Jaitley’s Budget Fails to Promise Real Reform
As policy-making in India has evolved into a continuous process, union budgets no longer need to be seen as vehicles for big-bang measures. Nevertheless, expectations stack up around this time of the year—as a legacy of our command-and-control past—making the annual budget a high-decibel act, with varied audience reactions tagging it as anti- or pro-industry/farmers/middle class/poor/ everyone. Given that union budgets are still expected to offer a policy direction, many were convinced that this was the opportune moment for bolder reforms. The underlying belief was that the government had settled in and assessed things from the inside and since the next general elections are four years away, it had a shot at translating its motto of acche din into action.
Apart from the usual announcements on various budgeted expenditures for this year, Finance Minister Arun Jaitley announced a grand vision for 2022, an Amrut Mahotsav in the 75th year of India’s independence. The plans include housing for all with 24-hour power supply, clean drinking water, a toilet, and road and communications connectivity; livelihood for each family; “substantial reduction of poverty”; access to healthcare and education for all; and increase in agricultural productivity along with reasonable price realisation for farmers. Jaitley also identified major challenges in terms of public investment, job creation and sustained spending on national developmental priorities—all against a backdrop of the need for budgetary discipline.
While Jaitley’s intent is noble, the route to the achievement of these goals is still not very clear. There was no matching narrative on how the deeply entrenched inefficiencies in government functioning would be addressed.
A key stumbling block in the country’s developmental agenda has been its legacy of shoddy implementation. It is in this context, that the slogan “per drop more crop” to announce an additional Rs 3000 crore for the Pradhan Mantri Krishi Sinchai Yojana—which aims to bring irrigation water to every village by converging the older schemes of various ministries—rang hollow, since the scheme itself is yet to see the light of day after being announced in the budget last year. The current status of the scheme, according to the implementation budget—one of the documents published along with the Union Budget—is that its concept note and draft guidelines have been circulated to the concerned ministries and departments. Similarly, last year’s budget had also announced a new watershed programme, Neeranchal, the current status of which is:“Cabinet Note seeking approval of Cabinet has been submitted on 29.10.2014.” Only half the funds out of the total Rs 4000 crore budgeted under the National Rural Livelihood Mission were actually utilised last year. The Start-up Village Entrepreneurship Programme for rural youth that was proposed in the last budget is yet to start. All that the implementation budget says about this programme is: “A workshop has been conducted with all the stakeholders at Hyderabad on 26-27 September, 2014. A note is under preparation.” These are of course just a few illustrations of a chronic ailment.
Thus concern should not be directed at the budgeted figures as much as it should be aimed at how the government proposes to spend its money to achieve the desired results. The answer lies in improving both the dynamics of the centre–state relationship, and the functional responsibilities of various ministries such as agriculture and health. The latter is closely dependent on the bureaucratic machinery, which is at the core of government functioning. Correcting all of this poses a tough set of challenges.
For too long, over-centralisation has hindered effective public spending. Formal expenditure responsibilities are constitutionally determined by the union, state and concurrent lists. However, there is an overlapping of jurisdiction in development planning, since the centre has its own national priorities for subjects in the state list, such as health and agriculture. While states fund their expenditure through their own resources and devolution of central tax revenues, neither route has been adequate so far. Therefore states have depended substantially on central funds in the form of Central Assistance for State Plans (CASP), which are unconditional transfers, as well as Centrally Sponsored Schemes (CSS), which come with strings attached. Over the years, the centre has launched a large number of programmes under CSS for national development priority issues that fall under the state list, as this allows it to claim credit and wield influence on state priorities through political bargaining and control how the money is spent.
Such new schemes keep getting announced in annual union budget speeches, but states are deputed the responsibility for both partly funding these from their limited resources and the implementation. Since CSS has grown to become a significant portion of central funding for states, it ties substantial portions of states' budgets to the centre’s programmes and constrains their spending on their own priorities. CSS does not provide adequate flexibility in the physical and financial norms of projects, despite much disparity across states’ demographics, geography, and status of infrastructure and level of economic development. Further, the centre does not release these funds until states commit a part of their budget as matching contributions, even while states cannot use their own share till the centre releases its portion. As CSS allocations change at the centre’s discretion, states’ commitments and targets get affected. Such rigidities have meant states have not been able to adapt the programmes to locally relevant needs and are often unable to use the funds effectively. Economically weaker states also face problems accessing CSS funds due to their limited capacity to provide the counterpart funds.
As the 14th Finance Commission report explains, a majority of states wants freedom from the “tied grants” under CSS—they have been asking that such schemes comprise no more than 15 percent of central assistance. They want several of these to be delinked from the centre and transferred as unconditional funding, and say that the centre should either give them flexibility in implementation if it wants them to partially fund these, or fully fund the schemes of which it wants to retain full control. They have also been asking for a 50 percent share in central tax revenues.
Against this backdrop, one relevant institutional change has begun this year, with the implementation of cooperative federalism as envisaged in the 14th Finance Commission recommendations. The Modi government has accepted some of these suggestions by agreeing to a significantly higher devolution of tax revenues to the states—which has been increased from 32 percent to 42 percent of central taxes.
The budget therefore marks a compositional shift of expenditure responsibility from the centre to the states under key heads, such as rural development, healthcare, education, water and sanitation. This, in the long term, is a shift in the right direction, provided states get more expenditure authority as well.
However, while the 14th Finance Commission had also recommended delinking of 30 of the 66 such schemes, the centre has done so only for 8. For 13 others, it has proposed a revised funding pattern with the states sharing higher fiscal responsibility, but has not indicated the sharing methodology yet. Nor is there any sign that there shall be an increase in authority of states to adapt these programmes to the priorities of their constituents. At the same time, the other form of central assistance to states—CASP—has been reduced. So, for now, the higher devolution of tax revenue has not translated into as big an advantage for states as is being claimed. As Rathin Roy, director of the National Institute of Public Finance and Policy, explained in an article titled “Numbers need to back the politics better,” while the states’ shares of taxes rose by 1.05 percent of the gross domestic product (GDP), they have lost central assistance worth 0.75 percent of the GDP. To be fair, cooperative federalism cannot be achieved overnight, particularly since most states have shown evidence of poor budgeting and expenditure management in the past. However, they have been improving, and it is very likely that states would further reform their functioning if they were to get autonomy over expenditure combined with more authority over revenue.
The second issue that needs to be dealt with is the functioning of the government at both central and state levels. Jaitley stated in his budget speech that he was seeking to stem corruption. For this, he proposed that the Parliament consider a new law and institutional structure for transparency in public procurement, and announced a new Public Contracts (Resolution of Disputes) Bill. These changes would be ineffective without functional corrections that would increase the accountability of ministries and their departments.
A quick look at the latest annual outcome budgets released by various ministries—the first step in evaluating how the money is being spent and its efficacy—would illustrate why serious effort needs to be made to strengthen this process. Ministries do not uniformly conform to the reporting guidelines that are in place for disclosing quantifiable deliverables against budgeted amounts. The quality of information varies to the extent it is very difficult for the public to assess performance. This can only be rectified by ensuring that all ministries disclose data that is transparent and comparable over time and across schemes. The 14th Finance Commission has suggested deploying a decentralised framework that would lead up to the consolidation of outcomes data with these ministries—since local government institutions are the last mile delivery platform on several fronts, they are best suited to manage and report outcomes on ground. However, as state governments have tended not to give them adequate authority to manage expenditures, these local institutions would first need to be more empowered.
As the dominant influence over policy and programme design and implementation, the bureaucratic system in India continues to be in dire need of an overhaul. In 2010, a survey conducted by the government among its civil servants showed that 35 percent of the bureaucrats felt the system was not fair, objective or transparent, while only half of them disagreed on strong external pressures being an impediment to their work. Transformation can happen only with fixed tenures to reduce political interference, discretionary post transfers, an objective performance-based appraisal and linking of compensation to proven competence.
A final point that needs highlighting is that of some critical policy reforms for promoting inclusive growth. Jaitley announced important institutional reforms aimed at improving the business environment. These included curbing black money and benami transactions, a bankruptcy law for terminally ill enterprises, a financial redressal agency for consumer protection, a monetary policy framework for inflation targeting, and a regulatory reform law for the infrastructure sector. In order to stop leakages and target subsidies efficiently at the poor through e-governance, Jaitley has proposed “JAM Number Trinity” as an initiative that will link Jan Dhan—a scheme aimed at opening basic bank accounts for every household—to the Aadhaar identities and mobile numbers of the intended beneficiaries.
This approach can help deliver subsidies to the poor in a targeted direct cash transfer system that would resolve long-standing distortions. For example, it may curb wastages, because currently more than half the wheat, almost half the sugar and 15 percent of the rice allocated under the public distribution system get lost as leakages—even as Rs 1.3 lakh crore is spent on the system through food subsidies. A direct transfer system may also help rationalise the massive expenditure of Rs 74,000 crore-plus on the fertiliser subsidy, which so far has not been able to ensure that all small farmers actually receive this critical input when they need it—artificial shortages in controlled fertiliser markets have even forced farmers to use spurious product. However, it is unclear how long the government will take to reform these subsidies against the backdrop of political sensitivities and strong lobbies.
Meanwhile, the necessary focus on agriculture, a sector that is not only important for the livelihood of the largest segment of the Indian population, but also for national food security, is still absent. The Bhartiya Janata Party election manifesto in 2014 had promised steps to enhance profitability in agriculture by ensuring "a minimum of 50% profit over the cost of production". Yet, for a still largely rain-fed agricultural economy, budget allocations for irrigation and watershed development have been reduced. While some work has been initiated towards creating a national market, which could in time reduce middlemen who eat into the farmer’s earnings and inflate food prices, the majority of small and marginal farmers lack the capacity to increase their crop yields and add value to their produce for higher incomes. While a farm credit target worth Rs 8.5 lakh crore has been set in the budget, in reality, small and marginal farmers continue to find it very difficult to get loans to buy critical inputs on time or to store harvested crops.
As the finance minister reiterated the prime minister’s promise of theirs being “a round-the-clock, round-the-year Government” the changes it brings about should not be restricted to its budget announcements. Radically reforming its functioning and a transformational focus on Indian farmers is likely to do far more for inclusive economic growth than any other measures.