union government has agreed to reimburse to the States any shortfall in sales tax revenue for five years.

Concluding Remarks:

The 2016-17 Budget (and associated measures) must be viewed as a part of the process of transforming India towards meeting challenges of growth and competitiveness in a manner which eases the ordinary life of the citizens, and which encouraging aspirations and hope for better quality of life. Four distinguishing characteristics of the Budget are competence exhibited to effectively implement seemingly small measures that disproportionately and positively assist in India’s transformation process; harnessing knowledge and technology to improve society’s use of resources; expanding funding sources government’s balance sheet components, and outcome-oriented rather than just financial input-
oriented, e.g. expenditure.

The tasks for the subsequent Budgets may include the following. Further expanding economic freedom in all sectors, including in education sector; increasing contestability and widening partnerships in policy design and implementation; initiating accounting, budgeting, and procurement reforms to better assess government’s performance; managing the implementation of the Goods and Services Tax (GST), once the Constitutional Amendment Bill pending in the Rajya Sabha is passed; refining Fiscal Responsibility and Budget Management (FRBM) framework, and undertaking reforms of income tax and its administration.

 

Article was originally published at Lee Kuan Yew School of Public Policy for their Working Paper Series.

Image Source : http://goo.gl/sYVFwt