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Issue No.: 550 | April 2013
 

Twelfth Plan and the 2013-14 Budget - 3

Sunil S. Bhandare
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Given such harsh realities about the absorptive capacity of the Ministries / Departments, one wonders how a massive jump of 29% in Plan expenditure during 2013-14 can be achieved?

The objective of this, the third part of the critique is essentially to reflect on the 2013-14 Budget’s expenditure strategy in the framework of the Twelfth Plan, which was effectively launched in 2012-13. In his budget speech, the Finance Minister (FM) talks eloquently about "the economic space” that is supposed to have been gained thanks to the compression of the Central Government’s total expenditure during 2012-13. This seems to have engendered  him not only to provide for a substantial increase in total expenditure, but more importantly, to propose as much as a 29.4% hike in plan expenditure for 2013-14 (budget estimates). In absolute terms, the total plan expenditure is placed at Rs555,322 crores in 2013-14 as compared to Rs.429,187 crores in the revised estimates for 2012-13. His sources of financing  would predominantly be from non-tax revenues and the usual dependency on large market borrowings and other capital receipts. 

It must be stressed that in the quest to contain the fiscal deficit/GDP ratio at 5.2%, the FM had drastically cutback plan expenditure by as much as Rs.91,838 crores in 2012-13 over the budget estimates of Rs.521,025crores. Doubtless, this was perhaps the severest fiscal austerity effort in the fiscal history of our country; and the entire burden of this has unfortunately fallen on the growth promoting areas of plan spending, and not on the "stubbornly” irreversible areas of non-plan expenditure like subsidies, administrative expenditure and historically proliferating, hugely "leak-prone” social sector spending. With large market borrowings and massive accumulated public debt, the burden of debt servicing had also knocked off over 36% of revenue receipts in 2012-13. 

In times of a decelerating investment cycle, fiscal prudence demands protecting plan expenditure and curbing non-plan expenditure. Every Finance Minister promises to build such "economic space”, but the actual outcome invariably turns out to be contrarian. The share of plan expenditure in the total expenditure, which was 31.6% in 2011-12, dropped to 30% in 2012-13. Thus, non-plan expenditure continues to pre-empt a predominant part (almost 68 to 70%) of the budgetary resources of the government. In the process, the plan expenditure for developmental activities continues to suffer from the constriction of fiscal space.  

Credibility of Commitment(?)

Be that as it may, how does the Budget 2013-14 propose to steer a sharp hike in the Central Plan outlay within the overall framework of the Twelfth Plan strategy? How compatible are its sector-wise outlays with the annual phasing of investment in selected infrastructure sectors outlined in the Twelfth Plan Document (TPD)? The focus must now inevitably shift towards the UPA II government’s progress with the implementation of a host of new schemes, projects and missions. In this context, one needs to appreciate the FM’s sincere post-budget efforts to build up feel good factors and "talk up” the investment outlook. But, what is going to be more critical and relevant to recharge the economy’s growth momentum are actions and deeds – and not mere words and rhetoric! The proposed financial allocations must translate into performance – and that too in terms of physical targets. 

The budget no doubt conveys the FM’s serious intentions in respect of Central Plan programs, which are apparently based on the consultative/participative process of assessing the requirements of various Ministries/Departments of the government. The success of plan implementation now depends on all of them working with a spirit of active coordination and cooperation; and we know for certain that this has been one of the major fault-lines in the UPA II government’s current governance system. It may also be relevant to invite our attention to two very significant observations: 

First, the FM in his budget speech states: "I dare say I have provided sufficient funds to each Ministry or Department consistent with their capacity to spend the funds. Now, it is over to the Ministries and Department to deliver the outcomes through good governance, prudent cash management, close monitoring and timely implementation”. All this is very well, but is the FM quietly advocating that only when all such "conditionalities” are fulfilled, the resources would be released to the Ministries/Departments concerned? Welcome in the context of considerations of fiscal governance, but almost impossible to manage, especially in coalition politics! Hence, there is an inevitable credibility gap about the FM’s capacity to steer the proposed step up in Central Plan expenditure.   

Second, the Finance Secretary in his interview to the Business Standard (March 7) points out that even when in 2011-12 "there was no curtailment and instructions were not really followed, the actual expenditure was only nine percent over the previous year’s actual. In 2012-13, the Budget Estimates (BE) were 25 percent more than the actual of 2011-12. Clearly, if they were able to spend only nine percent more without any restriction, 25 percent extra was, in many cases, beyond the spending capacity of the ministries”.  Given such harsh realities about the absorptive capacity of the Ministries/Departments, one wonders how a massive jump of 29% in Plan expenditure during 2013-14 can be achieved?   

Furthermore,  real action has now to emerge from the government’s political will to resolve various contentious non-budget areas of policy actions – land acquisition bill, environmental/forest clearances, pricing policies of natural resources, etc. Indeed, many of the public private partnership (PPP) projects, on which the government has been relying heavily in recent years, have also been held up due to such constraints. It has been found that in the absence of competent project development activities by the authorities concerned, the interest of private sector participants in such projects is waning, leading to mispricing and often times huge delays in/postponement of project execution. 

Apart from lack of coordination, the institutional capacities to undertake large and complex PPP projects are found wanting in various Central Ministries, States and local authorities. Incidentally, the Twelfth Plan has envisaged that about 50% of massive infrastructure investment of over US$ one trillion would be in the PPP format. Even while waxing eloquent about various budget initiatives to augment investment flows in infrastructure and industry, the FM has virtually been silent about how the government intends to resolve the current challenges of PPP projects. We believe that a large part of fiscal pains (whether relating to PPP or otherwise) will be visible only in the latter part of 2013-14, when the FM has to really make available the promised resources for funding the Plan expenditure on various programs of the various Ministries/Departments.

Comparison with TPD Estimates 

Finally, thanks to the FM’s promise of stepping up Central Plan spending, there is a strong belief of growth revival through such action! The proposed thrust of the Central Plan Outlay is visible from the Appendix table; but issues of availability of resources and absorption capacity of Ministries would continue to haunt the effective implementation of the plan programmes. 

Having said this, let us quickly examine whether the Central Plan outlays during the first two years of the Twelfth Plan really conform with what is envisaged for the entire Plan period. The TPD has assessed that the total public sector outlays/resources would be Rs.8050,123 crores, of which the Centre’s share would be Rs.4333,739 crores or 53.8%, and the balance would be of the State and Union Territories. Assuming that the FM fulfills his commitment of the Central Plan provision for 2013-14 as shown in the table, the total Central Plan spending in the first two years of the plan would be Rs.1236,299 crores or about 28.5% of the Center’s share for the entire five-year period. 

In other words, the remaining part of the Central Plan, that is as much as 71.5%, would be required to be provided in the last three years of the Plan. On present reckoning, there is going to be a huge forward loading of plan spending. Hence, there are risks of large shortfalls in plan expenditure in the subsequent period. Further, the TPD sets out year-wise phasing specifically of the projected investment in infrastructure. Thus, of the total infrastructure plan spending of Rs.5631,692 cores (over US$ one trillion), the Centre’s share is Rs.1628,129 crores or 28.9% of the total. If we were to aggregate the likely Central Plan expenditure on energy, transport and communications in the first two years of Twelfth Plan, it would work out to Rs.563,665 crores or 34.6% of the total envisaged infrastructure spending by the Centre. This appears to be fairly appropriate phasing of the Central Plan’s infrastructure spending. However, the issue of FM’s credibility of commitment to required financial allocations would still remain.     
   
Concluding Observations

Summing up, what transpire are  three critical issues: First, the Indian economy has already lost the very first year of the Twelfth Plan given our real economic growth of just about 5% - one of the lowest in the last decade. There is no promise that the real GDP growth would go beyond 6% in the second year of the plan period. In substance, the average real GDP growth rate would be stuck at around 5.5% for these two years in contrast to the annual desirable growth rate target of 8% during 2012-17. 

Second, the economy is desperately crying for a strong revival of the investment cycle. It is crying for acceleration of infrastructure development, be it in the exclusive domain of public or private sector or in the PPP format. The investment confidence of the private sector is visibly at a low ebb thanks to (a) the creation of excess capacities in many manufacturing industries, anticipating incorrectly  the sustainability of earlier demand buoyancy; and (b) the failure of PPP projects in the infrastructure areas to gather any momentum. Therefore, to "crowd in” private sector investment (including FDI), considerable action now rests outside the budget. 

Lastly, there is a huge credibility gap about the commitment to the proposed Central Plan (or even to the overall public sector plan) expenditure. The concerns about "the fiscal bind” of the government make this credibility of commitment even more suspect. We also apprehend that by the end of first two years of the Twelfth Plan, there would also be huge shortfalls in the budgeted financial allocations for the Central Plan. This would inevitably impact adversely the realization of physical targets. We strongly believe that no amount of road shows by the FM across various countries can substitute for the groundwork of actual action and execution that is necessary for promoting investment and returning to the path of high growth!

Appendix
                  (Rs. Crores)  2011-12   2012-13   2012-13  2013-14   % growth
 (Actuals)  (BE)  (RE)  (BE)   2012-13 (RE) 
over 2011-12 
 2013-14 (BE)
over 2013-14 (RE)
 1. Agriculture, Irrigation, Rural Development, etc.  64, 171  69,696  60,103   76,419  -6.3  27.1
 2. Energy   121,855  154,842  148,230  158,287 21.6  6.8
 3. Industry & Minerals  36,235  57,227  39,228  48,010 8.3  2.2
 4. Transport  107,532  125,357  103,023  133,488 -4.2  29.6
 5. Communications   6,586  15,411  8,257  12,380  25.4  49.9
 6. Science, Tech. & Environ.  11,735  16,592  12,119  17,587 3.3  45.1
 7. General Economic Services  19,696  24,777  21,017  31,602 6.7  50.4
 8. Social Services  135,480  178,906  158,339  193,04 16.9  21.9
 9. General Services  5,305  8,701  5,860  9,30 10.5  58.8
10. Grand Total  508,596 651,509 556,176 680,123 9.4 22.3
 
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