Union Budget: False commitments?

Very recently, the government froze the accounts of four charities and deported a German tourist for participating in anti-nuclear demonstrations against the Russia-built Kudankulam facility in Tamil Nadu. The manner in which the government has taken action indicates its strong resolve to push ahead with the project. However, what is required is not just a few pockets of strong action that support the government’s pet projects, but a wide range of policy actions that will help the economy grow at its potential rate.

The Finance Minister will be presenting the Union Budget this week, and we feel that this is just the right time to take stock of some of the major policies promised by the government during the last two years’ budgets, and to check if it really did deliver on what was promised or is the budget just a time-filling exercise?

An objective analysis of the budget policies over the last two years presents a sad story of failed and missed promises. The 2010-11 budget was the one that came after the government had taken some strong steps by providing a stimulus package to counter the effects of a global turmoil unleashed by the US sub-prime crisis. The main challenge then was to reduce the public debt to GDP ratio. This was duly acknowledged and announced in the Union Budget of 2010-11.

However, at the end of FY11, the total debt to GDP ratio still stood at 66.2 per cent. Although it had come down from 75.8 per cent recorded during the preceding year, it has still remained one of the highest in the region. The importance of this ratio can be understood in light of the crisis in Europe, which has a lot to do with the higher debt of the economies there. Hence, the government should act with urgency in this matter, and bring the debt to GDP ratio back to a comfortable level.

In the last budget (of 2011-12), the Finance Minister announced the introduction of the Public Debt Management Agency of India Bill. Despite this, the government still pushed the task of debt management into the RBI’s court. A rise in public debt will increase the debt servicing requisition of the economy, diverting money that would otherwise have been used for productive purposes. In the last one year, the debt service ratio of India has increased from 4.2 per cent of the GDP to 4.6 per cent.

Finance Minister, Pranab Mukherjee, presenting the Union Budget in the House.[PAGE BREAK]

The other major announcement made by the government during the last budget in a bid to control its debt and bring down the debt to an acceptable level was with respect to amending the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, laying down the fiscal road map for the next five years. This was to be introduced in the course of the year, but eleven months into the year, we are yet to see any activity on this front. Though the government is claiming that the bill will be introduced during the Budget Session of 2012, it is clearly one year behind schedule, at best. So, what happened to the resolve of maintaining fiscal discipline, Mr Minister?

In addition to the debt management of the country, two other big ticket reforms – which will help the economy to increase its efficiency in tax collection and will add to its revenue – have been a part of budget announcements but are still hanging in balance, waiting to see the light of the day. One is the introduction of the DTC (Direct Tax Code) and the other is the GST (Goods and Services Tax). The DTC Bill is still with the Parliamentary Standing Committee on Finance. While some progress has been made on the GST front, there is still no clarity on when the proposal will be implemented. Implementation of these two tax reforms will not only create greater transparency with regard to the incidence of taxes, but will also help in simplifying and rationalising the entire tax process, which will expand the tax base and minimise exemptions. Moreover, according to one estimate, the Indian economy is likely to gain USD 15 billion a year by implementing the GST, as it would promote exports, raise employment and boost growth. Hence, it becomes that much more important for the government to expedite the process.

One of the advantages that India currently has over other nations is its demography. If India has to reap the benefits of its demographic dividend, financial inclusion is a must. As of now, only 50 per cent of India’s population has bank accounts. Recognising this fact, the government had announced the issuance of additional banking licenses to private players during the Union Budget 2010-11 to help achieve financial inclusion. Even during the last budget speech the Finance Minister had stated that, “The RBI has proposed some amendments in the Banking Regulation Act. I propose to bring suitable legislative amendments in this regard in this session. RBI is planning to issue the guidelines for banking licences before the close of this financial year”. Only one month remains before the end of this financial year, and no clarity has emerged as yet on whether these licenses will be issued or not. We hope and believe that we may see some assertive action on this front in the next financial year.[PAGE BREAK]

Infrastructure spending is very critical for the growth of an economy, and more so for a developing economy like India. This would help in addressing several persistent issues simultaneously, which are hampering the progress of our nation. Infrastructure development has the potential to improve capital mobility as well as generate adequate employment avenues in the future. However, despite the government having announced various measures in the last budget, nothing concrete has taken off yet. For example, Rs 5000 crore was to be sanctioned for the India Infrastructure Finance Company (IIFCL) to provide long-term financial assistance to infrastructure projects. Nevertheless, as of the end of November 2011, only four projects worth Rs 294 crore have been sanctioned by way of this scheme. Such a dismal performance is reflected in the slow pace of infrastructure development.

Another key announcement made in the previous budget was regarding the issuance of tax-free bonds of Rs 30000 crore by various government undertakings, with the aim of boosting infrastructure development in railways, ports, housing and highways. It comes as no surprise that no such bonds were been issued till November 2011, and the Department of Revenue is yet to issue necessary notifications in this regard. This is indicative of the government’s slackness in implementing some of the most important schemes, which concern the overall development of the economy.

A growing economy like India needs more and more investments, and this is difficult to provide entirely through domestic sources. Therefore, attracting foreign capital is a must. To achieve this, the government had promised to open up the retail sector in the Union Budget of 2010- 11. These investments will not only help to create more employment, but will also help in controlling inflation by improving logistics and supply chain management in agriculture. The Union Cabinet had met in the month of November 2011 (more than a year after it had originally promised to) to approve Foreign Direct Investment (FDI) in multi-brand retail, with a cap of 51 per cent in foreign equity. However, it had to retreat on the opening up of retail in no time as opposition from all quarters thwarted the move, and the audacious attempt had to be revoked until a consensus could be met. Since the retail sector is the second largest employer in India after agriculture, the government should push for a consensus and bring this reform in at the earliest so as to realise the potential of the USD 300 billion market.[PAGE BREAK]

Roughly two per cent of the country’s GDP is expended on subsides. However, it is well established that these subsidies aren’t really creating benefits for those whom they are intended. Hence, in its last budget, the government announced its intention to move towards direct transfer of cash subsidy to people living below the poverty line in a phased manner. This was to ensure greater efficiency, cost effectiveness and better delivery of the subsidies. To this end, a task force headed by Nandan Nilekani was set up to work out the modalities for a system of direct transfer of subsidy for kerosene, LPG and fertilisers. Although the task force has submitted its report and pilot studies are being run in some parts of the country, no concrete modalities have emerged yet. Direct transfer of cash subsidy is touted to help plug the leakages in the system. For instance, according to industry estimates, the funds spent on poor farmers could potentially come down to Rs 37000 crore from the current Rs 100000 crore.

In addition to this it was also proposed that a Nutrient-Based Subsidy (NBS) policy be extended to cover urea, but no such directive has been issued by the government as yet.

One of the ways in which the government would have covered up the fiscal deficit is by selling its stake in public sector units. However, if we look at the target proposed in the budget for the amount to be collected through disinvestment as against the actual amount collected, there has been a deficit in that too. For the current fiscal, the government is in all probability going to miss the target of mopping up Rs 40000 crore through disinvestment. As of December 2011, it has been able to garner only Rs 1144.55 crore.

The list of failed commitments and missed deadlines is too long to be covered in this article. What we have done is listed some of the most prominent ones, which need urgent attention so that the economy can regain its growth trajectory.

It is not the first or second time in history that the Union Budget seems to be just a formality to be completed by the Finance Minister once in a year. It has been the same case over the years. Governments have time and again failed to put mechanisms in place which can actually help to implement what is spelled out in the Budget. In fact, it is only after the better part of the fiscal year is over that ministries wake up to the fact that a whole lot of commitments made in the budget have not been fulfilled or completed. By then, it is too late to accomplish what the budget had set out to do. The burden of carrying forward the pending commitments puts undue strain on the economy as a whole.[PAGE BREAK]

We believe that with the elections in UP and other states over now, the government should start focussing on pushing reforms and should stop making the Union Budget a platform for mere wishful thinking and lip service. This is the right time for the government to walk the talk and fulfill the promises made in the budget.