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Budget 2016: Behind the Symbolism
-Economic and Political Weekly

The Modi government tries hard to signal a makeover but beyond the symbolic it does not change much.

Budget 2016 is not important for the proposals that it has made but for what it tries to signal about the proposed makeover, in a limited way, of the Narendra Modi government. The budget does try hard to claim that the Modi government is not a “suit-boot” administration, an image it has to shed given the beatings it has taken in recent state elections and apprehensive as it must be of the state elections that lie ahead. The Union Budget for 2016–17 is not a “pro-farmer” budget nor is it a “Robin Hood” document and it certainly is not “pro-poor.” Within a few days of its presentation, analyses of the budget have shown that while the announcements have been many for agriculture and the rural sector the allocations for 2016–17, shorn of statistical jugglery, do not constitute a major increase over 2015–16. The minor additional levy the budget applies on the super-rich and on recipients of dividends of over Rs 10 lakh a year will together not soak the wealthy in any fashion and there is no major hike in social sector spending.

In the ultimate analysis, whether or not Budget 2016 can claim to have some semblance of being people-friendly will depend on the implementation of two new schemes. One is the scheme to provide five crore households below the poverty line (BPL) with LPGs within five years and to support them with the initial cost of an LPG connection. The other is a new health insurance scheme to provide up to Rs 1.30 lakh of cover, again to BPL families. The first has an allocation of Rs 2,000 crore for 2016–17 and the second may well be handed over to private insurance and private hospital chains to implement.

Budget 2016 is deeply disappointing in its taxation proposals. According to the 2015–16 revised estimates (RE), personal income tax and corporation tax revenues are together as much as
Rs 46,000 crore less than the 2015–16 budget estimates (BE). In the case of corporation tax, the decline is Rs 17,658 crore. With the economy supposedly growing by 7.6% in 2015–16, should direct tax collections fall short of the budgeted amount by such a large amount? The improvement in the tax–GDP ratio that has yet taken place (from 9.8% to 10.8% between the budget and revised estimates) is due to the windfall gain in union excise duty collections of more than Rs 55,000 crore. This has come from levies on benign petroleum prices without the benefit of low prices being passed on to consumers. In 2016–17 the main source of revenue collection will once again be indirect taxes in the form of higher excise duty collections. Thus, there is an implicit assumption that global crude oil prices will continue to remain at the same level as in 2015–16.

The major tax proposals in Budget 2016–17 reflect a lack of understanding of the tax system and tax policy governance in North Block. First, the introduction of various cesses and surcharges is only going to complicate the tax system further ahead of the planned shift to the Goods and Services Tax (GST). To make the tax system efficient, simple and transparent, it is important that the funding of government expenditure should come from general revenues rather than through earmarked taxation. Second, with a continuous imposition of cesses on the service tax to fund various programmes, the statutory rate of service tax will now climb to 15%. This is completely against the design of the GST that is being discussed or the proposed revenue neutral rate (RNR) of 18% for GST as recommended by the committee headed by chief economic adviser. Since the services tax rate is already 15% and one is talking about a GST–RNR of 18%, does the Ministry of Finance believe that post-GST, states will tax services at just 3%? A well-thought-out policy on GST implementation would have reduced the services tax rate and rationalised the central excise duty structure by narrowing the current divergence in rates. Third, in our federal system, cesses and surcharges are not shareable with the states. The continuous imposition of such levies denies the states their rightful share of national revenues collected by the central government.

Corporates and pro-market economists have described this budget as redistributive and pro-agriculture. However, if we examine the big picture, aggregate government expenditure as a percentage of GDP or in terms of growth does not show any increase. Between 2015–16 (RE) and 2016–17 (BE), while aggregate expenditure is expected to grow at the rate of 10.8%, the allocation for agriculture is expected to increase from Rs 15,809 crore in 2015–16 (RE) to Rs 35,983 crore in 2016–17 (BE). However, the 2016–17 (BE) allocation includes interest subvention of
Rs 15,000 crore, which was earlier shown under the budget head of the finance ministry. In other words, the additional increase is only about Rs 5,000 crore. We should also remember that agriculture is a state subject and addressing rural distress needs a national strategy. However, it is important to note that the budget has increased allocations significantly for rural roads through the Pradhan Mantri Gram Sadak Yojana, one of the more successful centrally-sponsored schemes.

Budget 2016 has finally announced that the government will be doing away with the distinction between plan and non-plan expenditure after the completion of the Twelfth Five Year Plan in March 2017. It is true that an artificial budgetary distinction between plan and non-plan expenditures has created a distortion in budgetary priorities and the neglect of maintenance expenditure. But, before the proposed abolition of this distinction, the central government should think through various transitional issues, including that of plan resource transfers to states. If one assumes that there will be no Thirteenth Five Year Plan and no plan transfers, adequate safeguards need to be taken to ensure that in the absence of plan flows the aggregate flow of resources to the states does not decline. Transfers should not become ad hoc and arbitrary under the sole control of the finance ministry.

Finally, the fiscal consolidation road map proposed in Budget 2016 does not project a major improvement in both direct and services tax collections in 2016–17. Also, a lot would depend on what happens to the GDP growth rate. How all these factors will play out and what the effect on fiscal consolidation would be is unknown. Probably that is the reason why the central government has announced a review of the working of the Fiscal Responsibility and Budget Management (FRBM) Act. The review should take note of the impact of the FRBM Act at all levels of government and should not become a tool to be used by the centre to justify its own fiscal profligacy as has been the practice in the past.