The Hindu Business Line : Nuts and bolts of the Budget

THE Budget speech of a Finance Minister can be expected to present only a broad outline of policy, together with a profile of trends of expenditure and revenue, besides important tax and expenditure proposals as well as new initiatives.

The voluminous documents that accompany the budget inevitably take time to digest and assimilate. I attempt below a brief analysis of these estimates.

First, let me turn to the estimates of revenue. The rate of increase indicated over even BE 2002-03 is rather conservative, — at about 7 per cent.

Against this, the nominal rate of growth of the economy implied in the Finance Minister's Budget speech is itself roughly 11 per cent. Perhaps, this lower figure is in line with the slowdown in tax revenue in the current year. The details of the relevant revenue estimates are shown in Table 1.

There has been a distinct slowdown in trend growth of tax collections this year reflecting decline in economic growth. The budget figures have `factored' in a continuation of the current trend.

Fixing low targets for revenue, however, tends to bias the tax collection machinery in the direction of slackness in efforts. At least, internal targets for collections should be fixed in such a way that they are higher than those indicated in the budget.

Collections in respect of customs are also pitched relatively low. An increase in capital goods as also import of raw materials with investment and industrial revival may help raise the receipts from Customs. The excise estimates of Rs 96,000 crore are also on the low side, allowing for an increase of less than 11 per cent over the revised estimates.

I now turn to estimates of non-tax revenue, which are lower than even the revised estimate of 2002-03 (see Table 2).

Certain comments are in order. Lower interest receipts reflect the lower interest rates charged by the Government on its loans to States, PSUs and industries. However, the dividends and profits from public sector enterprises, which have also shown a rise in RE 2002-03, cannot be expected to go down in 2003-04, unless we have already divested most of our profit-making public sector undertakings.

The Government of India is pushing the petroleum sector enterprise to give higher dividend this year (2002-03). One can expect the same trend to continue in the next year.

So far as the surplus profits of RBI are concerned, it is not clear why the next year's budget estimate is pitched at the same level as the BE 2002-03. Considering the higher fiscal deficit in the current and the next year — that means a greater resort to borrowing by Government — the possibilities are that the RBI's profits can well increase over the current year.

This head will also reflect the return on higher forex reserves. There is a cushion in these estimates also. A conservative view on receipts may, however, be justified considering that the items of expenditure may overshoot estimate in a pre-election year.

An important aspect of Government expenditure, which has received considerable attention from critics, is expenditure on "establishment" Their mantra is "Cut the size of babudom and all will be well". Out of the revenue deficit of Rs 112,000 crore and odd, the establishment outlay of Government, excluding that on Railways, which is a service agency and expected to cover its expenses, comes only to Rs 19,000 crore.

As a percentage on total expenditure on revenue account (Rs 366000 crore), the establishment outlay comes to just above 5 per cent. Reduction of establishment expenditure, while desirable per se, will not help to bring about a dramatic improvement in the overall fiscal balance of the Government of India.

Of course, the cut can have spread effects, in the sense of removing slack and ensuring better work culture. Overemphasis on cutting establishment costs may tend to be a tokenism.

An analysis confirms that the Government is relatively conservative on outlays on establishment and expansion of bureaucracy. In the period 2002 - 2004, the number of people on the rolls of the Government is expected to increase only less than half a lakh on a base of 34 lakh.

The total establishment strength of 34,86,935 expected at the end of March 2004 is also inclusive of the establishment borne on the rolls of the Ministry of Railways, which employ 14,78,986 and of the Department of Posts 575520. If we exclude these too large service departments, whose contraction will hit service levels, the total establishment strength will go down to 14 lakhs. The broad break-up of this establishment is as shown in Table 3.

It would appear that these establishments can be compressed only at severe risk to national safety and security. A sense of proportion is needed in job reduction in Government. The various services performed by the concerned Departments have to be kept in mind. Witness, for instance, the recent confrontation between a High Court and a State Government.

Let us consider the Ministry of Finance itself. The Department of Revenue, which employs the largest number of 135,000 people, spends about Rs 1500 crore. Considering that tax revenue is about Rs 250,000 crore, the economy of expenditure is striking. Further efforts at scraping the barrel in this department may be counterproductive.

Similarly, the Indian Audit and Accounts Department, a vital element in our structure for the surveillance of Government expenditure, accounts for just 62000 people and spends about Rs 1000 crore, money well-spent considering the critical role of the CAG in our national system of governance.

While it is not my intention to underplay the importance of efforts at achieving economy in Government expenditure, especially the ban on further recruitments in certain departments,

I would like to re-emphasise that the contribution of establishment cost to fiscal imbalance is much less important than that of other items like subsidies and losses in the public sector undertakings. It is on these important areas that attention should be concentrated. Cutting down a clerk here and a clerk there cannot help much.

Another item of information, which the budget documents, bring out is important, in that it shows the sizeable resource contribution of public sector enterprises towards the investment postulated in them in the Budget. The budget estimates of 2003-04 show that out of a total Plan Outlay of Rs 90,000 crore estimated, the budget support from Government itself accounts for only Rs 15,000 crore.

The rest of the outlay is accounted for by internal resources of the public sector enterprises. These estimates amount to as high a figure of Rs 37,000 crore. PSEs themselves are being encouraged to raise bonds and debentures to the extent of Rs 18000 crore. A higher investment outlay planned by the Finance Minister in his budget can, however, be financed only if the PSEs continue on their track of improved efficiency and are able to garner more resources by raising user charges and by more efficient operation of the undertakings.

All this goes just to re-emphasise the need for a higher focus on efficiency in PSUs, even if the current fashion of divestment continues. The higher investment outlay planned by the Finance Minister in the budget can be realized without unduly straining the budgetary resources if and only if the enterprises function more efficiently.

The need for efficient operation of the public sector enterprises and their collection of appropriate user charges continues to be important, even given the current fever of divestment. The arithmetic of the budget depends vitally on their contributions in the shape of surpluses and other resources — mechanically denominated as internal and extra budgetary resources.

The detailed Budget estimates of Government of India contain a feast of information, which can occupy us for long. A brief piece like this cannot do full justice to this wealth of data. A full-fledged research team could well devote its efforts, particularly to analysing the various details of estimates of expenditure and receipts provided in the documents.

Such a detailed analysis would definitely be worth the while — highly rewarding in the insights it can give into various aspects of Government's financial management, as disclosed by the extensive documents that accompany the Budget.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Let nominee directors stay

Nuts and bolts of the Budget

From silence to the world of sound

Sweet mango and insipid water

In this globalised world

UN and unilateralism

For whom the bell tolls

Opposition to VAT

Regulating TV channels