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Issue No.: 574 | April 2015
 

Budget 2015-16: An Evaluation

Ajit Karnik
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My view is that there was no need for such a radical budget at this point. The need of the hour was for the budget to show a sense of purpose, halt the drift in policy making that had set in, give growth an impetus and signal to the Indian economy and to the world that there was a strong and sure hand in charge at the government. I would say that the Finance Minister’s Budget Speech has done all that.

The budget for 2015-16 paints a wonderful vision for India which, it is hoped, will become a reality by 2022. Some elements of this vision are:

  1. A roof for each family in India. This would require building 6 crore houses in India
  2. Each house in the country should have basic facilities of 24 x 7 power supply, clean drinking water, a toilet, and be connected to a road
  3. Electrification, by 2020, of the remaining 20,000 villages in the country
  4. Connecting each of the 178,000 unconnected habitations by all-weather roads
  5. Providing medical services in each village and city
  6. Upgrading over 80,000 secondary schools and adding or upgrading 75,000 junior / middle schools to the senior secondary level
  7. Bringing the Eastern and North Eastern regions on par with the rest of the country
Obviously, the items listed above are unexceptionable and there can be no disagreement about the desirability of bringing about these changes. However, unless there is a concrete course of action regarding how this vision is to be realised, it remains a fairy tale of the "Garibi Hatao” kind that we had witnessed during Indira Gandhi’s regime. The Finance Minister (FM) Arun Jaitley’s strategy for achieving these objectives is enhanced investments leading to high rates of growth. But the FM is a realist and clearly recognizes the challenges facing the economy. These are spelt out in his Budget Speech.

  • Reviving agricultural incomes
  • Increasing investment, especially public investment in the short run
  • Boosting the manufacturing sector
  • Maintaining fiscal discipline

Of course, Jaitley is not obsessed with growth alone and pays due respect to social security. In a sense, he straddles the philosophies of both Amartya Sen (with emphasis on social security) and Jagdish Bhagwati (with prior emphasis on growth).

The NDA government has been dealt a wonderful hand in the first year of its rule and it is like manna from heaven: it can claim very little credit for it. But then, to be successful, the government has to make the best use of lucky breaks. The Central Statistical Organisation (CSO) has handed the NDA government a miraculously revived economy. The change of base for measuring the GDP has led a sudden increase in the growth rates for the past few years.[ i ] 

As per the earlier methodology, the rate of growth of GDP in 2013-14 was 5.1%, which has now been revised upward to 6.9%. We still don’t know what revisions might yet take place for the data in the years prior to 2013-14. But an interesting question remains: Is it possible that the performance of the UPA was not as bad as the old methodology made it out to be? We will not know the answer to this question till the CSO goes back and revises historical data as per the new methodology. This upward revision of 1.8 percentage points in the growth rate of 2013-14 has suddenly offered the NDA government a much higher base to work from. Given this, the rate of growth for 2014-15, at 7.8%, looks very impressive indeed. 

The other lucky break for the NDA government has been the dramatic decline in world oil prices since June 2014. Alongside this, the various measures that the RBI has been implementing for the last 18 months have begun to yield fruit and inflation has come down dramatically. This now opens up the possibility of interest rate cuts by the RBI [ ii ] which will further add to the growth momentum. It is important to see how the NDA government builds on these lucky breaks.

Investment Expenditures

To take the tide at the flood, the Budget has pushed hard on the investment front. The following major proposals have been put forward:

  • Rs. 5,300 crore support for micro-irrigation, watershed development and the Pradhan Mantri  Krishi Sinchai Yojana 
  • Bankruptcy law reform. Increase in investment for infrastructure (mainly roads and railways) to  rise by Rs. 70,000  crore in the year 2015-16, over the year 2014-15 
  • Establishment of a National Investment and Infrastructure Fund (NIIF) with an ensure of an  annual flow of Rs. 20,000 crore to it 
  • Tweaking the Public Private Partnership (PPP) mode of infrastructure development 
  • Setting up 5 new Ultra Mega Power Projects, each of 4000 MWs 

Many commentators have hailed these investment proposals of the FM and taken it as proof of his commitment for re-booting the investment activity in the economy. Two of the above proposals have an institutional dimension to it, namely, the bankruptcy law reform and the reform in the PPP. Certainly, these are very important initiatives but only time will tell how crucial they are likely to be in boosting investment. Right now these two proposals should be viewed as showing the right intent. The other items in the list are more concrete and a more tangible evaluation is possible.

Let us consider the budgeted additional Rs.70,000 crore to be spent in 2015-16 as compared to 2014-15 for infrastructure investment in roads and railways. The FM has made it clear that this would come from budgetary outlays. As far as the Ministry of Road Transport and Highway is concerned, the budget allocation for 2013-14 on the capital account was Rs.16,770 crore while for 2015-16 it is Rs. 33,049 crore, which is an increase of Rs. 16,279 crore. The allocation on the capital account for railways in 2013-14 was Rs. 30,100 crore and in 2015-16, it is Rs. 40,000 crore, an increase of Rs. 9,900 crore. Hence, for roads and railways, the combined additional capital expenditure for 2015-16 is Rs. 26,179 crore which is only 37% of the additional Rs. 70,000 crores mentioned by the FM. This implies that the remaining 63% will have to be funded from additional Internal and External Budgetary Resources (IEBR) which is made up of profits, loans or equity of PSUs. How likely is it that the required IEBR will be forthcoming? Considering the budgets from 2010-11 to 2014-15, actual IEBR have been about 74% of the budgeted amount. Given this uncertainty associated with respect to IEBR, one cannot be confident that the target for additional infrastructure investment will be met.

As far as the National Investment and Infrastructure Fund is concerned, no allocations have been made for it. In fact, the FM quite honestly states that he will now go about finding the required funds. The five Ultra Mega Power Projects are at the moment mere wishful thinking. As the FM states, there is no government involvement here, and neither is any time frame stated regarding when these power projects will start nor when they will be completed. Rs. 5,300 crore have been allocated to minor irrigation, watershed development and Pradhan Mantri Krishi Sinchai Yojana (PMKSY). Very little of this is towards capital expenditure: Demands for grants numbers 1, 85 and 107 (Expenditure Budget Vol. 2) which deal with these items have been allocated less than Rs. 200 crores towards capital expenditure. While some allocation for expenditure on the revenue account is required to run these schemes, the distribution between revenue and capital expenditures seems particularly adversely skewed.

Also consider the FM’s promise of building 6 crore houses by 2022 (Budget Speech, paragraph 16). No doubt the objective is laudable but it is necessary to get some idea about the magnitude of the task. Just to put matters in perspective, during the decade 2001-2011, India added 6.5 crore residential units to its housing stock.[iii] As per the vision of FM, almost the same number of units is to be added in the next 7 years. It is not clear where the funding for this is to come from. Apparently, ‘Team India’ led by the states and guided by the Central Government (Budget Speech, paragraph 16) is supposed to be in charge of this. The guidance of the Central Government, at the moment, seems perfunctory. The allocation to the Ministry of Housing (Demand for Grant No. 58, Expenditure Budget Vol. II) for 2015-16 is Rs. 5634.47 crore but surprisingly all of it is on the revenue account. I would have expected at least some allocation on the capital account of the Budget. Leave alone a credible commitment; this is not even a signalling of credible intent.

Social Security Expenditures

For a government that was supposed to be the anti-thesis of what Amartya Sen stands for, the Budget has given a lot of attention to social security. Almost Rs. 35,000 crore has been allocated to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which is more or less on par with what was allocated during the UPA regime. The FM has stated that "Our government is committed to supporting employment through MGNREGA. We will ensure that no one who is poor is left without employment” (Budget Scheme, paragraph 32). This is an amazing turnaround from the earlier views which had called MGNREGA a glorious failure [iv]. In fact, the Economic Survey 2014-15 is even more effusive in its endorsement of the employment guarantee scheme "The MGNREGA program has the virtue of being reasonably well-targeted” (Volume 1, p. 18). Critics of the programme had blamed it for the rise in rural wages which had made it expensive not only to hire labour in rural areas but also created a shortage of labour for industry since labour, "pampered” by high rural wages, had turned "lazy”. Incidentally, this is so reminiscent of Mitt Romney contemptuous comment about the "lazy" 47% Americans during the last US Presidential elections! In any case, Raghuram Rajan has rubbished these claims stating that MGNREGA contributed only about 10% of the rise in rural wages [v].  

Three schemes for insurance and pension have been announced. The Pradhan Mantri Suraksha Bima Yojna will cover accidental death risk of Rs. 2 lakh for a premium of just Rs. 12 per year. How realistic is this? A quick check on the Life Insurance of India premium calculator [vi]  is quite instructive. The Jeevan Rakshak product covers accidental death. For an adult aged 27 years (this is the median age in India), for a term of 10 years and to receive a cover of Rs. 2 lakh, the yearly premium is Rs. 16,275. Sure, the product that will be offered by the government will be quite different from the example I have used, but the difference in the two premiums indicates the subsidy component that is implied by this proposal. The situation with respect to the other two products - Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana  - is similar.

Fiscal Consolidation

Fiscal consolidation has been the Achilles’ heel of Indian public finances. These finances took a big hit especially after the onset of the worldwide recession in 2008. The Economic Survey notes "failure to control expenditure,…combined with excessive counter-cyclical policies in the second phase (2009-12) led to a loss of fiscal control that contributed to the near-crisis of 2013” (Economic Survey Vol. 1, p. 20). Even though fiscal policy is supposed to be counter-cyclical (i.e. lower budget deficits or even budget surpluses when the economy is doing well), there is general criticism that Indian fiscal policy has been pro-cyclical (higher budget deficits when the economy is doing well). The Economic Survey seems to suggest that the fiscal policy after 2008 was correctly counter-cyclical even though excessively so. 

The focus on cutting and / or targeting subsidies is a major step that has been taken in the budget. Once again, a programme that was much reviled has made this targeting possible. I refer to the Aadhar project which was in the process of being wound up by the NDA government but better sense prevailed. The FM has stated that Rs. 6,335 crore have so far been transferred directly, as LPG subsidy to 11.5 crore LPG consumers. For 2015-16, the total LPG subsidy amounts to Rs. 22,000 crore (Demand No. 75, Expenditure Vol. 2) of which Rs. 21,140 will now be under Direct Benefit Transfer for LPG (DBTL) scheme [vii]. Assuming that these subsidies are well-targeted, this represents only about 8.5% of the total subsidies bill of Rs. 243,811 crore. Plugging leakages and targeting the remaining 91% of subsidies is going to be a daunting challenge given that interests of major groups / lobbies are involved in the continuance of fertilizer subsidy, food subsidy inclusive of support prices for farmers and interest subsidies.

Conclusion

The expectation from the 2015-16 Budget was that it would usher in Big-Bang reforms and that it would be as path-breaking as the 1991 Manmohan Singh budget that brought in economic reforms. That budget did change the direction that the Indian economy had followed up until 1991 and hence it was, indeed, path-breaking. There was no need for such a radical budget at the present time. True, the budget needed to show a sense of purpose. It needed to halt the drift in policy making that had set in; also true that it needed to give growth an impetus; and yes, it needed to signal to the Indian economy and to the world that there was a strong and sure hand in charge at the government. I would say that the Finance Minister’s Budget Speech has done all that. The importance of investment and growth has been brought to centre-stage but, despite this, the commitment to social security has not been abandoned. Both, the Budget Speech and the Economic Survey, have recognized the benign environment facing the Indian economy and both documents have emphasized the importance of taking advantage of this. My critique of the budget has been that the actual actions (in the form of allocation of funds) had not matched the words. This is a trend that I have observed over the last few budgets: impressive announcements have been made in the budget, huge sums of money have been dangled before the public, but the fine print in the other budget documents has not matched up to these grandiose announcements. This raises doubts whether budgets have become elaborate smoke and mirrors exercises which do not follow up with credible commitments in the form of assured funding. I have similar doubts about Arun Jaitley’s 2015-16 budget as well.
________________________________________
[i] http://passthrough.fw-notify.net/download/698873/http://mospi.nic.in/Mospi_New/upload/nad_press_release_30jan15.pdf
[ii] http://www.thehindu.com/news/national/rbi-cuts-interest-rate-by-25-basis-points/article6957965.ece
[iii] http://censusindia.gov.in/2011census/hlo/Data_sheet/India/Housing_Stocks.pdf
[iv] http://indianexpress.com/article/business/budget/despite-modi-criticism-jaitley-gives-nrega-a-slight-nudge/
[v] http://articles.economictimes.indiatimes.com/2014-08-17/news/52901493_1_rural-wages-raghuram-rajan-welfare-programme
[vi] http://www.licindia.in/premium_calculator.htm
[vii] http://petroleum.nic.in/dbt/
DR. AJIIT KARNIK, Professor of Economics, Middlesex University, Dubai, UAE. Excerpted from his blog. For the full text please visit  
http://ajitkarnik.blogspot.ae/2015/03/budget-2015-16-evaluation.html

DR. AJIIT KARNIK, Professor of Economics, 
Middlesex University, Dubai, UAE. Excerpted from his blog. 
For the full text please visit 
http://ajitkarnik.blogspot.ae/2015/03/budget-2015-16-evaluation.html
 
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