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The hallmarks of a good Budget

Nilanjan Banik | Updated on February 15, 2013

Primary education bundled with free meals turned out to be a success.

Apart from making the requisite allocations towards infrastructure and pruning non-merit subsidies, policies should be well designed for the outlays to bear fruit.



The Budget deals with allocating money towards areas where the government thinks it is essential to spend, and finding out ways such as taxes, to finance it. The Government primarily requires money to spend on social infrastructure (such as schools, hospitals, water, sanitation, etc.), physical infrastructure (such as railways, roads, airports, etc.) and transferring funds to the poor and the deprived, so that distribution of income becomes more equal. Too much unequal income distribution can instigate revolt, and in the case of democracy, can vote a government out of power.

But, how does one say whether a budget is good or bad? The general assumptions underlying a good budget are: it contains the fiscal deficit, carries on with the necessary reforms, beefs up planned capital expenditure, and curtails non-planned spending while increasing revenue receipts.

FISCAL DEFICIT CUTS

Controlling the cis an important factor from the perspective of sovereign rating – countries with higher fiscal deficits generally lose out in terms of investor attractiveness. For the last fiscal year, India’s fiscal deficit (Centre-States combined) was around 9 per cent, the highest when compared with the other BRIC economies – China 1 per cent, Brazil 2.8 per cent, and Russia minus 1 per cent (or surplus).

A lower foreign capital inflow on account of higher fiscal deficit has a broader implication in terms of deteriorating foreign exchange reserves, a depreciating rupee, and even higher inflation.

India’s combined fiscal deficits (Centre and States) have been growing rapidly during the past few years. A large part of the growth in the combined deficit can be attributed to the States’ fiscal deficit.

The interest payment component on the earlier deficit is increasing. It also implies cumulative government debt is increasing. Following reforms, there is now limited scope for monetisation of the deficit (or printing money to finance the deficit) and this has led to increase in market borrowings by the central government. The rising proportion of internal debt has become more acute, especially with fewer disinvestment opportunities, and less recoveries of loans. The rising proportion of internal debt in total debt is worrying.

SOCIAL SCHEMES

Given this background, the road map to a good budget is therefore is to control fiscal deficits and make sure that the allocations for social programmes are spent effectively. To control fiscal deficit, the Finance Minister is expected to cut subsidies, defence expenditure, and welfare schemes such as MGNREGA.

There is now a consensus that subsidies on non-merit goods should decline and those on merit goods should increase. Non-merit subsidies refer to food and fertiliser subsidies, and subsidies in the petroleum and power sector. This will enable FM to set aside money for government’s pet project, the Food Security Bill. The Food Security Bill is about providing 5 kg of food grains at a subsidised rate to 75 per cent of households in the rural areas and 50 per cent of households in urban areas.

The second part comprises using funds allocated for welfare schemes more effectively. To plug leakages in the system, an important reform push is direct cash transfer (DCT) scheme. DCT has been started on an experimental basis, initially covering 20 districts, and later to be extended to the other 600-odd districts.

Another way to increase effectiveness of government-funded programmes is to make them more flexible. For instance, in the case of MGNREGA, unskilled labourers were used to build rural infrastructure.

Instead, MGNREGA labourers should also be allowed to be take up alternate activities such as working in agricultural farms, or in small and medium scale industries, depending on requirements. Likewise, money is sanctioned under any particular scheme, say, under SSA to build schools, should be allowed to be used for next best alternatives, say, building hospitals, if the village already has a school.

LAND ACQUISITION

Like faulty legislation, faulty policy design can also limit the performance of the government.

A big problem in the India’s growth story is structural in nature. Infrastructure is needed to sustain the growth process. When it comes to investment in infrastructure or industry, the crucial issue is getting land.

Inability to obtain land can slow down growth. Farmers do not want to part with land, as it serves as a sense of collateral and provides for sustainable income. Even if they want to sell land, they may not get the right price or the land deal may not happen at all. In the event of small land holdings, where buyers have to negotiate with numerous tiny sellers (often with unclear land records), the transaction cost for trading in land goes up.

Often, the negotiated price rises more than the ‘market’ price because of third party intervention, such as land brokers with strong political connections. These land brokers typically procure land in bulk before the start of the project. So, even if the farmers have wilfully given land to the government and land brokers before the start of a project, they may resort to agitation when they see the price of land skyrocket after start of the project. Farmers’ agitation over land acquisition in Greater Noida, in May 2011, was of this type. Those who have earlier given land feel left out or cheated as price of land increases manifold upon completion of the Yamuna expressway (highway connecting Delhi-Agra).

To prevent agitation and to procure agricultural land for non-agricultural purposes, farmers have to be made stakeholders. Farmers can be given part of the land in a developed form. Alternatively, proceeds from sale of land can be put in interest-bearing bonds, so that the farmers need not protest against high land prices in subsequent years.

An example of policy design making all the difference is education. Primary education was successful because of meals given as freebies. However, in spite of the success in enrolling students in primary education, a vast pool of the population is stuck in the agriculture. In fact, the agriculture sector accounts for 75 per cent of unemployment; 56 per cent of the population with a Master's degree earns only Rs 6,000 per month. Many corporates such as Axis Bank, ICICI Bank, BPCL, to name a few, have set up their own institutions, which offer a 2-year MBA degree. The government has failed to provide quality education at the post-secondary level.

For policies to work and budgetary allocations to achieve their goals, what really matters is a clever policy design and a proper legislative framework.

(The author is Professor at Institute for Financial Management Research, Chennai.)

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Published on February 15, 2013
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