The great financial non-event
With non-plan expenditure, including interest payments, wages, pensions and subsidies on the rise, bulk of government expenditure remains inflexibleindia Updated: Feb 19, 2006 23:13 IST
Three months of close door meetings, tonnes of data from various ministries and states, heaps of memoranda and wish lists from interest groups and reports of numerous committees. That’s what goes into the making of the annual budget of India. The document, often running over 1, 000 pages, comprising over 5,000 changes in tax rates, has emerged as the sole annual exercise encompassing almost all major economic announcements.
In every budget a cornucopia of new schemes are announced without clear statement on implementation. Populist new schemes are announced but not backed up with funds. For example, a major feature of the last year’s budget was the announcement of Bharat Nirman for rural infrastructure development in six core areas. The implementation of this programme is slow and without a clear indication of how the funds would be utilised.
The 2003-04 NDA budget promised public-private partnership for infrastructure investment. It never took off due to lack of funds. The then finance minister Jaswant Singh promised setting up six AIIMS-level institutions in six states. He announced three major new funds - Agricultural Infrastructure and Credit Fund to help the agriculture community, Small and Medium Enterprises Fund to help small business, and the Industrial Infrastructure Fund to support industries. All these are on the back burner now.
The present government’s National Rural Employment Guarantee Scheme, which assures 100-day employment to the rural poor, has been hotly debated. Though an allocation of Rs 5,400 crore has been committed for the scheme, the modalities for implementation are yet to be worked out, despite its inauguration ten months after the announcement.
Another big fallacy of budgets is the variation of revised and actual estimates. Fiscal marksmanship is the degree of accuracy between the two estimates. A World Bank study on fiscal prudence says wide variations between actuals and estimates raises questions about the integrity and sanctity of budget mechanisms. It says that the lack of fiscal marksmanship results in distortions in fiscal management.
Under the Fiscal Responsibility and Budget Management Act of 2003, the government has to bring these deficits to zero by 2007, but the UPA government has stretched the deadline to 2009. Even this appears to be an unlikely goal since both fiscal and revenue deficits are actually rising rather than shrinking. The finance minister’s options are limited as the bulk of government expenditure such as interest payments, wages and salaries, pensions, subsidies, and transfers to states, account for over 90 per cent of non-plan expenditure. Obviously the answers lie in long-term economic policies.
Taxation remains, though need not be, the most important part of the Union budget. A plethora of new policies are announced, old policies scrapped and by the time the notifications are issued, it’s time for another budget. The tax GDP ratio has remained almost the same over the last ten years, a little over 10 per cent of the GDP. In fact, the Vijay Kelkar committee on direct and indirect taxes has suggested simple and stable tax laws and widening of the tax base from the current 1.5 crore direct tax payers.
Unlike in many other countries, the annual budget in India gets top billing. An IMF study says that India’s opaque and secretive budgets are becoming fiscal non-events. The next story shows how many other nations are moving away from traditional budgets to more participatory models.