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How the Budget merger may derail the fiscal roadmap

Muthukumar K BL Research Bureau | Updated on January 16, 2018 Published on October 02, 2016

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Fiscal deficit targets could become harder to meet owing to bloated salaries and pensions arising from the 7th Pay Commission awards

The 92-year-old practice of presenting a separate Budget for the Indian Railways will end from 2017-18, when the Railway Budget will be unified with the Union Budget. The decision won’t change the functioning of the Railways very much, but it could have significant ramifications for fiscal management.

Moving fiscal target

Once the two budgets merge, it will become more difficult for the Centre to meet its fiscal deficit target, largely owing to the higher salaries and pension pay-outs following the 7th Pay Commission award.

Currently, Railways salaries and pensions are fully paid from its revenue receipts. However, following the Budget merger and the implementation of the Pay Commission recommendations, there will be an additional burden to the tune of ₹30,000 crore as salaries, allowances and pensions of the Railways in 2016-17.

The Railways’ pensions and salaries as a percentage of GDP will increase from 0.75 per cent in 2015-16 to 0.8-1.0 per cent in 2016-17, going by the estimates of the Pay Commission report. This could push up the fiscal deficit by 5-24 basis points (after the Budget merger).

When the Budgets merge, the Centre will pocket close to ₹18,210 crore as the Railways’ net revenues in 2016-17. On the other hand, it will also not receive dividends from the Railways, which translates into a loss of ₹9,731 crore in non-tax revenues. Net-net, the Centre will receive a surplus of ₹8,479 crore, which roughly works out to 0.06 per cent of GDP.

Therefore, merging the two Budgets will likely affect the overall fiscal deficit target to the tune of 18 basis points in the worst-case scenario.

Under the current roadmap, fiscal deficit as a percentage of GDP is expected to come down from 3.9 per cent in 2015-16 to 3.5 per cent in 2016-17 and further to 3 per cent by 2017-18, a level that conforms to FRBM (Fiscal Responsibility and Budget Management) stipulatoins.

About 38 per cent of the Railways’ 1.3 million working staff are in the 50-60 age bracket. About 57,000 people will retire in each of the next two financial years, 2016-17 and 2017-18, which will push up the overall pension expenditure. In 2013, pensioners outnumbered the serving staff. For 2016-17, the Railway Ministry had budgeted ₹45,500 crore for pension payouts.

Big is beautiful

Additionally, the merger will increase the size of the Union Budget by about 1.2 per cent of GDP. The size of India’s budget for 2016-17 is ₹ 19,78,060 crore, or about 13 per cent of the estimated GDP for 2016-17. Post-merger, the Budget size will bloat by about ₹1,89,270 crore to 14.2 per cent of GDP. (Since the figures for Budget 2017-18 are not available, the financial impact of the merger has been worked out as if it happened in 2016-17 and using Budget Estimates.)

Historically, almost half the capital expenditure of the Railways has been funded through the Union Budget under the head of Gross Budgetary Support. The rest of the capex needs were met through funds raised by the Railways though other routes such as bond issuance of the Indian Railway Finance Corporation or from internal resources. So, the capital expenditure in the Union Budget will not increase with the merger of the Railway Budget.

The total expenditure of the Union Government had touched 15.8 per cent of GDP in 2009-10; in 2015-16 it was about 12.8 per cent of GDP. Some policy makers see merit in an increased budget size since they like to see larger government spends in a developing economy such as ours.

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Published on October 02, 2016
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