Union Budget 2016-17 : IASbaba’s Daily Current Affairs -1st March 2016

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UNION BUDGET 2016-17

IASbaba’s Daily Current Affairs – 1st March, 2016

ECONOMICS

TOPIC:  General Studies 3

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Government Budgeting.

NOTE: This article is compilation of information from 5 different National Newspapers’

All you need to know about – ‘Budget 2016-2017’

Background:

• The Union Budget 2016 has been crafted under the most extraordinarily challenging economic environments India has seen.
• The external environment is both uncertain and volatile, the inherited logjam caused by stressed banks and the stressed private sector has yet to be broken, poor monsoons have caused immense rural distress, and demand, a central pillar of growth, has been tepid. Many of the measures needed to face up to this challenge are not, strictly speaking, budgetary.
• It has a much greater sense of purpose and direction. It signals macroeconomic credibility by adhering to fiscal deficit targets.
• The ambitious provision of LPG connections to all is quite revolutionary, for its health, gender justice and aspirational effects, though its political-economy effects on the subsidy bill will become clear over the next few years.
• It goes to great lengths to reverse the government’s pro-corporate image

Budget Basics:

1. What is a Budget ?

• Budget is Estimate of inflows and outflows of the Government during a year.
• Budget is presented for the ensuing Financial year.

2. What does Budget consist of?

• Every budget consist of Actual figures for preceding years, Budget and revised figures for the current year, Budget estimates for the following years
• So the Budget presented in March 2001 will be estimate of Inflows and outflows of the Funds for the period beginning from 1st April 2001 to 31st March 2002.

3. When is Budget presented?

• Budget is to be presented in Lok Sabha on a day as the President directs. By convention, the Budget is presented in Parliament on the last working day of February.

4. Who draws the timetable for Budget?

• Timetable is drawn by the Business Advisory Committee (BAC) of Parliament. In the schedule drawn up by the BAC, there is a fixed period of discussion for each ministry.

5. Who has the responsibility for Budget?

• Budget Division in the Finance Ministry has the overall responsibility. It prepares the budget on basis of proposal received from various departments and ministries and the availability of funds. However, final approval is from the Prime Minister.

6. What if Budget is not approved by 1st April?

• The Constitution empowers Lok Sabha to grant a Vote-on-Account (Article 116) so that the government can continue with the necessary expenditure into the new fiscal, before the Budget proposals actually get passed after necessary discussions.
• The vote-on-account normally covers the expenditure requirement of the government for two months.

7. Is it compulsory to have budget for every year?

• Yes. Under Article 112 of the Constitution, a Statement of estimated receipts and expenditure of the Union Government has to be laid before the Parliament in respect of every financial year running from 1st April to 31st March. The Receipt and Payments of the Government is categorised in three parts:
• Consolidated Fund. : All the inflows like Tax and other Revenues as well as Loans raised by it form part of this category. All outflow including expenses etc also form part of this Account. For withdrawal from this fund parliament authorisation is required.
• Contingency Fund: It is the money kept at the disposal of the President to meet out any unforeseen expenses. The corpus of the fund is merely Rs.500 Crores.
• Public Account: This category comprises of money raised from various Schemes of the Government like Provident Fund. But this was the technical framework. To put simply it is Annual financial discipline like other corporates prepare Profit and Loss Account and Balance Sheet. However to what disclosure norms the government accounts are subjected to is mystery. We have seldom come across the laid down norms like other balance sheets to disclose the information in a manner prescribed.

8. What is the process of Budget approval?

• The Finance Minister introduces the budget in the Lower House of the Parliament or the Lok Sabha & makes a short speech, giving a overall view of the budget.
• After the presentation of the Budget, Parliament allots some time for a general discussion on the Budget. The finance minister replies at the end of the general discussion. The reply is also of a general nature and no specifics of the Budget are discussed. However, no motion is moved nor voting required at this stage.
• After the finance minister’s reply, Lok Sabha takes up for discussion each ministry’s expenditure proposals, and is known as demand for grants. The demands for grants presented by each ministry are taken up by the House.
• After, the prescribed period for the discussion on demands for grants is over, the Speaker applies the `guillotine’, and all the outstanding demands for grants, whether discussed or not, are put to vote at once. Only the Lower House is entitled to vote.
• Appropriation Bill is introduced in the Lok Sabha after it has passed all demands for grants relating to all ministries. This is to authorise the government to draw funds from the Consolidated Fund of India. Once this Bill is passed, it becomes the Appropriation Act and is certified as a Money Bill.
• After passing of Appropriation Bill, the Finance Bill is introduced and it incorporates all taxation proposals. At this stage, amendments for tax proposal can be moved. After the passing of this Bill, it enters the statute as the Finance Act. Thus the final Budget gets approved.

Budget 2016-2017: Snapshot

Taxation:

• The principal tax rates have reached stability. The rates of direct taxes are comparable to international rates (except for personal tax brackets, which vary across countries on account of differing price levels); and indirect taxes are in a long process of replacement by the Goods and Services Tax, which is stuck in disagreements between States.
• For 2016-17, the Finance Minister has promised to bring this ratio down to 3.5 per cent primarily through a 20 per cent increase in indirect taxes and as much as 39 per cent in excise duties , even as the corporate taxes go down.
• A rise in indirect taxes as opposed to direct taxes is a clear case of regressive taxation because both the poor and the rich pay the same tax per unit of purchase of an item. That this has been the pattern of revenue mobilization of this and the previous government goes to show their concern for the ‘aam aadmi’.
• There is another problem an increase in indirect taxes brings to the table: inflation. The fact that the economy is not witnessing high inflation today is not because of any prudent monetary policy but because the oil prices are at a real low — that might not be the permanent state of affairs in the coming year. If the oil prices go up, with these hiked indirect tax rates, inflation might hit through the roof.
• The odd changes in taxation provisions for future provident fund withdrawals make it a budget hostile to the middle class.
• The salaried class is likely to feel hard done by a move to tax 60 per cent of the corpus created from contributions to the Employees’ Provident Fund starting April 1 as part of a move to create a ‘pensioned society’.

Addressing the slowdown

A Budget in such difficult times should address the problem of a slowdown squarely. It can do it in two ways:

• Directly by injecting demand into the economy
• Indirectly by creating opportunities for other sources of demand to pick up.

Big business and the media want the government to do the latter and not the former, whereas a pro-people government will push for the first. The strange thing about this Budget is that it does neither.

An economy grows based on demand for its goods and services. There are broadly five sources of demand in an economy:

• Consumption by the poor,
• Consumption by the rich,
• Private investment,
• Fiscal deficit and
• Trade surplus.

Contrary to popular belief, the indirect effects of a Budget are positively related to the direct effects of it. So, while a rise in the fiscal deficit directly increases the profits as well as wages in the economy, thereby pushing demand up, it indirectly increases private investment if ‘business sentiments’ are low otherwise.

Fiscal consolidation quick-fixes:

The Finance Minister has maintained that he will adhere to the ‘fiscal consolidation’ map, which means bringing down further the fiscal deficit as a proportion of GDP.

• Fiscal deficit is essentially government expenditure minus its tax revenue. So, bringing it down means a fall in government expenditure and/or a rise in tax revenue as a proportion of GDP.
• Budget for 2016-17 sticks to the commitment made under the Fiscal Responsibility and Budget Management Act by keeping the fiscal deficit target at 3.5% of GDP.
• This problem becomes doubly difficult if the estimate of the GDP itself is inflated, which is what has happened this year.
• The revised estimate of the GDP for 2015-16 is less than the Budget estimate by about Rs. 5,41,753 crore. If the denominator itself is falling in a ratio, the numerator has to fall further for the ratio to decrease.
• The way they have managed to keep the ratio to 3.9 per cent despite such a fall in the estimated GDP is through increased collection in the indirect taxes and excise duties even as the non-plan expenditure has declined.
• Such a strict belt-tightening shows that the long wait for the ‘achche din’ is not over. It requires the poor to pay through their nose through increased indirect taxes while the cushion of the social sector is consistently taken away from them, and all of this is being done in the name of creating ‘business sentiments’, which themselves are ever elusive.
• Good to see that unlike between 2012-13 and 2014-15, fiscal consolidation in 2015-16 is not being achieved by paring capital spending but through subsidy reduction afforded by sharply lower crude prices. This has improved the spending mix of the government with a tilt towards infrastructure.

What are the structural factors aiding the fiscal math?

• Improved coverage and higher tax on services.
• In the current fiscal, service tax collections were marginally higher than budgeted despite slowing growth in the services sector.

Pros of the Budget:

• The budget ticks the boxes on fiscal, revenue and primary deficit parameters. It has done better on the revenue deficit target (2.5% vs 2.8%) and effective revenue deficit target (1.5% vs 2%). Not only that, it projects an accelerated decline in the effective revenue deficit, reaching 0% by 2018-19.
• True, there has been some deviation from the goals envisaged under the Fiscal Responsibility and Budget Management Act to support investment activity. But the overall direction has been the correct one of consolidation: fiscal deficit as a percentage of gross domestic product (GDP) narrowed to 3.9% in 2015-16 from 4.9% in 2012-13, and revenue deficit as a percentage of GDP has come down to 2.5% from 3.6%.
• The increased outlay on infrastructure, particularly the Pradhan Mantri Gram Sadak Yojana. Rural connectivity is great for growth; and power and logistics are key to India’s competitiveness. Symbolically, this budget speaks to the government’s potential strengths: Power, infrastructure, railways, and petroleum and gas.
• To be sure, these have helped offset the shortfall in direct tax collections because of weak manufacturing activity, poor corporate performance, increased food subsidy, and lower-than-anticipated nominal growth. Nominal GDP growth was 8.6% in fiscal 2016 against 11.5% assumed in the budget.
• But the most pleasant surprise is the direction in which we want to go on the environment. An additional cess on coal and taxes on cars are signals of a long-overdue resolve that the environment is no longer a luxury. There are small administrative victories like the abolition of the distinction between plan and non-plan expenditure.
• Farm sector: Nearly 65 per cent of small farmers in this country depend on rain-fed irrigation. More than 75 per cent of Indian farmers are not covered by crop insurance. Since shocks, such as bad weather or bad health, affect the poor significantly more than the average citizen in the country, allocations provided for irrigation, crop insurance and health insurance will significantly impact the rural population’s ability to withstand negative economic shocks.
• In particular, farm insurance, health insurance and cooking gas connections for BPL (below poverty line) families are superb initiatives that will focus government spending on those sections of the population that need the government’s attention the most — the poor and the downtrodden.
• Fertilizer and electricity subsidies together amount to 1.6 per cent of the GDP, much of which leaks abroad or to non-agricultural uses, or goes to inefficient producers, or to firms given the exclusive privilege to import. Rs 40,000 crore of subsidies are provided in the electricity sector.
• But precisely for these reasons it has proved politically impossible to close the inefficient firms or eliminate the canalization of imports. By providing a legal framework for the Aadhaar platform, the “JAM trinity” of Jan Dhan, Aadhaar and mobile would be strengthened considerably.
• This will help to rationalize the regime of subsidies and lead to better targeting. Again, better targeting of subsidies to deserving beneficiaries would help to foster domestic demand, particularly in the rural sector.
• Another key measure in the budget relates to providing a legal framework for the Aadhaar platform, which will help to ensure that subsidies are directed to the needy. More than Rs 40,000 crore of subsidies provided for fertilizers.
• As for crude prices, they are expected to average $10 per barrel lower next fiscal compared with $45 in the current one. This means the transitory benefit of lower oil prices will continue and afford an offset to the extra spending being made based on the One Rank One Pension and Seventh Pay Commission recommendations. Increased excise duty on oil will benefit the next fiscal year more, because these came into effect only from November 2015.
• On the financial sector front, some of the measures are welcome, though most of them are along expected lines — such as the recapitalization of banks (where the allocation of Rs 25,000 crore may be inadequate), the strengthening of asset reconstruction companies, a dispute resolution regime for financial firms and enabling the setting up of a Monetary Policy Committee to set interest rates.
• Education fares even worse. While there has been a slight increase in the allocation in absolute terms, the budgetary allocation for education has declined, both as a percentage of GDP and as a percentage of the total Budget. It was 0.5 per cent of GDP and 3.8 per cent of the revenue expenditure for 2015-16, and it is down to 0.48 per cent of GDP and 3.7 per cent of the Budget estimates this year
• Outlay of Rs.19,000 crore that the Central government will spend this year on rural roads as part of its goal to ensure that all habitations are connected by 2019,
• Push to achieve universal village electrification in the next two years. Between improved road connectivity and the availability of electricity, the potential is significant for a multiplier effect on the rural economy and improvements to the quality of life for residents of the hinterland.

Social sector:

• Sarva Shiksha Abhiyan budget increased by 2% from 2015-16 (revised estimates) while the Mid-Day Meal scheme budget increased by 5%.
• The Budget proposes the introduction of a health insurance scheme that would provide up to Rs.1 lakh as coverage against hospitalization costs for economically weak households, with senior citizens above the age of 60 eligible for another Rs.30,000 in top-up cover.
• The National Health Mission budget increased by 2%, while the Mahatma Gandhi National Rural Employment Guarantee Scheme, which according to the finance minister had received its highest allocation yet in this budget, increased by 4% from the previous years.
• Swachh Bharat Mission (SBM), the flagship programme on rural sanitation, saw one of the biggest jumps at 38%. However, this jump is in part due to lower revised estimates.
• Health : the big jumps in allocation are in health insurance—the old Rashtriya Swasthya Bima Yojana has been renamed and has received a 152% hike (Rs.900 crore
• The allocation for the National Social Assistance Programme (for the aged, disabled, widows, the Annapurna Scheme) has gone up only marginally, from Rs.9,000 crore last year to Rs.9,500 crore.
• The other, equally laudable, initiative is to provide all families below the poverty line with cooking gas. This can afford those in underprivileged homes the dignity of a quicker and less harmful way to keep their kitchen fires running.

Cons of the Budget:

• As for the farm sector, whose welfare is purportedly the primary focus of this Budget, the allocation of Rs.35,000 crore is woefully inadequate given the drought-related distress that farmers have faced for consecutive years. It covers only 20 per cent of farmers, and there has been no effort to bring a greater number of farmers into the net. It’s a good sign that small and marginal farmers find a mention, but there was no mention of the landless farmer
• Weak growth in advanced and emerging countries has taken its toll on India’s exports. As imports have also declined, principally on account of reduced prices of crude oil for which the country is heavily dependent on imports, trade and current account deficits continue to be moderate.
• Growth in agriculture has slackened due to two successive years of less-than-normal monsoon rains. Saving and investment rates are showing hardly any signs of revival. The rupee has depreciated vis-a-vis the US dollar, like most other currencies in the world, although less so in magnitude… Given the prevalent overall macroeconomic scenario, and assuming a normal level of rains in 2016-17, it would not be unreasonable to conclude that the Indian economy is all set to register growth in excess of 7 per cent for the third year in succession
• Another disappointment is that the government has made a very tentative beginning in removing corporate tax exemptions and lowering the tax rate. The measures announced reflect revenue-consciousness rather than growth consciousness
• Even the two interesting initiatives announced by the Finance Minister – health cover of Rs.1 lakh per family and a National Dialysis Service Programme — betray an anxiety to help the private sector (through the PPP framework) rather than the Indian patient.
• At the same time, two long-standing demands have been ignored: universalizing social pension for those over 55 years old, and increasing the minimum pension amount from the abysmal Rs.300 per month to Rs.500 per month
• While the health budget has seen a marginal increase of 9-10 per cent, it is way below the 30-40 per cent increase needed to keep India on course for a health allocation of 2 per cent of GDP in the medium term.
• The ‘Vikas Ka Budget’ flyer on the new dynamic social sector included schemes like the LPG connection, the health insurance program, the Stand Up India scheme, the Jan Annusuddhi Yojana, but none of this can be pieced together into a coherent narrative for what the government envisaged for social policy in India.
• Many commentators have picked up on the important decision in the budget to end the distinction between Plan and non-Plan expenditure. But an equally critical and far-reaching change is in the decision to adopt the NITI Aayog recommendation to streamline centrally sponsored schemes to 30, introduce a sunset clause and, above all, undertake an outcome review.
• The Direct Taxes Code seems to have been buried permanently. There was only a lukewarm reference to the GST bills, but there was no promise of accommodating the legitimate criticism of the Opposition.
• There is nothing in the budget for the urban middle classes, even in the form of a symbolic raising of income tax exemption slabs that has been a feature of every single budget in recent years.
• The worrying aspect in the current budget is about the banking sector. The Rs 25,000 crore provided for the capitalization of public-sector banks in this financial year is woefully inadequate.
• In the next five years, Public sector banks (PSBs) will require several multiples of this amount to be able to meet the capital requirements of Basel III.
• Another key announcement that is worrisome in this context relates to the consolidation of PSBs. As we have witnessed with the merger of Indian Airlines and Air India, bunching up two large and struggling PSUs only serves to exacerbate problems for the merged entity. Consolidating PSBs without first empowering the boards of these banks would create more costs for the financial system than benefits.

Iconic barometer

• Coming finally to that iconic barometer of a government’s welfare intentions, the MGNREGA, the budgetary allocation of Rs.38,500 crore, while marginally higher than last year, is way below the amount needed (estimated to be at least Rs.50,000 crore) to keep this scheme going in any meaningful fashion.
• So be it education, health, pensions for the socially vulnerable, distressed farmers, or MGNREGA, the 2016 Union Budget has nothing radical to offer.

Way ahead :

• Global economy is in a serious crisis and does not seem to be coming out of it any time soon. With international scope limited for exports, therefore, what was required of this Budget was a direction to the economy in terms of generating demand domestically, which in turn would generate employment for the fast-growing unemployed youth population of this country. This Budget does little or nothing on that count.
• Government spending will have a critical role in improving both social and physical infrastructure, and provision of subsidies to the needy. There is certainly scope for the restructuring of government expenditure towards investment and better targeting subsidies using the Aadhaar platform.
• Good to see the announcements on the name change from disinvestment to Investment and Public Asset Management and the abolition of the distinction between Plan and Non-plan expenditure. Also welcome is the emphasis on sunset date and outcome review on new schemes.
• Given the fact that the global economy is tottering, there is a definite need to foster domestic demand to accelerate economic growth. At the same time, it is politically and economically imperative that jobs are created in the formal sector to avoid the demographic dividend becoming a demographic liability. Given these twin objectives for the country, this year’s budget to be an admirable exercise.
• While there are concerns regarding the budget’s ill effects on the banking sector, it is an excellent budget because it helps to foster rural demand and attempts to fix risks in the rural economy.
• In the final analysis, it is a thoughtful, prudent and careful budget. But it is hard to avoid the impression that it has been more careful than it needed to be, especially in the critical areas of bank recapitalization and corporate tax reforms.

Connecting the dots:

• Could this budget be the first step towards developing an outcome-based financing model for social policy in India? Comment.