DR. WAQUAR ANWAR analyses the Union Budget 2016-17 tabled on 29 February, finds the vicious circle going on over the years and calls for structural changes in Indian economy.
A National Budget comprises quantitative statements laced with political deliberations. Budget documents, that are quantitative in nature, follow a budget speech of the Finance Minister, who has to achieve political ends thereby. Budget 2016-17 tabled in the Parliament on 29 February, 2016, was no exception and the political overtone, as usual, was easy to comprehend. Particularly the effort to regain the lost ground of rural India and to change the makeup from that of the suited-booted gentlemen to the humble villagers was obvious.
One may cite both positive and negative traits of the budget. However, one thing is clear that the Finance Minister was short of addressing the expectations of, if not belied, almost all the sections of the society. It was expected that this year when the political administration is half way through its term in office the FM would be bold enough to address the basic concerns of the economy like decline in export, downward trend in production, sliding down of the value money, and failure to create sufficient employment, etc. No provision of the budget can be linked to any of the chronic bad symptoms of the Indian economy.
All is not unwell in the Indian economy. It has several healthy signs including the fact that overwhelming portion of debt is in domestic front with negligible foreign borrowing. The availability of such domestic savings may further be tapped in any future fund planning with suitable schemes. Right now we do not find any such effort.
DOING AWAY WITH PLAN BUDGET
In continuation of the earlier decision to scrap Planning Commission it has now been decided to do away with the ‘Plan’ and ‘Non-Plan’ classifications in the budget. This is understandable. The Russian legacy of Plan economy is being erased. There is no problem if the scheme in totality is implemented. The Nitee-Ayog, in this transition period, is toothless and the required SUNSET provisions for projects have not been ushered in yet. Half-baked moves do not serve much and may cause unintended harms.
BIRTH OF CENTENARIES
Yet two birth centenaries are to be celebrated with public funds. A sum of Rs. 100 crores has been earmarked for the birth centenary of Pandit Deendayal Upadhyay and similar amount has been earmarked for that of Guru Gobind Singh. The political positioning and the coming Punjab elections may be read between the lines.
MGNREGA ADOPTED
The flagship programme of the erstwhile ‘Congress Culture,’ which the present regime once criticised in strong terms, has rightly been embraced. Earlier, the Government celebrated the completion of one decade of the scheme. This is a case of political maturity and one should hope that this phenomenon of acting in right direction, regardless of past rhetoric, will be noticed in other cases too. However, the concern expressed by experts regarding paucity of fund for the scheme needs to be looked into and addressed properly so that, along with payment of past dues, the idea of providing 100 days of work per year is not hit below the belt.
This is a unique programme in the nature of right-to-work that is not found in any other country and so the world is watching. Its success will speak aloud about the health of Indian economy. There is no harm if the services of Mr. Raghuvansh Prasad Singh, the architect of the scheme are also remembered and his suggestions are sought. Can one think of this level of non-partisan accommodation in the present charged political atmosphere? Perhaps, it is too much to expect!
RE-CAPITALISATION OF BANKS
The issue of Non-Performing Assets (NPA), rechristened by the FM as Stressed Assets, has been described in the budget and the measure noted thereby is to provide Rs.25000 crores for the banks. The amount is too little compared to the quantum of NPA and so would serve no purpose. Further, the issue does not relate to liquidity of banks but to their basic performance. Obviously, the defaulters are not small fries but are big fishes. Catching hold of the existing defaulters is the solution that will deter future bad practices. The need of a simple but stringent bankruptcy and insolvency law that can reach out to the personal assets of the wilful nonpayer class beyond those mortgaged to banks and financial institutions. Making a statute for such unlimited liability and implementing the same requires a political will. One hopes that the Government in office musters that courage.
Another lesson from this NPA dilemma is the fact that big loan takers are mostly defaulters. This phenomenon is not that serious in the microfinance sector. A scheme for microfinance with all its four segments of micro deposit, micro credit, micro enterprise and micro insurance as a window in rural branches of existing banks may be considered.
[To rename NPA as Stressed Assets makes no difference. It is like calling a Disabled Person a Differently-Abled Person.]
RURAL THRUST
It is a welcome move that the rural sector and panchayats have merited the attention of Mr. Arun Jaitley. The conceptual problem with the present government is that it aims at rural areas converted to urban areas, so it talks about Rurban model. The need is simpler and basic. Let villages remain villages and provide them with basic facilities of primary health, education and sanitation along with road links and electricity, preferably through viable solar power mode. This much would suffice to check the present migration of population from villages to towns and encourage a number of persons to go back to their roots. Let urban remain urban and do not try to make it Rurban or mini-towns.
SERVICE TAX
Increasing revenue through service tax has become a norm in every budget. This time the increase from 14.5% to 15% is on the pretext of a cess. The problem with cess is that it is always an earmarked event and its share is not provided for state governments. This goes against the federal structures we are following and it needs to be discouraged.
INSURANCE, FDI AND PPP MODE
The role of insurance is scheduled to be increased in a big way as now it is being extended to the farm sector. In all probability this will be organised in PPP mode, if not totally in private. Further the opening up of insurance through FDI route is a possibility with the logic that the required infrastructure and technology, besides initial investment, are hard to locate locally. The scheme on the face of it looks good but one aspect should not be ignored that insurance increased up to the cost of living and the ultimate loser is the aam aadmi. The case of medical services is a proof that its costs went sky-rise on account of this particular factor.
TAXING PROVIDENT FUND
There is every possibility that the proposal of tax on withdrawal from provident fund would be rolled back. The idea of taxing retirement benefits could not find any taker even from the committed cadre of the ruling party. Any face saving device is expected. The FM and his advisors failed in gauging the sensitivity involved in the matter.
STOCK MARKET BEHAVIOUR
Everyone is not unhappy with the budget. There appears to be at least one taker of the budget and that is the stock market. The market was falling on the day the budget was being presented. However, it shot up by the evening in an unprecedented manner. The other day it opened even higher. One possible justification for the strange behaviour of the market was that the announcement of the FM that the government will not increase its borrowing meant higher availability of loan fund in banks for private utilisation that may lead to lowering of interest rate by the RBI. Another explanation is that it was the handiwork of any bull-work – a guided tour.
THE STATUS OF INDIAN ECONOMY
The balancing act that an FM has to do in making a budget is like walking on a tight rope. He has little scope for manoeuvring as his hands are tied. One can imagine the dilemma of the present FM. He had to address the prospective constituency of his party, the rural India, taking clue from the Kissan rallies his PM was addressing in order to make good the debacle in Bihar. Further, the FM had to include the cost of the impact of the new pay commission. He did not increase borrowing, did not provide extra fund for Defence, did not increase the Economic Sector and did some shrinking of Social Sector. Last year the cut in Social Sector was higher as compared to that this year. And that is all he could do in the given circumstances because other commitments have to be met without any scope of tinkering.
Tables presented with this write up depict the tight situation. Out of the total outlay of Rs. 1978 thousand crores of Rupees, 25% have to be paid as interest on past borrowings, 14% as instalments of past borrowings falling due for payment during the year, 15% for defence and police services (including both payments of Revenue and Capital natures), 13% on subsidies, 4% on social and economic services and the rest 29% on general services of administrative nature.
In order to meet the commitments of the above mentioned 1978 thousand crores of Rupees the FM had only 53% income from tax revenues and 20% from non-tax revenues like grant, profits, dividends, interests on loan provided. The balance shortfall, called fiscal deficit have to be met through borrowings and other liabilities.
Thus scope for any worthwhile planning in the present structure of income and expenditure is limited. Unless drastic structural changes are made, no leap forward can be dreamed – and if dreamed, it cannot be realised.
DEBT SERVICING
We have computed debt to be served in the Budget 2016-17 in a Table presented here. The Table illustrates that repayment of debt (i.e. instalments of loan becoming due for payment) in the year is Rs. 284 thousand crores, whereas Rs. 493 thousand crores has to be paid as interest. Thus debt to be served comes to Rs. 777 thousand crores. Revenue receipts available, from tax and non-tax income, is Rs. 1377 thousand crores. Debt servicing is 56% of this income. Even if we add capital receipts, excluding fresh borrowings, the debt servicing would devour 54% slice.
The severity of the problem can be understood by one simple fact that as against the fresh borrowing of Rs. 534 thousand crores, the interest to be paid for earlier borrowing is Rs. 493 thousand crores. In other words, it can be said that 92% of the fresh loans are utilised for payment of interest on past loans. The burden of payment of yearly instalments of loans is over and above that. With fresh borrowing the size of loan becomes bigger and interest payment would inflate further. Thus the vicious circle goes on over the years.
This calls for structural changes in economy, a change in favour of financing based on justice and equity, discouraging the existing interest based economy.
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