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The Big Picture – Merging Budgets: What are the Benefits?

  • October 26, 2016
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Merging Budgets: What are the Benefits?

TOPIC:

General Studies 2

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

General Studies 3

  • Government Budgeting.

 

The proposed reforms

The decades old practice of presenting two budgets- railway and the general budget, will come to an end when two budgets will be merged from next year onwards. The decision by the cabinet also saw the re-schedule of parliament session and to advance the date of presentation of general budget which was traditionally presented at the last day of February. Another change is doing away with plan and non-plan expenditure.

History of rail budget

A committee was set up under chairmanship of William Acworth which submitted a report in 1924. The report said that

  1. Railway be under state control
  2. Railway budget separated from general budget

Reason– Railways require a certain autonomy, flexibility in the administration. Even at that time it was fairly big organisation which has now grown many times.

Merging of budgets

These reforms were being considered for long. It will give multiple benefits to the functioning of the government by improving the efficiency of expenditure that government is incurring on infrastructure sectors and other sectors.

 

Earlier, decision making was politicised, especially the fares. Normally the taxation has to be approved by the Parliament but the user charges did not require parliament approval. However, since railways were presenting their own budget, they had to present the revenue and expenditure part to the parliament. This brought forward the rail fares which became a tool of votebank politics and hardly the fares were increase due to populist measures.

Now, the reforms will be advantageous if two things are taken care of:

  1. Financial autonomy of railways is preserved.

The railways work round the clock and throughout the year. Decisions have to be taken immediately on many things. Thus, Railways had lot of power when the finances were under the control of railways. They could use the funds from one project to another which was more urgent and progressive. However, if all this will be available or not is still a question.

Earlier, there have been powers which were misused by people. The railway minister worked under tremendous pressure for railway budget as scores of MPs, MLAs and CMs met and pestered the minister for favouring their constituency. Also, the minister also had his own constituency. So, lot of lobbying was done internally.

  1. Railway gets required help from the exchequer from progressing its projects.

Right now, railway gets GBS- Gross Budgetary Support. It was 40000 crore last year which now needs to be now increased. However, there are talks that GBS may go down as dividend of around 10000 crore is not going to be taken. In such case, there will be no added benefit to railways. The purpose of the merger is that railway develops faster. If it has to again cry for money, progress will not be as expected.

Difference made to railways– There should be result in improvement of railway system, the development of railways should accelerate and the projects which are languishing for years should be completed quickly.

However, the parliament should have been taken into confidence on this subject. The finance committee of parliament has taken up this subject to study the ramification of the separation of railway budget from general budget. But this is a post mortem as government has already decided. Instead, the government could have waited for finance committee’s report. This would have made parliament’s view available to government before they take the decision.

Plan and no plan expenditure has also been eliminated

The elimination of plan non plan expenditure bifurcation was overdue and it was a part of Rangarajan committee recommendation too. India was getting into a situation where it was able to provide for capital expenditure but not maintenance expenditure on assets created by government.

The origin was that the Finance Commission will devolve funds to the state for capital expenditures which would include maintenance expenditure on past investments. But the maintenance expenditure on new investments cannot be covered by Finance Commission since it does not know how much they would be and hence they were included in the planned expenditure.

It was becoming increasingly meaningless because in key areas like education and health, it is essentially maintenance expenditure as most of the investment stuff has been done. So much of the plan was revenue type expenditure. However, it will also mean that there will be change how centre-state fiscal relation are done.

The states are being made to adopt new thigs- GST is being implemented, the expenditure has to be streamlined as per new definitions. Thus, the states need help to implement the new changes. No mechanism has yet been evolved as how the state governments will adopt to these changes in revenue and expenditure patterns.

Budget making is presenting revenues and expenditure for next year. Though with the proposed change, the expenditure will get sanctions much before April 1, but on the revenue as well as expenditure projection side, it is doubtful about how much information the government would have before going to budget.

The crucial information about the GDP growth for next year is very important. Earlier, there were limitations with February estimates, now it is going one quarter before, before the end of financial year. Hence, how much weightage can be given to the estimate and how much use it can have on revenue projection is dubious. For past 10-15 years, all revenue projection have been off- track. So, given the new changes, it will be important to see how will such early revenue and expenditure projections for next year be effective. However it has been said that Finance Minister can revise the budget estimates before March 31, if the data varies too much.

Another view says that getting advanced GDP numbers should not be such a big challenge because the CSO has said that it can make the basic information available on the kind of economic growth that they projecting for next year.

The nominal growth figure is the key. It has two components- the real GDP growth estimate comes from CSO and the inflation estimate comes from economic division of finance ministry. The economic division will face more critical time in predicting the nominal growth on the basis of which the deficit ratios will be fixed but they are not insurmountable. The bigger challenge is to get revised estimate number on expenditure side. Normally the revised estimate figures are worked out by November by when there is a fair idea of three quarters. However, such challenge will be faced this year only as by next year the CSO will come out with new device and instrument by which new and accurate GDP numbers can be projected.

Another issue will be that indirect taxes take immediate effect in a budget. The moment the budget is advanced, if the budget sees indirect taxes, which this year GST may actually raise.  The upside of this year’s revenue will be very substantial.

Hence, there are three basic challenges-

  • Expenditure side estimate
  • GDP estimate
  • Indirect tax revenue issue

Conclusion

To believe that rail budget is dead is an exaggeration of sorts. The railway minister will not have the pleasure of delivering a speech but the railways budget exercise will be continued and railway board members will have to explain the rationale of budget. It should be seen that the rights that belong to the railways and Rail Tariff Authority and Railway Development Authority of fixing fare and freight should not be seeded to finance ministry.

Now, there wont be railway budget but demand for grants. The scope of demand for grants is limited. The finance ministry should not micromanage the railway finances. Functional autonomy for effective and efficient working of railways is essential.

The trend of de-politicisation of railways has started when the current railway minister did not introduce any new rains. For last 10-15 years, the railway ministers were highly political persons with high political ambitions. Also, new methods like flexi fare as an executive decision have been introduced on trial bases. This will make sure that railways manage to create income for them for their sustenance.

Key words:

Gross Budgetary Support: The Government’s support to the Central plan is called the Gross Budgetary Support. The GBS includes the tax receipts and other sources of revenue raised by the Government.

Nominal Growth: The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP.

Connecting the dots:

  • Is merging of budget expected to bring more freedom for railways? Examine.

 

Related article:

A unified budget- Railway budget to be merged with General budget

Don’t merge rail and general Budgets

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