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LATEST NEWS UPDATES | Budget 2015-16 takes a leap towards market fundamentalism: CBGA

Budget 2015-16 takes a leap towards market fundamentalism: CBGA

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published Published on Mar 1, 2015   modified Modified on Mar 1, 2015
-Centre for Budget and Governance Accountability (CBGA) Press Release

 

New Delhi: The direction indicated by the Finance Minister's Budget Speech in general and that of the taxation policies in particular indicate a quantum leap being taken towards market fundamentalism. In the absence of any increase in the overall spending capacity of the government (Centre and States combined), the steps for fiscal decentralization (from Centre to States) have been constrained, implying only a modest increase in the spending capacity of the State Governments though their fiscal autonomy (in terms of discretion over the resources available) would certainly go up from 2015-16. In such a scenario, the move towards transfer of a number of major social sector programmes from the Centre to the States over the next couple of years raises concerns pertaining to the overall magnitude of budgetary resources that would be available for critical social sector interventions in the coming fiscal year and beyond. It appears that the transfer of social sector responsibilities to the State Governments is not going to be matched by an adequate increase in their spending capacity.


Union Budget is primarily the arena of fiscal policy of the Centre; however, the 2015-16 Budget Speech of the Finance Minister has followed and even accentuated a trend observed over the last several years, which is that of restricting the discussion on core fiscal policy decisions to provide space for elaborate references to developments pertaining to banking sector, monetary policy and other measures outside the purview of the Budget. The overall direction indicated by the Budget Speech, and particularly those pertaining to taxation, indicate a much stronger adherence to market fundamentalism than what was witnessed over the last few years. For instance, the decisions to cut the Corporate Tax rate (from 30 % to 25 %), defer some of the measures (like the General Anti Avoidance Rules) that could limit the scope for MNCs to dodge taxes and increase the dependence on Indirect Taxes to compensate for the softer approach towards Direct Taxes do underscore the overall policy framework being pursued by the new government at the Centre.


While the nominal rate of Corporate Tax would be reduced in 2015-16, the rationalization of the plethora of exemptions (that have led to the effective Corporate Tax rate being a rather low 23 %) is scheduled to be done in a phased manner and that too starting in 2016-17. The proposals relating to Personal Income Tax would make the Income Tax base even narrower, and those pertaining to the abolition of Wealth Tax (being replaced by a 2 % additional surcharge on Income Tax on the super-rich) would weaken further the limited progressivity in India's tax system. The argument cited for abolition of Wealth Tax, that it is an inefficient tax, seems questionable as the cost of collecting Rs. 100 from this tax has come down from Rs. 54 in 2001-02 to Rs. 9 in 2013-14. While the revenue from the additional surcharge on Income Tax on the super-rich is projected to more than compensate for the loss in revenue due to abolition of Wealth Tax, the collections from Surcharge are not part of the divisible pool of Central Taxes and hence would not be shared with the States.


Though India collects two-third of its total tax revenue (of around 17 % of GDP) from Indirect Taxes and only a third from Direct Taxes, Union Budget 2015-16 has moved towards even greater dependence on Indirect Taxes and softening of the regime of Direct Taxes. The tax-GDP ratio for Gross Central Taxes is projected to increase to 10.3 % in 2015-16 from 9.9 % in the Revised Estimate (RE) for 2014-15; but even the tax-GDP ratio projected for 2017-18 (at 10.7 %) is going to be way below that attained earlier in 2007-08 (11.9 %).


What this has meant is that no expansion could be envisaged in the overall spending capacity of the government (Centre and States combined) for the next few years, despite the fact that the overall fiscal policy space in the country (i.e. the overall government spending to GDP ratio, at around 27 %) has been smaller than that of not only the developed countries but also of many other developing countries (like Brazil, South Africa, Mexico and China). The inability and unwillingness of the Centre to pursue any expansion in the country's overall fiscal policy space has constrained the policy thrust towards fiscal decentralization, which the 14th Finance Commission has attempted to provide for the next five years (2015-16 to 2019-20).


Quite contrary to what has been the common perception about the implications of the 14th Finance Commission recommendations, the net increase in the spending capacity of the State Governments (resulting from the changes being introduced in Centre-State sharing of resources) in 2015-16 would be very modest. It needs to be recognized that while the Share of States in Central Taxes would go up from Rs 3.82 lakh crore in 2014-15 Budget Estimate (BE) to Rs 5.23 lakh crore in 2015-16 BE and Non Plan Grants and Loans to States would increase from Rs 69095 crore in 2014-15 BE to Rs 1.07 lakh in 2015-16 BE, the overall magnitude of Central Assistance to States for Plan Spending is going to decline sharply from Rs 3.3 lakh crore in 2014-15 to Rs 1.96 lakh crore in 2015-16 BE (as the Centre is not only going to discontinue most forms of untied assistance for Plan spending by States, it is also going to stop incurring Revenue Expenditure on Plan schemes in a number of sectors expecting the States to take those up from 2015-16). As a result, the net increase in spending capacity of the States (combined for all States) in 2015-16 (as compared to 2014-15 BE) is projected to be only Rs 46192 crore, which would be a small 0.33 % of GDP for the year.


In the new framework of Centre-State sharing of resources being put in place, the Union Budget support would be continued fully only for those programmes or schemes, which are mandated by legal obligations (e.g. MGNREGA), backed by Cess collection (e.g. funds for Sarva Shiksha Abhiyan and Mid-Day Meal from the Prarambhik Shiksha Kosh, schemes funded from the National Clean Energy Fund), those targeted for socially disadvantaged groups (e.g. schemes meant specifically for SCs, STs, minorities, persons with disabilities, and social security schemes for unorganized workers) or those meant for poverty alleviation in backward regions (especially the Special Area Programmes). A few of the prevailing Plan schemes would be dropped completely (e.g. Backward Regions Grant Fund, Model Schools scheme, National e-Governance Action Plan, among others) with the possibility that some of the States may decide to continue some of these interventions with their own budgetary resources. However, what is most important to note is that starting from 2015-16, the Centre will not cover the Revenue Expenditure (especially the recurring expenditures on salaries of staff) incurred at the State level in 24 different Plan schemes (e.g. National Health Mission, Integrated Child Development Services, Rashtriya Krishi Vikas Yojana, Rashtriya Madhyamik Shiksha Abhiyan, National Rural Drinking Water Programme, Swachh Bharat Abhiyan, Indira Awas Yojana and National Rural Livelihoods Mission, among others).


Among all these Plan schemes where the Centre is going to cover only the Capital Expenditure (i.e. expenditures meant for assets or infrastructure creation) part, many are in the social sectors where in the long run (i.e. in a couple of years as the infrastructural shortages are addressed) a bulk of the expenditure would necessarily be Revenue Expenditure (recurring expenses on staff salaries, text books, medicines, supplementary nutrition, and maintenance etc.). Following this decision, the Union Budget outlays for all these schemes have been reduced drastically in 2015-16 BE (as compared to 2014-15 BE). Hence, it is obvious that these schemes are effectively getting ‘transferred' to State Governments, with the expectation that the States will provide additional budgetary resources from their own funds now to compensate for the resources withdrawn by the Centre. It needs to be pointed out here that the net increase in spending capacity of the States in 2015-16 is projected to be a small 0.33 % of GDP.


In 2013-14 BE (the latest year for which the RBI has compiled information for all the State Budgets), the total allocation for Social Sectors accounted for 40.5 % of the aggregate spending by all States. Hence, if the States on an average continue to allocate resources following the same prioritization of their Budgets, only around 0.12 % of the GDP would be the incremental spending from State Budgets on the Social Sector programmes. However, the Union Budget outlay for all Social Sector ministries (including Rural Development and Urban Development, but excluding Agriculture and Food Subsidy) registers a decline from 1.92 % of GDP in 2013-14 (Actuals) to 1.68 % of GDP in 2015-16 BE. Hence, the total resource envelope for social sectors in the country could witness a decline in 2015-16 unless the States step up the priority for social sector programmes in their Budgets significantly.


The move towards effectively transferring a host of important social sector programmes to States along with an increase in their discretion or autonomy over the budgetary resources available to them would be a step in the right direction provided the State Governments have adequate overall spending capacity. However, primarily because of the stagnant tax-GDP ratio of the Centre and the fact that only 42 % of the divisible pool of Central Taxes would be shared with the States, the State Budget outlays for these crucial development programmes (like SSA, MDM, IAY, NHM, ICDS, NRDWP and RKVY etc.) might not increase by as much as would be required just to protect the overall budgetary outlays for these at the prevailing levels. What makes this concern even more grave is that for most of these social sector programmes, the prevailing magnitudes of budgets have themselves been quite inadequate.


It is worth noting that two important programmes backed by legislations have escaped the axe that has fallen on the Union Budget outlays for most social sector interventions. Union Budget for 2015-16 protects the outlay for Food Subsidy at Rs 1.24 lakh crore, which is nearly the same as the Rs 1.23 lakh crore allocated in the RE for 2014-15. Likewise, for MGNREGA, the outlay for 2015-16 BE is pegged at Rs 34699 crore, with a stated intention of providing an additional Rs 5000 crore if the receipts from taxes in 2015-16 exceed the projected levels because of tax buoyancy; the outlay for the programme in 2014-15 RE is Rs 33000 crore.


What causes a serious concern about Union Budget 2015-16 is the fact that the transfer of responsibilities to the State Governments across a range of development sectors is not going to be matched by an adequate increase in their spending capacity, which could make the ongoing interventions in these sectors even more resource-constrained than what has been the case until now.

---

Subrat Das

Executive Director, Centre for Budget and Governance Accountability (CBGA)

(Email: subrat@cbgaindia.org)

For further information, contact Ms Happy Pant (happy@cbgaindia.org )

Centre for Budget and Governance Accountability (CBGA) Press Release, 1 March, 2015


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