Is the Budget efficient on allocations?

On the whole, the Budget has achieved the tough task of balancing everyone’s interest by taking measures to boost investment while attempting to unlock the demand constraints existing in the economy.

The Budget has tried to create a positive environment for investment by committing to reduce the corporate tax rate to 25 per cent over the next four years while pruning present exemptions, encouraging entrepreneurship through refinance and support schemes, tax pass through status for Alternative Investment Funds (AIFs) which channel venture funds into small and medium enterprises (SMEs), and, above all, by bringing another ₹70,000 crore as public investment into the economy alongside five new ultra mega power projects worth ₹1 lakh crore.

Simultaneously, following up on the previous year’s efforts, the government has tried to put more money into the hands of citizens for more savings as well as consumption, by making the hitherto untouched transport allowance, health insurance premia, etc. in line with the changing times and by introducing tax-free bonds, and gold monetisation schemes while bringing in parity between Employees' Provident Fund (EPF) and National Pension Scheme (NPS).

These measures are significant given the recent fall in savings and investment rates and slackening domestic demand. Considering the impetus to growth and investment, one is forced to overlook the flexibly shifting fiscal targets.

However, any budgeting exercise needs to be analysed from three perspectives: (1) whether it is encouraging fiscal discipline, given the policy imperatives and macroeconomic conditions; (2) whether it puts money in the right place where it is needed; and (3) whether it attempts to bring in efficiency in operations of the government.

One worrying aspect about the Budget is the ever-shifting goal posts for the fiscal side. Effective revenue deficit for FY2014-15 has increased from the budgeted 1.6 per cent to 1.8 per cent.

The effective revenue deficit which had to be eliminated by March 2015 will now be eliminated only after three years — by March 2018.

The 3 per cent goal post of fiscal deficit by 2016-17 has been shifted by one more year to the end of 2017-18.

The Fiscal Responsibility and Budget Management (FRBM) Act has become a flexibly responding budget management act. Further, the Finance Commission’s recommendation to eliminate the concept of effective revenue deficit has not been paid heed to.

Almost 50 per cent of the fiscal deficit is on account of subsidies. Fuel subsidy has been reduced by around 50 per cent for the coming year and may rightfully come down due to benign crude prices and decontrol of diesel.

However, some part of this subsidy is not reflected in the Budget as it is borne by the oil marketing companies. If we include the burden of the oil marketing companies, the petroleum subsidy figures would see a quantum jump.

Further, the food subsidy has been increased only by a marginal 1.42 per cent, whereas the actual growth in the previous year was 33 per cent.

It will be challenging to contain the food subsidy to such a meagre growth.

Further, there are many announcements for which, perhaps, there is no provision in the current year.

The government has shown a commitment to reduce the corporate tax from 30 per cent to 25 per cent. It may be noted though that the effective tax collection after exemptions is only around 23 per cent.

In short, in the given constrained fiscal space (even though the overall outgo to the States may increase only by a few percentage points despite a 10 percentage point increase in tax devolution), the Budget has tried to reallocate funds from agriculture and other primary sectors to industry and infrastructure.

It is imperative to note that allocation to agriculture has declined from almost 9.5 per cent of the total developmental expenditure in 2013-14 to just 2.7 per cent in 2015-16.

This is worrying because the Economic Survey had candidly admitted that the growth last year was purely domestic driven and the contribution of external environs was virtually zero.

The major source of this domestic demand is the rural demand, which is set to decline as the agricultural growth rate is dipping faster. Despite this alarming context, the government has not allocated much resource for the agriculture sector except for the social security efforts towards micro insurance and pension for the rural and urban poor.

Broadly, it can be said that farmers and the rural poor are left to be content with the trickle down from the other sectors.

As regards the third criterion for assessing the effectiveness of budget — enhancing the efficiency of the government — the Budget has tried to eliminate some of the unproductive and effort consuming taxes such as wealth tax by replacing it with a 2 per cent surcharge, merging the two financial market regulators — the Securities and Exchange Board of India (SEBI) and Forward Markets Commission (FMC) — bringing parity and competition between two pension fund schemes — EPF and NPS (though it still keeps mutual fund retirement plans outside the similar tax treatments), and so on.

In sum, while it enhances the operational efficiency of the government and addresses some of the pressing concerns of the economy, the Budget scores lower on fiscal discipline, casting doubts on allocative efficiency.

The writer is Partner – Public Finance and Urban Development, PwC India

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