Why advancing the Union Budget date may not make much difference
October, 14th 2016
It is human to follow structures and processes as inherited. “No questions asked” is a comfortable position. These statements are true in relation to the functioning of the government where status quo is the norm.
It is human to follow structures and processes as inherited. “No questions asked” is a comfortable position. These statements are true in relation to the functioning of the government where status quo is the norm. But this time around, the finance ministry has started questioning some basic postulates around the Budget exercise of the government.
The Cabinet has passed three changes in relation to the forthcoming Union Budget 2017-18. First, the Indian Railways (IR) Budget would be merged with the General Budget. Having a separate Rail Budget was our colonial legacy. While railways and post office, both inherited from the British, have deep networks, both institutions need an overhaul to be relevant and meaningful. IR is the third-largest rail network in the world with 66,000 route km and 8,000 stations. IR employs the largest workforce of about 1.4 million in the world and is the backbone of the economy, as it carries 23 million people per day, which amounts to 2% of India’s population. The demand for the service far exceeds the availability; the image of railways that is imprinted on our mind is of overcrowded trains. Though roads carry more than 60% of the goods traffic, the cost of road per tonne per km is R1.5 against R1 per tonne per km for rail.
IR so far has been managed by a special ministry owing to its sheer size. The ministry of railways remained a lucrative portfolio and was often milked for the political mileage. The capital investment was often sacrificed to manage the Rail Budget. The decision of the finance ministry to merge Rail Budget with the General Budget ends the malady at one stroke. The government proposes to operate railways with autonomy similar to other public sector enterprises (PSEs), like Indian Oil, Bharat Petroleum, Hindustan Petroleum and Oil & Natural Gas Corporation, which figure among biggest companies in the world. IR could follow a similar path of efficiency. The Budget would also do away with expenditure classification of Plan and non-Plan. Plan expenditure included the yearly budgetary allocation to the ongoing Five-Year Plan. It was usually considered developmental expenditure as it included expenditure on infrastructure, research, health and education. Plan expenditure roughly amounted to 30% of the government’s total expenditure. Non-Plan expenditure, on the other hand, amounted to about 70% of total expenditure and was under four heads—administration, defence, subsidy and interest. My students often asked why the expenditure on the above heads cannot be planned in advance.
There was a division of capital and revenue expenditure under both categories of Plan and non-Plan. Construction of a school building would be part of capital expenditure whereas the salaries of teachers would be revenue expenditure in the Plan category. Similarly, investing in tankers would be capital expenditure whereas salaries of personnel in defence would be revenue expenditure in non-Plan category.
With the scrapping of the Planning Commission, it was the logical next step to dissolve the classification of Plan and non-Plan expenditure. The government expenditure would be now divided into categories of capital and revenue. Capital would include all long-term expenditure towards creation of assets. Revenue would include all expenditure for the running of the government machinery. We hope there is greater clarity and transparency in government expenditure.
The Budget proposals are also advanced by about a month. Instead of presenting it at the end of February, it will be presented at the end of January. The government claims this will facilitate implementing Budget proposals by April 1. The government expenditure is found to be modest in Q1, April-June of each year, since budgetary allocations are delayed. It remains to be seen how much improvement can be made in this aspect as a large chunk usually gets spent in Q4, before the year closes. If this is the first step to move the financial year to January-December, it is a welcome move. We have had our financial year run from April-March mainly to accommodate the harvest time for agrarian economy. It made sense when more than 50% of India’s GDP came from agriculture. With fall in share of agriculture to 18% in GDP in current period, do we need to rethink?