Friday, July 11, 2014

Budget 2014-2015: New Government but Same Old Budget

High on everyone’s expectation the Modi-Jaitley juggernaut failed not only the aam aadmi but also the markets. What we see in the budget is a strong continuum from where the UPA-2 ship got grounded. The fiscal policy does not change in any significant way, infact there is an amazing continuity. What is different though is that Modi and Jaitley do not have the compulsion of coalition politics stifling the implementation of their policies. Thus the big thing that emerges in the budget is a strong market economy push, including “PPPizing” the public sectors/services to complete the full circle of neo-liberal reforms. A clear push further to the right of centre. To consolidate this in their spirit of “minimum government and maximum governance” they have proposed the setting up of an Expenditure Management Commission “which will look into various aspects of expenditure reforms to be undertaken by the Government” and help “overhaul the subsidy regime, including food and petroleum subsidies, and make it more targeted”.

Thus from the market perspective the increased FDI limits for sectors like Defence and Insurance upto 49 percent equity share has been welcomed, as also the construction sector where FDI norms have been further liberalized. But this was not something that Modi-Jaitley seeded, it has been in the pipeline of the UPA. Manmohan Singh’s government did not have the numbers and support from its coalition partners to push this through and this was labeled by right wing economists as policy paralysis. Further Public Sector Units would be encouraged to seek fresh capital from the markets thus increasing their private stake. No significant changes in tax rates are seen and the tax expenditures (revenue forgone) for the corporate sector also remains intact. This means growth in tax revenue is small so the tax to GDP ratio would continue to stagnate. Most of the increase in revenues comes from non-tax sources, including divestment/disinvestment income. So the markets are generally pleased on this account though they wanted much more.

From the aam aadmi perspective, except for the small hike in the tax exemption limit (which perhaps the UPA budget too would have done if they had presented a regular budget), there is nothing that this budget offers. The social sector’s status quo in terms of the budget allocations is maintained. Infact if we factor in inflation there is a decline in social sector budget commitments. This has largely happened due to expenditure compression. In 2013-14 total expenditure of the Union government was 15. 7 percent of GDP and in the Modi-Jaitley budget it is down to a low of 13.9 percent of the GDP, clearly an effort to rein in the fiscal deficit. This has considerably reduced the fiscal space for raising allocations for key social sector programs and services. Jaitley in his speech implied that a lot was being invested in social sectors and these investments were populist and wasteful, harking back to what Modi in his election campaign had referred to MGNREGA as a dole and a humiliating experience. He emphasized that social sector spending needs to be made more efficient and further increases should happen via the PPP route. Thus for MGNREGA he mentioned that the works have to be directed towards more productive assets and that instead of further investments in MGNREGA resources should be directed towards promoting self-employment initiatives and this would be linked to the multi skill development program called Skill India and to support this a new program called Star Up Village Entrepreneurship program will be launched.

While efficiency may be an issue for social sector programs, as for all other economic and general services programs, the problem is not so much about efficiency as it is about deficiency. It is infact a shame that in India public resources committed to healthcare is only 1.2 percent of GDP, for education 3.5 percent of GDP, social security of unorganized sector workers who constitute over 90 percent of the workforce a mere 0.15 percent of GDP, and the share of the Union government in that being between one-fourth and one-fifth. The global benchmarks are 3 to 5 times higher. No wonder India which is the 3rd largest economy in the World (in PPP GDP terms) has a low HDI rank of 136.

Reviewing the budget allocations another big change one notices is the unusually sharp decline in social sector and rural development allocations in the Union budget. For social services it has declined from Rs. 1382.31 billion to a mere Rs.610.78 billion (mostly SSA, NRHM, water and Housing) and for rural development from Rs 426 billion to Rs.29 billion (mostly MGNREGA ). This would shock even the most rabidly right wing economist and politician but when one looks into the detailed budget document the story is not so shocking. Yes these sectors, if corrected for inflation, have seen a decline in resource commitment. What has changed in this budget (and again this actually happened within the UPA’s interim budget of Feb 2014) is that a very large proportion of the social sector and welfare budgets has been moved from the Union governments direct spend and/or allocation to implementing agencies (what were off-budget schemes like SSA, MGNREGA, NRHM etc..) to the state sector plans; and these get reflected in the Union budget under grants to states and union territories. Thus the Grant in Aid allocations in the Union budget have seen a corresponding jump from Rs. 2400 billion to Rs. 3730 billion and this effectively means that the transfers with respect to these schemes will now reflect in the state government budgets. This would certainly cheer the state governments. What kind of flexibility will be available to states in the use of these funds we will have to wait and see?

What the above could also mean is gradually the Union government abdicating its responsibility towards the social sectors and shifting the onus on the states. This has been apparent in Modispeak as well as in Jaitley’s budget speech and in his presentation of the Economic Survey to Parliament. Both Modi and Jaitley are against an entitlement approach and would like to use the decentralization of fiscal resources as a mechanism to kill this and say that they are instead empowering them. But isn’t entitlement a pre-condition for empowerment? That is why MGNREGA and RTI as also Food security now are relatively strong in sharp contrast to NRHM, SCSP, TSP and other social sector programs which do not have the backing of a legal entitlement.

To conclude, key social sector program budgets whether they are legally entitled programs or not continue to be neglected. As can be seen from the Table below not only the allocations remain low both in terms of total government spending as well as in terms of GDP, but also there seems to be a declining trend in budgetary support for these programs. Health, education, social justice and labour welfare seem to be the worst affected in terms of deficiency of resource allocations. Also for many of the announcements in the budget speech one does not see actual allocations in the budget document. For instance for healthcare Jaitley mentioned that free drugs and diagnostics would be made available in public health facilities but we don’t see any allocation for that in the budget. So the road ahead for social sector budget commitments continues to be difficult and there is every indication that it could get worse under the new government.


Table: Social Sector Allocations 2012-2013 t0 2014-2015 in Union Budget (Rs. Crores)
2012-13 A/c
2013-14 BE
2014-15 BE
percent increase 14-15 over 13-14
percent of GDP 14-15
percent of A/C 12-13
percent of budget 13-14
percent of Budget 14-15
Food Security
86220
91035
115657
27.05
1.00
6.11
5.47
6.56
Drinking Water Sanitation
12969
15266
15265
-0.01
0.13
0.92
0.92
0.87
Health and Family Welfare
25133
33278
34382
3.32
0.30
1.78
2.00
1.95
AYUSH
715
1259
1256
-0.24
0.01
0.05
0.08
0.07
Health Research
720
1008
1018
0.99
0.01
0.05
0.06
0.06
AIDS Control
1316
1785
1771
-0.78
0.02
0.09
0.11
0.10
Housing & Urban Poverty
933
1468
5286
260.08
0.05
0.07
0.09
0.30
School Education & Literacy
45631
52701
54205
2.85
0.47
3.24
3.16
3.07
Higher Education
20423
26750
26865
0.43
0.23
1.45
1.61
1.52
Labour and Employment
3646
5081
5055
-0.51
0.04
0.26
0.31
0.29
Minority Affairs
2174
3531
3724
5.47
0.03
0.15
0.21
0.21
Rural Development
50187
74478
78408
5.28
0.68
3.56
4.47
4.45
Social Justice & Empowerment
4940
6752
6204
-8.12
0.05
0.35
0.41
0.35
Disabilty Affairs
633
0.01
0.00
0.00
0.04
Tribal Affairs
1400
1779
4398
147.22
0.04
0.10
0.11
0.25
Urban Development
8467
10364
19143
84.71
0.17
0.60
0.62
1.09
Women and Child Development
17036
20440
20801
1.77
0.18
1.21
1.23
1.18
Total Social Sectors
281910
346975
394071
13.57
3.41
19.99
20.84
22.35
TOTAL Govt Expenditure
1410367
1665297
1763214
5.88
15.27


GDP
9388800
10472800
11550000
10.29




Source: Union Budget Expenditure Statement Vol 1, Budget 2014-15,  Ministry of Finance, Govt of India, New Delhi 10th July2014; GDP data from Economic Survey 2013-14 (2014-15 projection by author)

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