Some recent reforms introduced in the budgeting process

 

 

• The Estimates Committee of Parliament (Chair: Mr. Girish Bhalchandra Bapat) submitted its report on the subject ‘Recent Budgetary Reforms for Better Management of Government Expenditure’ on March 19, 2021.  The Committee discussed certain budgetary reforms undertaken by the central government and their impact on the finances of the central and state governments.  These reforms include:
•  (i) advancement of the budget cycle with the union budget presentation on February 1, (ii) merger of plan and non-plan expenditure in the budget, and
• (iii) merger of the rail budget with the general budget.

 

Key observations and recommendations of the Committee include:

• State-wise allocation:  The Committee observed that the Union Budget at a Glance document provides an overview of the budget, including the allocation for major schemes by the central government.  However, the funds allocated to different states do not reflect in this document.  The Committee noted that people are interested in knowing the amount of money allocated to different states by the central government.  In its absence, a common man does not have a clarity of the budget allocation, i.e., the amount of money provided by the state government and that provided by the central government.  The Committee recommended the central government to incorporate the state-wise allocation details in the union budget documents to bring transparency in transfer of funds to states.
• Readability of the union budget documents:  The Committee observed that the union budget documents are so voluminous that the common man and public representatives do not have the time required to go through and understand them.  The Committee recommended the government to organise a briefing session for the Members of Parliament immediately after the presentation of the budget in Lok Sabha and highlight the details from the budget documents.
• Unspent balances of states in bank accounts:  The Committee observed that the grants transferred by the central government to states remain in state treasuries till they are transferred to implementing agencies.   It noted that some state governments deposit the unspent balance remaining from schemes/ grants in banks, which earn them a substantial amount of interest.  The Committee recommended the central government to identify the interest earned by various states from such unspent balances in banks and frame guidelines (if none exist) for utilisation of the funds earned by them.
   
• Advancement of the budget cycle:  The Committee observed that with advancement of the union budget cycle starting from 2017-18, Parliament has approved the Appropriation Bill before the commencement of the financial year.  As a result, the full budget is available to the Ministries at the beginning of the year and states get sufficient time to plan and present their budgets in accordance with the union budget.  The Committee noted that the pace of expenditure of the central government in the first three months of the year 2017-18 showed an increase as compared to that in the previous year.  However, the pace of spending declined in 2018-19.  The Committee recommended the Department of Economic Affairs (DEA) to examine the factors responsible for slowing down of expenditure in 2018-19 and take corrective measures.
   
• Underspending:  The Committee observed that DEA conducts mid-year review of the expenditure by all Ministries and revises their expenditure ceiling for the year based on the progress of expenditure till date and their capacity to spend in the remaining year.  It noted that despite advancement of the budget cycle, savings (i.e., underspending or under-utilisation of allocation) occurred in 99 departments in 2017-18, 97 in 2018-19, and 100 in 2019-20.  The Committee recommended that the objectives of advancement of budget cycle in this front needs to be reviewed so that this trend is discontinued and funds available with the government in the union budget are optimally and fully utilised.
• Monitoring the implementation of schemes:  The Committee observed that the Secretary of a Ministry/ Department, being its Chief Accounting Authority, is responsible for monitoring the implementation of its projects/ schemes.   However, the Committee noted that the Secretary, DEA, being an overall controller of the central government’s accounting, is also equally responsible for monitoring the implementation of the projects/ schemes of various Ministries/ Departments.  The Committee recommended that a system may be evolved by DEA to track the progress of Ministries/ Departments on implementation of projects/ schemes, so that habitual defaulters who have not updated the progress can be identified while allocating the budget.

 

Removal of planned and non-planned expenditure and advancement of budget presentation:

This was a part of Rangarajan Committee recommendations. Since the Planning Commission has been done away with, there is no requirement of planned and non-planned expenditure any more. How centre-state relation develops in this new aspect is important. There is a requirement of mechanism for state governments to adapt to these changing patterns of revenues and expenditures.

Budget making is basically projecting the revenues and expenditures for coming year. Before going to the budget, there is a need for information on expenditure projection and revenue as well apart from expenditure such as the information on GDP growth for next year. Even the advanced estimate that comes in February has its own limitations. How much weightage should be given to the information which is available one quarter before the financial year is crucial. All the revenue projections made in past few years have been off track. Most of the revenues and expenditure comes in the last quarter of the year. Given that kind of situation, how revenue and expenditure will be tracked has to be seen.

CSO can provide the basic information on the kind of economic growth being projected for next year. Nominal growth rate is what is considered which has two components- real GDP growth and inflation estimate. Inflation estimates are provided by Economic Division of the Finance Ministry. Real GDP growth rate projection is done by CSO. Therefore, Economic Division might have a greater challenge to provide a nominal growth rate on which the deficit ratios for the next year will be fixed. Indirect taxes take immediate effect in a budget which affects inflation and this year GST might roll out from 1^st April. Revised estimates number on the expenditure side has to be obtained. These problems might be seen in the next year by the advancement of the budget.

 

Merger of General budget and railway budget

The almost century old practice of presenting a separate Railway Budget ahead of the General Budget is to be dispensed with from the next financial year (2017-18) and the Railway Budget will be merged with the General Budget. The proposal has been cleared by the Union Cabinet.

 

Reasons for the aforementioned step:

• The decision to present a separate railway budget was a mandate of the colonial era policy of British government on the basis of report by Acworth Committee. In 1924, when the first Railways budget was presented, the Railways entailed more funds than India’s expenditure on all other aspects of administration combined. Moreover, it was a tool to protect the foreign investment, particularly British investment in railways in India
• Also, a separate Railway Budget is being dispensed with so that the Indian Railways need not pay the annual dividend to the Government of India on the budgetary support given each year, saving the financially stressed Railways about Rs.10,000 crore annually

• In 1924, when the first Railway Budget was presented, the Railways entailed more funds than India’s expenditure on all other aspects of administration combined. So it made sense to present a separate Budget. That equation changed long ago, and now the Railways’ outlay is just 6 per cent of the total expenditure proposed in the Union Budget for this year. In fact, revenues from the domestic aviation business are more than the Railways’ traffic earnings. Nearly Rs.2.5 lakh crore has been planned this year as defence expenditure, but it found little mention in the Finance Minister’s Budget speech. Yet, the ritual of the Rail Budget has continued even as the economy opened up over the past 25 years. A key reason that it lingered so long is India’s fractured polity and the tendency of coalition partners to demand Railways as a juicy portfolio with its possibilities for populist posturing and patronage. Over the years, the Budget has been misused by politicians as a populist platform to enhance their own image
• Railway Ministers will no longer need to conjure up fancy and often regurgitated promises about new, improved services for passengers without charging them the operational costs of reaching their destination. The pressure to hold commuter fares has skewed the Railways’ freight rates, year after year. Indeed, the change is already being felt as tweaking of tariffs outside the Budget has begun. Other instances are changes in coal freight and the introduction of flexible pricing on premium passenger trains.
• No other Ministry has a separate budget and the practice exists in no other country today.
• The NITI Aayog had suggested this merger as the Railway budget was being used to dole out favours by way of new trains and projects.
• Bibek Debroy Committee has recommended discontinuance of a separate Rail Budget and it is part of the Prime Minister’s reform programme
• Railway Minister Suresh Prabhu has said that the merger of rail and general budgets will not impact the functional autonomy of the railways but help in enhancing capital expenditure. It would help the Railways raise extra capital expenditure that would allow them to enhance connectivity in the country and boost economic growth.

 

Arguments against the merger:

• One of the more publicized reasons for the merger is that it will free the Railways of the obligation of paying the annual dividend, as mentioned earlier. This is only partly true. The dividend is paid not only on the budgetary support extended during a year but also on the total “capital at charge” which includes the gross budgetary support (GBS) of previous years. By this merger, a “loan-in-perpetuity” is converted to a grant. Thus it is akin to a loan waiver, and loan waivers are granted to individuals or institutions in extreme financial distress
• Budget is not merely a statement of allotment of funds to various projects and programmes, unlike other ministries, but comprises a fairly detailed performance review, physical and financial, of the previous year and prospects for the current Budget year. A separate post-Budget discussion in Parliament on the Railways, as indicated by the Finance Minister, is no substitute, as the focus most likely will be on allotments to various projects, not on financial performance
• Railways is unlike any other Central ministry in size and scope: It is an operational ministry; it earns as well as spends, unlike other ministries that only spend. Its gross earnings (Rs.1.68 lakh crore in 2015-16) are among the highest for any Indian organisation, public or private; it has a staff strength (13.2 lakh) that exceeds that of the Indian Army; it fully meets the pension liabilities of its retired employees (13.8 lakh) out of its own earnings unlike other ministries; it follows an accounting practice, though not up to the standards of a purely commercial establishment, that has a number of features of a commercially-run organisation. So, if the Railways is to be treated like other ministries, the question that crops up is whether the government would fund the pension liabilities which are estimated to be about Rs.45,500 crore in 2016-17
• Bibek Debroy committee recommendation to go for merger of railways budget with general budget was accompanied with a slew of other reform measures such as complete overhaul of the project financing architecture of the Railways involving ruthless weeding out of unviable/long-pending projects; comprehensive accounting reforms; separation of infrastructure and operations; and setting up of a rail regulatory authority. Pending these steps, each of which is a major project in itself, the move to give a hasty send-off to the Railway Budget is perplexing

 

 

Conclusion: 

The Centre needs to now seriously consider setting up an independent tariff regulator to depoliticise fares. New lines and trains should be determined by economic viability rather than the constituencies covered. Initiatives such as demand-driven clone trains must be deployed to boost earnings, and the Rs.37,000-crore tab on social obligations, including concessional ticketing, must be borne by the exchequer. The Railways’ accounts need to be cleaned up and made bankable. Scrapping the Rail Budget is a good starting point to fix the fading utility. Bringing it back safely on track will take a lot more doing, and undoing.

 

Budget advancement:

The objective behind this move is to have the Budget constitutionally approved by Parliament and assented to by the President, and all allocations at different tiers disseminated to budget-holders, before the financial year begins on April 1.

• The proposal for a change in the budget presentation date was first mooted by some of the government’s senior most bureaucrats as part of a ‘Transforming India’ initiative in January 2016.

Presenting the budget earlier comes with both advantages and disadvantages.

Advantages:

• In the existing system, the Lok Sabha passes a vote on account for the April-June quarter, under which departments are provided a sixth of their total allocation for the year. This is done by March. The Finance Bill is not passed before late April or early May. If the Budget is read in January and passed by February-March, it would enable the government to do away with a vote on account for the first three months of a financial year.
• Retired and serving officials say the biggest plus would be that the Finance Bill, incorporating the Budget proposals, could be passed by February or March. So, government departments, agencies and state-owned companies would know their allocations right from April 1, when the financial year begins.
• It would also help the private sector to anticipate government procurement trends and evolve their business plans. And, civil society could deliberate on and give feedback in time for the parliamentary discussions.

 

Disadvantages:

• One big disadvantage of advancing the Budget preparations is lack of comprehensive revenue and expenditure data. Currently, work on the Budget begins in earnest by December. By the time it is finalised in mid-February, data on revenue collections and expenditure trends is available for the first nine months of the financial year, i.e April-December. Based on which, projections for the full year can be made.
• To read the Budget in January, the centre will have to start preparing it by early October. To go by less than six months of data and making projections for the full year and the next year, based on such an incomplete picture, will be an impossible task.
• Advancing the Budget dates would be fraught with practical difficulties. Effective Budget planning also depends on the monsoon forecasts for the coming year, making the advancing the whole exercise even more difficult.
• Besides, whether the chambers of Parliament and its standing committees will get adequate time to deliberate on the budget is a moot point. The standing committees of Parliament, whose charter is to examine the justification of the ministry-wise allocations and funding needs of concomitant programmes included in the Budget, undertake their scrutiny during a two to three-week gap within the budget session period, when the houses are adjourned. This scrutiny is an essential element in the parliamentary budget approval system.

 

Way ahead:

Advancing the presentation of the Budget, so as to allow Parliament to vote on tax and spending proposals before the beginning of the new financial year on April 1, is a good idea. It would do away with the need for a vote on account and allow new direct tax measures to have a full year’s play. Members of Parliament now will have to work hard over two months to vet Budget proposals, for this to work.

 

Conclusion:

These reforms make sense, but Budget reform has to go further, to incorporate a multi-year time horizon and shift to outcome-linked expenditure management, as had been recommended by a committee headed by C Rangarajan in 2011.

 

Gender Budgeting

(link to mindmap: https://www.insightsonindia.com/2021/03/22/mindmap-gender-budgeting/)