The Union Budget 2013-14 has a number of good specifics to get investment going again, but the constituents of the headline numbers on fiscal correction are unclear
The Union Budget every year is seen as a statement of the macroeconomic stance of government, and its expenditure priorities. The macro stance was essentially dictated this year by the confluence of adverse circumstances facing the country, admirably summarised at the outset of the budget speech. The expenditure priorities in turn were similarly dictated by electoral considerations, in the last year of the present government’s five-year term.
Before going into these, the two best features in the entire budget speech were in paras 110 and 56. If followed through, the first will hugely rationalise Plan expenditure and strengthen the Indian federation all at the same time. This is the promise that the 173 Centrally Sponsored Schemes (CSS) will be collapsed into 70 schemes, and more importantly, that the Central component of these will be transferred to States as part of Central Plan assistance. What a relief this will be to States, which have hitherto been required to pay their co-funding share into CSS like the Sarva Shiksha Abhiyan, in proportions dictated by the Centre. For States unable to cough up their co-share, the funding from the Centre was correspondingly curtailed. The new freedom given to States will carry a review every two years. If this is really carried out, and I can scarcely believe that it has actually been announced, it will be a new dawn for federalism. And perhaps a new dawn for outcomes as well.
The second, tucked away in para 56, is a Rs. 5000 crore funding provision through NABARD for the construction of godowns, which can also be accessed by panchayats, where farmers can store their produce. This is a first move towards providing for institutionally decentralised stocking of produce, recognised worldwide as the fundamental requirement for ensuring food security in any country. Also for the first time, it recognises the role that panchayats were supposed to play, as partners in the execution of national policy.
On the macroeconomic stance, I have to say that the triumphant achievement of a fiscal deficit of 5.2 per cent for 2012-13, and the budgeted target of 4.8 per cent for 2013-14, took me quite by surprise. I have not examined the figures closely, so I do not know whether some subsidy payments for the current year have got deferred to the next fiscal year. The structure of direct and indirect taxation for 2013-14 remains largely unaltered. The revenue addition from the new measures, like the surcharges on high income earners, and enhanced levies on luxury consumption, are quantified at Rs. 18,000 crore. Since Rs. 9000 crore is being set aside upfront for States claiming compensation for the withdrawal of the Central Sales Tax in the move towards a nationwide Goods and Services Tax (GST), the net revenue gain is a mere Rs. 9000 crore. So unless there is a very optimistic tax buoyancy assumption underlying the revenue projections for next year, or expectation of large receipts from disinvestment, it is unclear how the projected expenditure increase can actually be financed while at the same time reducing the overall deficit.
On a more positive note, considerable thought has gone into getting investment back on track, with a particular focus on infrastructure investment. There are a number of infrastructure finance facilitation measures, listed in para 56, tax incentives for private investment in plant and machinery, and specific institutional measures to handle road project bottlenecks and regulatory hurdles. There are plans for new industrial corridors, ports and inland waterway grids. There is recognition of the need to expand domestic production of coal to ease the thermal power generation bottleneck, and to review the vexed issue of natural gas pricing. The only issue which has been glossed over is the revealed reluctance of State governments to participate in the restructuring scheme for power distribution companies (DISCOMS). Until this is resolved and the power supply bottleneck correspondingly eased, small and medium enterprises in the country simply cannot take off.
Food inflation is acknowledged as a major unsolved problem, with a promise to ease supply side bottlenecks. The continued raising of the minimum support price for foodgrain is mentioned in para 41 as the policy instrument through which foodgrain production has been increased. In reality, it has served to exacerbate foodgrain inflation, even while foodgrain production has increased. By artificially raising the profitability of producing foodgrains, it prevented the crop diversification that would otherwise have automatically happened in response to the rising prices for non-foodgrain crops. So it has led to food inflation all round. The Rs. 500 crore now being provided to promote crop diversification in the original Green Revolution States could have been saved, and the objective achieved more elegantly, by not interfering as much with the market mechanism. And of course, there would have been commensurate saving on the food subsidy, had food inflation been lower, which it could easily have been.
Milk inflation in particular has had a devastating impact on child and maternal nutrition, but the promise in para 53 that feed and fodder availability will be increased is not spelled out in any detail. Last November, the mass burning of harvest residue after the mechanised harvesting of the kharif crop in Punjab and Haryana cast a month-long smoke pall which covered Delhi, and caused widespread respiratory distress. Economists at the Indian Statistical Institute have identified mechanisation alternatives which can preserve crop residue for use as fodder. A targeted subsidy on these machines would be fully justified by the resulting reduction in both air pollution and fodder prices, and milk prices further down the line.
Finally, on expenditure priorities. There are a number of commendable initiatives to improve the condition of women and children. The Nirbhaya Fund of Rs 1000 crore for safety of women is certainly welcome, although everything depends on how it will be deployed. The basic requirement is for better provision of public goods like street lighting, and that calls for funding at municipal level. A scheme for maternal and child malnutrition for the 100 poorest districts, with an allocation of Rs. 300 crore, comes not a moment too soon, although again implementation details are not spelled out. Unless the existing anganwadi infrastructure of the Integrated Child Development Scheme (ICDS) is used, most of the provision will go into new infrastructure rather than to delivery of nutrition. The ICDS itself is commended in the budget speech for having spent all of its allocation of Rs. 15, 850 crore in 2012-13, and I suppose that is one possible indicator of the success of the scheme. However, in this as in all other schemes, there is no publicly stated commitment to examining the structure of it, whereby a path to achieving better nutritional outcomes could be meaningfully charted. In these fiscally challenged times, the imperative need is to squeeze better outcomes by restructuring the institutional processes of social sector spending.
Addressing skill deficit
There is considerable emphasis on addressing the skill deficit in the Indian economy, with the various schemes from which funding will be sourced clearly spelled out, and an additional provision of Rs. 1000 crore as an incentive for candidates achieving successful certification. These initiatives are certainly welcome. But they remain patchwork responses to an underlying failure to match skill production to skill requirements, even of publicly funded schemes. For instance, the National Health Mission, which now combines rural and urban sectors, is getting an increase of 24 per cent in its budgetary allocation, to Rs. 21,239 crore. But as anyone familiar with the programme knows, its critical limitation has been the failure to find medical personnel at any level to staff it. Skill development carries lead times and gestation periods, and the Planning Commission simply has not done its homework on manpower projections as it should have.
(Indira Rajaraman is a member of the Central Board of the Reserve Bank of India, and was a member of the Thirteenth Finance Commission)
Keywords: Union Budget 2013-14, India economy, investment, Centrally Sponsored Schemes, NABARD, food security, GST, indirect taxation, infrastructure development, food subsidies, food inflation, Nirbhaya Fund, women's safety