Government Budgets

Government Budgets

A different economic approachop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How to balance the trade-off between the health of economy and public health.


Context

The Covid-19 pandemic and subsequent 21-day lockdown by India has forced us to resolve the public health versus economic health trade-off.

The debate over lockdown

  • No clear idea on number of lives saved: As it fights COVID-19 with its meagre healthcare resources, India has chosen to bring the economy to a near halt with no clear idea of how many lives can be saved in this manner.
  • What is going to be the cost of this decision? The 21-day lockdown will reduce the gross value added (GVA) during this period to near zero.
  • More than half the GVA is contributed by the unorganised sector.
  • A disproportionate burden of the economic cost has fallen on this large segment.
  • Debate: The suffering of the stranded migrant labourers has set off a debate: is the disruption and the economic pain justified?
  • Is it worth sacrificing the economy to save lives?
  • And at the core of such questions is a policy dilemma: should public health matter more than economic health?

So, what should be the policy objectives?

  • In time, a vaccine will become available. But the economy cannot remain shut until that happens.
  • A prolonged lockdown will extract a huge economic cost.
  • Therefore, the policy objective must be to find ways of ensuring that the lockdown ends early without compromising on public health.
  • Following are the policies that could ensure the twin objective of not ending lockdown without compromising on public health.

1 The policy of aggressive testing and isolation

  • The economic cost of combating COVID-19 can be reduced by combining aggressive testing and isolation, a strategy proposed by economist Paul Romer for the U.S.
  • For it to work, people must be tested in large numbers.
  • Those who test positive must be isolated. This will make it unnecessary for the rest of the population to stay home and it will allow the economy to restart.
  • After ending the lockdown too, testing of randomly selected people must go on in large numbers, so that those found infected can be isolated.
  • Eliminating the fear of isolation: The success of this will depend on eliminating the fears associated with isolation. Such fears can be reduced only if isolation facilities are good.

2 Ramp up the manufacturing capacity

  • The second precondition is the substantial ramping up of manufacturing capacities for medical-grade masks, gloves, gowns, ventilators, testing labs, etc.
  • This ought to be on a scale large enough for domestic use and, if possible, for exports for costs to be low.
  • The strategy calls for fully operational hospitals to be constructed in every district of the country in a matter of weeks.
  • Problem-solving of an unprecedented order will be required.
  • Recently, garment manufacturers in Coimbatore were asked to explore the possibility of re-purposing production lines to make masks.
  • There’s been no progress on this front, as the special-grade fabric required is difficult to source.
  • What about the funding? In normal times, governments wrestle with dilemmas such as whether to allocate the limited available tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour.
  • But during a public health crisis, all resources must be used to ramp up healthcare capacities.

Way forward

  • Investment in healthcare can resolve trade-off: Since the state of the lockdown is not a normal condition, the usual policy levers become ineffective.
  • Loan moratoriums and cash transfers can fend off bankruptcy and defaults for a few months and buy time on non-performing assets in banks.
  • But they cannot make good the GDP lost due to the economic shutdown because liquidity and cash released by monetary and fiscal policies cannot get transmitted to the real sector during an economic shutdown unless they are funnelled into the sector that is still active, which is healthcare.
  • If the public health sector can be the economy’s main engine for six months, the public health versus economic health trade-off can be resolved. The spread of COVID-19 will slow down.
  • The economic pain of combating the virus will reduce.
  • There will be jobs, including for low-skilled construction labourers. If planned and executed smartly, the severe health infrastructure deficit will get addressed.
  • Remove the price controls: Sadly, India’s economic policies for fighting COVID-19 are the opposite of what’s needed.
  • In a crisis, the first instinct of policymakers is to slap controls. Just about everything from masks to kits has been placed under price controls.
  • This has removed the incentive for private labs to ramp up capacities.
  • The government should fully subsidise testing: At zero MRP, more people with symptoms will come forward to get tested. Private labs will quickly ramp up capacities if they don’t have to worry about losses. The number of suppliers will increase. Costs will reduce. Private enterprise and technological innovations will come up with cheaper tests that produce results quicker.
Government Budgets

A niggardliness that is economically unwarrantedop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Fiscal deficit and its relation with inflation, CAD etc.

Mains level : Paper 3- Should India consider a package to ease the sufferings inflicted by the covid-19 even at the cost of large fiscal deficit?


Context

The Centre can afford to step up its COVID-19 assistance to a higher scale; fiscal deficit is no worry.

Comparison with the US

  • Unemployment benefit in the US: In the United States, for instance, where the lockdown has raised the number of persons filing unemployment claims from 2.8 lakh to 6.6 million in a matter of days, those affected can fall back on unemployment benefit.
  • Comparison of packages: The US government has approved a package of ameliorative steps costing roughly 10% of that country’s GDP to cope with the crisis.
  • In India by contrast, the Finance Minister’s package comes to less than 1% of its GDP; and much of it is just a repackaging of already existing schemes.
  • New expenditure comes to just a little over half of the ₹1.7-lakh crore earmarked for the package.
  • Migrant workers are not the beneficiary: Besides, none of the steps will help the migrant workers; not even the larger foodgrain ration which in principle could, because most of them would have ration cards back home rather than in the places where they stay.

What can be done?

Consider the cash transfer

  • Many economists and civil society activists had suggested a cash transfer of ₹7,000 per month for a two-month period to the bottom 80% of households to tide over the crisis, in addition to enhanced rations of foodgrains and the inclusion of certain other essential commodities within the ration basket.
  • The cost of their proposed cash transfers alone would come to ₹3.66-lakh crore, which is more than 10 times the cash transfers provided in the Finance Minister’s package.
  • Providing assistance on the scale proposed by civil society organisations is necessary; it will no doubt pose logistical problems, but not financial problems.
  • Two possible effects of cash transfer: Even if all of it is financed through a fiscal deficit for the time being, the economic implications of such an enlarged deficit would not be forbidding.
  • These implications can manifest themselves in two ways: one is through inflation, and the other by precipitating a balance of payments problem. Let us consider each of these.

   Effect of cash transfer on inflation

  • As long as supplies of essential commodities are plentiful and these are made available through the Public Distribution System to the vast majority of the people so that they are insulated against the effects of inflation, any inflation per se should not be a matter of great concern. This is the case in India at present.
  • Foodgrain stocks with the FCI: The supply of the most essential of goods, food grains, is plentiful. Currently, there are 58 million tonnes of foodgrain stocks with the government, of which no more than about 21 million tonnes are required as buffer-cum-operational stocks.
  • This leaves a surplus of 37 million tonnes which can be used for distribution as enhanced ration, or for providing a cushion against inflation.
  • The rabi crop is supposed to be good; as long as it is safely harvested, this would further boost the government’s food stocks.
  • Rise in demand of other commodities: Likewise, the supplies of other essential commodities which consist of manufactured goods and where output has been demand-constrained all along will get boosted in response to higher demand; and in special cases, imports may have to be resorted to.
  • There is in short no reason to think that inflation of a worrisome magnitude will follow if the fiscal deficit is increased.
  • What about the multiplier effect? There is an additional factor here. The increase in total demand caused by an initial increase in demand, which is financed by a fiscal deficit, is a multiple of the latter.
  • Now in a situation like the present, when even if the lockdown is lifted social distancing and restrictions on social activities will continue, the value of the multiplier will be lower than usual.
  • People, in short, would hold on to purchasing power to a much greater extent than usual because of the continuing restrictions on demand, which would act as an automatic anti-inflationary factor.
  • Of course, there will be shortages of some less essential commodities and also hoarding on account of such shortages. But since these shortages will be expected to be temporary, a result of the pandemic unlikely to last long, there will be a damper on hoarding.

Effect of cash transfer on deficit

  • The price rise of non-rationed commodities: If inflationary expectations are strong and persistent, then the prices of non-rationed commodities may rise sharply for speculative reasons.
  • How the government can prevent the price rise? But the government can prevent such expectations, by adopting measures such as bringing down petro-product prices, taking advantage of the collapse of world oil prices.
  • A larger fiscal deficit, therefore, need not cause disquiet on account of inflation.
  • Balance of payment issue: On the balance of payments front, the worry associated with a larger fiscal deficit is financial flight caused by frightened investors.
  • Some financial flight is already happening, with the rupee taking a fall.
  • Rush to dollar: This flight is not because of our fiscal deficit but because, whenever there is panic in financial markets, the tendency is to rush to dollars, even though the cause of the panic may lie in the United States itself.
  • Using foreign exchange reserves: India has close to half a trillion dollars of foreign exchange reserves. These can be used, up to a point, to check the flight from the rupee to the dollar.
  • Restriction on capital outflow: If the flight nonetheless persists, then India will have a legitimate reason for putting restrictions on capital outflows in the context of the pandemic.

Way forward

  • The Centre must not worry about its fiscal deficit; and since the State governments will bear a substantial expenditure burden on account of the pandemic.
  • The Centre must make more resources available to the states.
  • The centre should raise their borrowing limits, perhaps double their current limits as a general rule, apart from negotiating the magnitude of fiscal transfers it should make towards them.

Conclusion

If the hardships of the people are not ameliorated through larger government expenditure, because of the fear that the larger fiscal deficit required for it would frighten finance into fleeing, then the privileging of finance over people would have reached its acme.

 

Government Budgets

States at centreop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Mains level : Paper 3- Financial stress on the states and what centre should do to address the problem.


Context

Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.

State finances showing the signs of stress

  • The fiscal crisis stemming from the disruption in economic activity due to the coronavirus is now beginning to show.
  • Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.
  • The stress to state finances stems from multiple sources.
  • First, as economic growth falters, their own income streams, for instance, revenues from petroleum products, real estate transactions, will slow down further, as will GST collections, and the amount collected through the compensation cess will not be enough to meet budgeted expectations.
  • Second, as the Centre’s own revenues also slow down, transfers to states will take a hit. It is quite likely that tax devolution to states, which has been budgeted at Rs 7.8 lakh crore in 2020-21, will not materialise.
  • Collectively, state expenditure far outstrips that by the Centre, with revenues falling short, any cutbacks in their spending, at a time when there is a need for a bold fiscal expansion, will further aggravate the economic stress.
  • Need assurance of adequate resource: Thus, states, which are at the frontline of fighting the public health crisis, need to be assured of adequate resources.

Increase in the WMA limit will not address the issue

  • Limit increased by 30%: The Reserve Bank of India decided to increase the ways and means advances (WMA) limit by 30 per cent for state governments.
  • What is WMA? The WMA is a temporary liquidity arrangement with the RBI which helps governments tide over their short-term liquidity woes.
  • A short term measure: While states have been averse to opting for this facility in the past, and the new WMA limits may need to be revised further if the mismatch rises, this is a short-term measure, and does not address the underlying issue of significant revenue slippages.
  • Contradictory impulse: Under the existing fiscal deficit constraint, the collapse in revenues will force states to cut back on spending, imparting a contractionary impulse to the economy.

Way forward

  • The Centre must take several steps to ensure an adequate flow of resources to states.
  • First, it must immediately clear all its pending dues to state governments.
  • Second, while it is cheaper for the Centre to borrow and transfer to states, even though the spreads between state and central government bonds have now widened, making state borrowing more costly, states must be allowed to borrow more.
  • Third, as some state chief ministers have suggested, the fiscal deficit limits imposed on states must be relaxed.
Government Budgets

A prescription for revivalop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Mains level : Paper 3-Measures to revive the Indian economoy.


Context

The root cause of the present malaise in our economy is the “death of demand”.

How demand matters for growth?

  • The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
  • How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.

What needs to be done to break the vicious cycle?

  • What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
  • Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.

Demand in India

  • No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
    • We still have to provide so many goods and services to our people in order to improve their “quality of life”.
  • Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
  • How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
  • Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
    • Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.

How the government should deal with the situation

  • Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
    • Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
  • Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
    • But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
    • What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
    • The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
    • In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.

Figures of the latest budget and need for the reforms

  • Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
  • The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
  • Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
    • Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
    • How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.

Conclusion

A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.

Government Budgets

Union Budget 2020: Key Takeaways of FM’s speechPriority 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Union Budget and its highlights

Mains level : NA


Union Finance Minister has presented the Union Budget 2020.

Major highlights of FM’s speech are as follows:

Between 2006-2016, 271 million are out of poverty.

India has moved on from over 4 per cent growth in 1950s to 7.4 per cent to 2014-19 period.

Total of 60 lakh new taxpayers and 105 crore e-way bills generated under GST. Average household now saves 4 percent of monthly spend due to reduced GST rates.

Central government debt reduced to 48.7 per cent of GDP in 2019 from 52.2 per cent.

FM rules out a16-point guide to make India an aspirational economy. India is now 5th largest economy in world.

Government to incentivise farmers to go solar. Over 6 crore farmers under Pradhan Mantri Fasal Bima Yojna have been insured. Pradhan Mantri Kisan Urja Suraksha and Utthan Mahabhiyan (PM KUSUM) to be expanded, providing 20 lakh farmers in setting up standalone solar pumps.

Railways will set up Kisan Rail through PPP model so that perishable goods can be transported quickly. Krishi Udaan scheme to transport agri products to national as well international destinations to be launched.

Agri-credit target for the year 2020-21 has been set at Rs 15 lakh crore.

Rs 69,000 crores for allocated for the healthcare

Education and training: Rs 99,300 crore allocated for education in FY21. Govt will start start Ind-Sat Exam to promote study in India and a degree-level online education programme for the deprived.

Allocation for Swachh Bharat Mission for 2020-21 stands at Rs 12,300 crore. In further push to ‘Nal se jaal’ scheme, govt proposes Rs 3.6 lakh crore towards piped water supply to households.

National Textile Mission to be launched with a proposed Rs 1,480 crore allocation, says FM Nirmala Sitharaman.

To boost infrastructure, FM says 9,000 km of economic corridor will be set up. “Chennai-Bengaluru expressway will also be started. Delhi-Mumbai expressway to be completed By 2023.

Internet connectivity:  550 WiFi facilities have been commissioned at railway stations. 1 lakh gram panchayats to get optical fibre link. An allocation of Rs 6,000 crore will be provided for BharatNet scheme.

Allocation of Rs 27,300 crore for development of industry and commerce.

Renewable Energy: Rs 20,000 crore for renewable energy sector in a bid to tackle pollution and climate change. A new scheme of smart meters will be launched.

100 more airports to be developed by 2025.

An allocation of Rs 8,000 crore will be made for National Mission on Quantum Computing and Technology.

Women schemes, senior citizens in Budget: Sitharaman says enrolment ration for girls under ‘Beti Bachao Beti Padhao‘ is higher than boys. Further, Rs 28,600 crore will be allocated in FY21 for women-linked programmes. Allocation for senior citizens and ‘Divyang’ enhanced to Rs 9500 crore.

FM proposes Rs 4,400 crore to tackle Delhi’s air pollution problem. Last year, the Supreme Court had termed the situation as “worse than Emergency” as air quality dipped to hazardous levels.

Insurance cover for bank depositors raised from Rs 1 lakh to Rs 5 lakh. Currently, in the (unlikely) event of a bank going bust in India, a depositor has claim to a maximum of Rs 1 lakh per account as insurance cover — even if the deposit in their account far exceeds Rs 1 lakh.

Foreign direct investment (FDI) into the country has increased to $284 billion during 2014-19 from $190 billion in previous five years.

Nirvik (Niryat Rin Vikas Yojana) scheme to provide enhanced insurance cover and reduce premium for small exporters.

Focus on MSMEs: More than 5 lakh MSMEs benefited from RBI’s restructuring of loans, says FM.

Fiscal deficit target pegged at 3.8% of GDP for FY 2019-20. FY21 fiscal deficit target pegged at 3.5% of GDP. Fiscal deficit is considered the most important marker of a government’s financial health. Not letting the fiscal deficit go completely out of control has been one of the standout achievements of the government.

Government to sell part holding in LIC. Besides, govt to also sell stake in IDBI Bank to private investors. That LIC has been identified as a candidate for a potential public listing by the government. The government’s move is a part of efforts to push through an aggressive disinvestment and asset monetisation programme.

Nominal growth of GDP for 2020-21 has been estimated at 10 per cent.

New income tax rates: 10% tax for income between 5 lakh-7.5 lakh; 15% tax for income between 7.5 lakh to 10 lakh; 20% tax for income between 10 lakh to 12.5 lakh; 25% tax for income between 12.5 lakh to 15 lakh; 30% tax for income above 15 lakh.

Vivad se Vishwas’ scheme announced by Sitharaman for direct tax payers whose appeals are pending at various forum. 4.83 lakh direct cases pending in various appellate forums. “Under the scheme, taxpayer to pay only amount of disputed tax. They will get complete waiver on interest and penalty if scheme is availed by March 31, 2020.

15th Finance Commission has cut state share of central taxes by one percentage point to 41 per cent.

Government Budgets

Shun fiscal adventurismop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Why fiscal stimulus is not the elixir as it is made out to be?


Context

In the run-up to the budget, there was enormous pressure on the finance minister to launch a fiscal stimulus so as to pump-prime the economy. That she did not succumb to the temptation is a big relief.

Why fiscal stimulus is unwarranted?

  • There is already considerable stimulus in the system. 
  • Excessive fiscal deficit: To her credit, the finance minister took a step towards transparency by admitting to off-balance-sheet borrowings of 0.8 per cent of GDP for both the current and next fiscal year.
    • Acknowledging that the fiscal deficit would actually be higher at 4.6 per cent and 4.3 per cent of GDP respectively. This is already excessive.
  • Unrealistic projection of revenue growth: Add to this the unrealistic projections of revenue growth and disinvestment proceeds for next year and we have a potentially unsustainable fiscal situation.
    • Any stimulus on top of this would have been clearly

Possibility of undermining the RBI’s efforts

Fiscal pressure could harm the RBI’s efforts to revive the economy in the following ways-

  • Harming long term investment rates: Fiscal pressures will undermine the Reserve Bank of India’s struggle to revive investment by bringing down long-term interest rates.
  • Rating downgrades: It could result in a sovereign rating downgrade and jeopardise efforts to attract foreign capital.
  • Increase in inflationary pressure: It can stoke inflationary pressures, something we cannot afford when inflation is above the RBI’s target rate.
  • Pressure on the external sector: And most importantly, it can lead to pressures on the external sector.
  • Past experiences: The balance of payments crisis of 1991 and the near crisis of 2013 in the wake of taper tantrums were, at their heart, a consequence of extended fiscal profligacy.

Counter-arguments of the supporters of the stimulus and fallacies in it

  • Low Debt-to-GDP ratio: It is argued that our debt-to-GDP ratio is low in international terms.
    • Misleading comparison: The data don’t bear this out. In any case, our experience, as well as research, shows that international comparisons of debt-to-GDP ratios, without reference to other parameters, are misleading.
  • Debt in domestic currency: It is also argued that we do not need to worry because our debt is mostly in domestic currency unlike that of many emerging economies.
    • The fallacy in this argument: Our debt in the domestic market didn’t protect us from previous crises, and there is no reason to believe that it will protect us from the next one, especially as our foreign debt is proportionally higher than before.
  • Robust foreign exchange reserves: It is argued that our foreign exchange reserves are robust and a balance of payments crisis is improbable. Such complacency is misplaced.
    • Fallacy- No forex is large enough in bad times: We should not forget the lesson that in good times any amount of forex reserves looks like it is too large, but in bad times no amount of reserves is large enough.

Quality of fiscal consolidation

  • Quality a cause for concern: As much as the headline fiscal deficit numbers are a cause for concern, the underlying quality of fiscal consolidation is a bigger concern.
  • Increasing revenue deficit: Conveniently off the radar, the revenue deficit, far from coming down, is actually going up.
    • Two-third borrowing to finance revenue expenditure: This year, more than two-thirds of what the government is borrowing is going to finance current expenditures like salaries, pensions, interest payments and subsidies.
    • That ratio will rise to three-quarters next year.
    • Crowding out of the expenditure: This debt-financed revenue expenditure is simply unsustainable as it will increasingly crowd out capital expenditure.
  • Red flags on the state finances.
    • Another dimension of the quality of fiscal consolidation is the combined fiscal position of states which is, in fact, the big elephant in the room.
    • Together, states spend one-and-a-half times more than the Centre.
    • Larger development impact than Centre: Studies show that how efficiently states spend their money has a much greater development impact as compared to the Centre.
    • Red flags by the RBI on states finances: The states are not doing a good job. In its latest annual report on state finances, the RBI raised several red flags on state finances-
    • states’ increasing weakness in their own revenue generation.
    • Their unsustainable debt burdens.
    • And their tendency to retrench capital expenditures in order to accommodate fiscal shocks such as farm loan waivers, power sector loans under UDAY and a host of income transfer schemes.
    • Consequences in the market: The market will penalise mismanagement of public finances; it does not care who is responsible — the Centre or states — for an unsustainable fiscal stance.

Conclusion

  • The fear of one-off fiscal stimulus becoming permanent: By far the biggest fear about a fiscal stimulus is that it is tempting to plunge into a spending programme saying it is a one-off and will be withdrawn when the pressure eases. Experience shows that it is very difficult to bail out. It is good that the finance minster avoided doing any such thing.
    • As Milton Friedman famously said, there is nothing more permanent than a temporary government programme.
  • Need to kick-start the private investment: What the economy needs for a sustained turnaround is kick-starting private investment.
    • Implementation of reforms: A necessary condition for inspiring investor confidence is the implementation of structural and governance reforms. This will be a long-haul.
    • That the budget did not launch the journey is a big disappointment. But, at least, the budget did not make a bad situation worse by embarking on fiscal adventurism.
    • It’s better, as Keynes said, to be roughly right than precisely wrong.

 

 

Government Budgets

[op-ed snap] No rescue in sightop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Government budget- allocations to various sectors-how it could help revive the economy.


Context

The disconnect between Budget and Economic Survey is much greater this year.

Background of the economy as the budget is introduced

  • The 2020 Budget was presented against the background of-
    • Slowing economy.
    • Poor investment climate.
    • Declining consumption demand and
    • Stagnant exports.
    • The steady deceleration in growth, which registered at 4.5 per cent in the second quarter of the current fiscal — the lowest in the last 26 quarters — presented a challenge as well as an opportunity.

Infrastructure investment

  • The hope of substantial increase in allocation for infra: The hope was that there will be a substantial increase in infrastructure investment, which in turn will trigger investment demand, but the actual allocations are not promising.
    • This was particularly surprising in the wake of the recent announcement that there will be an investment of Rs 103 trillion in the next five years to leapfrog India to a $5-trillion economy.
    • Private sector expected to contribute: Much of the investment for this will have to be made by the private sector and it is hoped that the allocation of Rs 20,000 crore in equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore of investment support.

Budgetary allocation for capital expenditure

  • 1.7% of GDP to 1.8 %: The budgetary allocation for capital expenditure for the current year, which is estimated at 1.7 per cent of GDP this year, is budgeted at 1.8 per cent in 2020-21.
  • Agriculture, irrigation and rural development: The Budget also contained 16 action points on agriculture, irrigation and rural development and the Rs 2.83 lakh crore allocation is higher than the budget estimate for the previous year by just 2.5 per cent and revised estimate by 13.2 per cent.
    • But the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimate over the revised estimate.
  • Transport infrastructure: The allocation to transport infrastructure in the Budget- at Rs 1.7 lakh crore-is just 7.6 per cent higher than the revised estimate for 2019-20.
  • MGNREGA and PM-Kisan Samman Nidhi: The allocations to schemes like the MGNREGA has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in 2020-21.
    • PM Kisan Samman Nidhi: For schemes like PM Kisan Samman Nidhi, it is just as much as was budgeted for 2019-20.
    • As a consequence, not much is expected in terms of propping up the consumption demand.

Slippage in fiscal deficit

  • Increase in fiscal deficit expected: The slippage in fiscal deficit from the target set in the budget estimate in 2019-20 was expected for the following reasons-
    • Below expected nominal GDP growth: Nominal GDP growth was 7.5 per cent as against the estimated 12 per cent in the budget.
    • Overestimation in the growth of tax revenue at 18.3 per cent over the pre-actuals of the previous year.
    • Missed disinvestment target: The slippage in achieving the disinvestment target of Rs 1.03 lakh crore.
  • Thus, it is not surprising that the fiscal deficit for the current year stands estimated at 3.8 per cent of GDP and for the next year at 3.5 per cent.
  • Off-budget financing: The major concern is that the reported off-budget financing is almost 0.85 per cent. This does not capture the bills and refunds payable by the government.

Would the budgeted and revised estimates realise?

  • On disinvestment front: The disinvestment revenue is estimated at Rs 65,000 crore though the realisation so far has been just Rs 18,000 crore, which implies another Rs 47,000 crore will have to be mobilised in the next two months.
  • On tax revenue front: The RE of tax revenue for the current year is over 14 per cent higher than the actual for 2018-19.
    • This is perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, which allows the settlement of disputed tax to be paid without interest and penalty.

Tax reforms in the budget

  • DDT abolition: On tax reforms, the abolition of dividend distribution tax (DDT) was expected.
  • Complicating Income tax: The reforms in individual income tax complicates the tax by creating six brackets.
    • The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax.
  • What could have been done? The government could have simply-
    • Phased out the tax concessions.
    • Indexed the brackets for inflation and
    • Reduced the rates of tax with an appropriate adjustment in the brackets.

Conclusion

The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level.

Government Budgets

[op-ed of the day] A workmanlike accountop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Government budget, $5tn dollar economy


Context

The Budget was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.

Fiscal arithmetic of the Budget

  • A clearer picture of off-balance-sheet borrowings: To a large extent, the Budget has done this, giving a much clearer picture of the off-balance-sheet borrowings, which add to the government’s debt and its obligations to pay.
    • Increasing the credibility of government: This move will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
  • Possibility of nominal 10 % growth: The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth.
    • Aggressive revenue projection: The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics.
  • Disinvestment and privatisation revenue: The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation.
    • The target is up sharply to Rs 2.25 lakh crore.
    • This initiative has been one of the core focus areas of the government, has to be lauded for-
    • The effects of increasing efficiency in operations and-
    • Restricting the losses to the public balance sheet.
    • Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
  • Optical allocation by the Govt.: Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue.
    • High revenue expenditure: Capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies.

The slowdown in the economy and squeeze in the credit flow

  • Three aspects of the current slowdown that makes it different
  • FirstMultiple engines of growth have synchronously decelerated-
    • Consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning
  • Second- Demand led slowdown:
    • This is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital.
  • Thirdthe trigger for this episode was a financial shock-
    • NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
  • Squeeze in the credit flow of the banks
    • Drastic reduction in credit flows: A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019.
    • MSMEs worst affected by the credit squeeze: Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium enterprises (MSMEs) has been one of the worst affected.

Whether the slowdown is more cyclical or structural-conundrum for policymakers

  • If it is more cyclical, aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result.
    • If not, then the wait is likely to be longer and will involve more sector-specific de-bottlenecking initiatives.
  • Signs of structural constraints: While there is certainly a cyclical component in the manufacturing segment- the proximate source of the slowdown- there are signs of deeper structural constraints.
  • Quintuple problem– This problem has now expanded into almost quintuple problems, encompassing the government, households, NBFCs along with the banks.
    • Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence.

Conclusion

Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.

 

 

Government Budgets

[op-ed snap] Falling short of aspirationsop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Government budget and allocations for various sectors and schemes.


Context

The Budget can be judged in terms of its effect on rural demand, investment and private sentiments– all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.

Skill development allocation- 3000 Crore

  • Unmet Demand: There is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers.
    • Need for quality education and skills: Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills.
    • Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills.
    • Skilling will require massive investment and concerted efforts.
    • What could have been done? The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth.
    • The country cannot afford to let the world’s largest workforce waste this way.

On flagship welfare schemes

  • The MGNREGA is allocated ₹61,500 crore, which is less than ₹71,000 crore for the current fiscal year.
  • PM-KISAN: Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded.
  • Good schemes for increasing demand: These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services.
    • Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.
  • Micro-irrigation schemes for 100 water-stressed: Focus of schemes such as micro-irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes.
  • Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.
  • ₹1.7 lakh crore for transportation infrastructure: The allocation of ₹1.7 lakh crore for transportation infrastructure is also a welcome step. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle –to spur job-creating growth.
  • To pull in private investment, public funding should be front-loaded in under-implementation projects.
  • Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.

 Bonds Market development  and startups

  • Need for the corporate bond market: The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market.
  • No focus on the corporate bond market: The focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange-traded funds in government bonds.
    • Need for the well-developed market: Government’s moves are welcome but not enough. A well-developed bond market should draw upon-
    • Domestic insurance funds.
    • Pension funds and
    • Mutual funds-which are capable of investing in corporate bonds across different schemes.
  • Startups: The other leg of the “aspirational” Budget is the startups.
    • Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome.
    • Reluctance to abolish angel tax: But the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable.

Scheme for NBFC

  • Allowing NBFCs into TReDS: Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS).
    • TReDS is an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.

Changes in provisions for SMEs and their problems

  • Audit threshold increased to 5 crore: To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from ₹1 crore to ₹5 crores for those entities that carry out less than 5% of their business transactions in cash.
  • Restructuring window increased: A provision in the budget extended the window for the restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.
  • Problems faced by the SMEs
    • Input tax rate higher for input than for the final goods: For many products produced by these enterprises, the tax rates are higher for inputs than the final goods.
    • High taxes on imports and exports: In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.

Other provision made to revive the private sector 

  • Recognising the need to revive the dying spirit of the private sector, several provisions have been made in the budget to revive the spirit of the private sector like-
    • Decriminalisation of several civil offences by firms under the Companies Act.
    • The abolition of dividend distribution tax (DDT).
    • The assurance that tax-related disputes will be considered with compassion.
    • The scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity.

Conclusion

Everything considered the future of the economy will turn on whether the government delivers on the promises of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.

 

 

 

 

Government Budgets

Explained: Fiscal Responsibility and Budget Management (FRBM) ActExplained

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM act

Mains level : Read the attached story


Context

  • As the years have rolled by, fiscal deficit has become a key factor to watch out for in every Budget presentation.
  • It is considered the most important marker of a government’s financial health.
  • A government that abides by the FRBM rules enjoys greater credibility among the rating agencies and market participants – both national and international.

FRBM Act

  • The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
  • It was first introduced in the parliament of India in the year 2000 by Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
  • Subsequently, the FRBM Act was passed in the year 2003.

Features of the FRBM Act

  • It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
  1. Macroeconomic Framework Statement
  2. Medium Term Fiscal Policy Statement and
  3. Fiscal Policy Strategy Statement

Fiscal Indicators

It was proposed that the four fiscal indicators be projected in the medium-term fiscal policy statement viz.

  1. Revenue deficit as a percentage of GDP,
  2. Fiscal deficit as a percentage of GDP,
  3. Tax revenue as a percentage of GDP and
  4. Total outstanding liabilities as a percentage of GDP

Why FRBM is back in debate?

  • Not letting the fiscal deficit go completely out of control has been one of the standout achievements of the incumbent NDA government.
  • However, as India’s economic growth has decelerated, there have been growing pressures on the government to breach the FRBM orthodoxy and spend in excess of fiscal deficit targets to reboot domestic growth.
  • Others, however, continue to caution that the “real” fiscal deficit is already far more than the official number, and as such, there is no room for further increasing the expenditure by the government.

Which of these narratives is true?

  • Actually, neither. But to understand that one has to first understand what are the different types of deficits and why does it matter to limit them.

Different types of deficits

  • Fiscal is the excess of what the amount the government plans to spend over what the government expects to receive.
  • Obviously, to make up this gap, the government has to borrow money from the market.But all government expenditure is not of the same kind.
  • For instance, if the expenditure is for paying salaries then it is counted as “revenue” expenditure but if it goes into building a road or a factory – that is, something that in turn increases the economy’s capacity to produce more – then it is characterized as “capital” expenditure.
  • The fiscal deficit is another key marker and it maps the excess of revenue expenditure over revenue receipts.
  • The difference between fiscal deficit and revenue deficit is the government’s capital expenditure.

What FRBM says on deficits?

  • As a broad rule, it is considered fiscally imprudent for a government to borrow money for “revenue” purposes.
  • As a result, the FRBM Act of 2003 had mandated that, apart from limiting the fiscal deficit to 3% of the nominal GDP, the revenue deficit should be brought down to 0%.
  • This would have meant that all the government borrowing (or fiscal deficit) for the year would have funded only capital expenditure by the government.

Why prefer capital expenditure over revenue expenditure?

  • In any economy, when the government spends money or cuts taxes it has an impact on the economic activity of the country.
  • But this impact (also called the “Multiplier” effect) is quite different for revenue expenditure and capital expenditure.
  • In other words, when the government spends Rs 100 on increasing salaries in India, the economy grows by a little less than Rs 100.
  • But, when the government uses that money to make a road or a bridge, the economy’s GDP grows by Rs 250.
  • The question then is: How to get governments to switch from revenue expenditure to capital expenditure? That’s where the FRBM Act comes in handy.

What is the significance of an FRBM Act?

  • The popular understanding of the FRBM Act is that it is meant to “compress” or restrict government expenditure. But that is a flawed understanding.
  • The truth is that FRBM Act is not an expenditure compressing mechanism, rather an expenditure switching one.
  • In other words, the FRBM Act – by limiting the total fiscal deficit (to 3% of nominal GDP) and asking for revenue deficit to be eliminated altogether – is helping the governments to switch their expenditure from revenue to capital.
  • This also means that – again, contrary to popular understanding – adhering to the FRBM Act should not reduce India’s GDP, rather increase it.

Here’s how: When you cut on revenue deficit – that is, reduce your borrowings for funding revenue expenditure – and instead borrow to only spend on building capital, you increase the overall GDP by 2.5 times the amount of money borrowed. So adhering to FRBM Act is a win-win.

What has been India’s record on adhering to FRBM Act?

  • Between 2004 and 2008, the Indian government had made giant strides on reducing both revenue deficit and fiscal deficit.
  • But this process was reversed thereafter thanks largely to the Global Financial Crisis and a domestic slowdown.
  • Since then, there have been several amendments to the Act essentially postponing the targets.
  • But the worst development happened in 2018 when the Union government stopped targeting revenue deficit and instead focussed only on fiscal deficit.

Way Forward

  • There is a need to revert back to the original FRBM Act if 2003 by recognising and prioritizing the reduction in revenue deficit.
  • Doing this will help the government boost the kind of expenditure that actually increases the GDP.
Government Budgets

[op-ed snap] The stress in state financesop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Effects of low growth rate on the State's finances.


Context

Lower tax devolution, delays in GST compensation are potential risks to the states.

Trends in the finances of the state

  • The unaudited fiscal data of 21 states:
    • These states account for around 90 per cent of India’s GDP in 2017-18. The data reveal some trends.
  • First Trend: Revenue receipt sliding down
    • From 15.6 to 4.6 %: At the aggregate level, revenue receipts of these 21 states have grown by a mere 4.6 per cent, sliding down from 15.3 per cent over the same period last year.
    • Decrease in Central tax devolution: The analysis shows that the states’ share in Central tax devolution has slowed the most, contracting by 2.3 per cent during this period, after having grown by 12.1 per cent over the same period last year.
  • Second trend: The Centre’s gross tax revenues are expected to fall short of the budgeted target by a considerable Rs 3- 3.5 trillion this fiscal year.
    • The aggregate tax devolution to all states may be as much as Rs 1.7 – 2.2 trillion lower in the current fiscal year than what was budgeted.
    • This is a key revenue risk staring at the state governments this year.
  • Third trend: States own tax and non-tax revenue contracting.
    • The states’ own non-tax revenues have contracted by 5 per cent during the first eight months of this fiscal year, after an expansion of 15.3 per cent over the same period last year.
    • Decreasing tax revenue: Growth of states’ own tax revenues, the largest source of their revenue receipts, eased to a tepid 2.2 per cent during this period from a healthy 16 per cent over the same period last year.
    • This is in part by the modest rise in collections of the State Goods and Services Tax (SGST).
  • Fourth trend: Increase in the grants from the Centre
    • The primary factor boosting the GST compensation seems to be the low growth in states’ GST revenues relative to the mandated 14 per cent annual growth for the five-year transition period.

Delay in receipt of the GST collection and the risk

  • Some state has voiced concerns over the delays in receipt of the compensation amount in recent months.
    • The delay has complicated their fiscal position and cash flow management.
    • Risk for the states: The timing of receipt of the compensation is the second major revenue risk facing state governments.
    • If compensation gets delayed to the next fiscal year, we may well find some traditionally revenue surplus states staring at a revenue deficit
    • Case of no GST compensation: But it seems states will have to start gearing up for life without the GST compensation.

The Rise in State Development Loans or Market borrowing by states

  • SDL rising in first three quarters: According to ICRA’s estimates, net SDL issuance of all states and UTs rose by 15.5 per cent to Rs 2,806 billion in the first three quarters of this fiscal year, up from Rs 2,429 billion last year.
    • The combined gross SDL issuance has expanded by a significant 34.9 per cent to Rs 3,874 billion this fiscal year (April-December), up from Rs 2,872 billion last year.
    • The calendar for state government market borrowings for the fourth quarter indicates tentative gross SDL issuances of Rs 2,086 billion in the quarter, implying a moderate 9.1 per cent growth.
    • But, this conceals a large dip in redemptions.
    • Net SDL issuances will expand by a staggering 55.7 per cent to Rs 1,766 billion in Q4FY20, up from Rs 1,134 billion last year, underlining the stress in state government finances this year.
  • About 25 % rise in borrowing this fiscal: If market borrowings in the fourth quarter are in line with the amounts indicated, total gross borrowing this fiscal year would rise by 24.6 per cent to nearly Rs 6 trillion, up from Rs 4.8 trillion last year.
  • Net borrowing by states as large as Central govt. borrowing: Net borrowings by states would rise by an even sharper 28.3 per cent to Rs 4.6 trillion this year, becoming nearly as large as the Central government’s net market borrowings of Rs 4.7 trillion that have been announced so far for this year.

Conclusion

The figure and the trends indicated the financial risk the states are staring at. The government must take measure to revive the economy in order to address the problems faced by the states and ensure that the states are not left in lurch while SGT compensation receipts get delayed.

 

 

Government Budgets

[op-ed snap] An independent fiscal watchdog for Parliamentop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Parliamentary Budget Offices

Mains level : Utility of such PBO for Indian parliamentarians


Monitoring money flow

  • When most people arrive at the ballot box, they vote with their gut.
  • But getting there requires absorbing and shaping months and years of conversations, long-held opinions and ideally, hard facts and evidence.
  • What is then important for our electorate and the representatives we vote for is that they have an independent, non-partisan source for these hard facts and evidence.
  • This is particularly important for our Parliament, which controls where and how money flows into our government and our country.

Need for expertise

  • The money flow needs to be not based on political allegiance or expediency, but on its expertise in budgetary, fiscal and economic matters.
  • Regardless of a majority or minority government, this body serves parliamentarians equally and without prejudice.
  • Even in a majority government, besides few expertises from the civil service, most parliamentarians do not benefit from timely access to good quality analysis on economic, fiscal or financial matters.

The Parliamentary Budget Offices

  • The body exists in many countries around the world, going by many names but most commonly as Parliamentary Budget Offices (PBOs).
  • These bodies help shape the debate and discourse around the state of the nation’s finances and the fiscal implications of significant proposals.
  • The work done by PBOs naturally ends up in the public sphere; when they do, they help drive smarter, more focused debate in the media and with our electorate.

Learning from examples: Defence costing

  • Take an example: the Rafale deal. Part of the controversy resulted from uncertainty regarding the true lifecycle costs of the aircraft bought.
  • In 2011, the Canadian PBO released a cost estimate for purchase of F-35 jets. This estimate far exceeded the one presented by defense analyst.
  • Defence costing, typically the purview of the Defence Ministry, was a completely new area of analysis, information and research that parliamentarians could now access to hold the government to account.

What PBOs provide

  • Besides costing policies and programmes, PBOs provide significant and sometimes the sole source of information on fiscal and economic projections.
  • The role of such an office does not always mean challenging the government; it is often the case that economic and fiscal projections of a PBO and the Ministry of Finance are similar.
  • This is unsurprising as data sources and economic methodologies for such projections are well established and uniform.
  • However, without the existence of another data point, generated by an independent, non-partisan office, it is difficult for parliamentarians to ensure that these projections and estimates continue to be reliable enough for them to make decisions on.
  • When these projections come into question, the Cabinet can tap the civil service for further research and analysis.
  • Most parliamentarians do not have this luxury and may have to rely on poor quality third-party data and analysis, done without relevant expertise. This is a situation that must be avoided.

Co-existing with the AG

  • A question — and a reasonable one — that often arises is the necessity of such an office when we already have an auditor general.
  • However, this misunderstands the role the auditor general performs, which is to provide retrospective audits and analysis of the financial accounts and performance of government operations.
  • These audits are often focused on the day-to-day goings on of government, and often hone in on the performance of the civil service.
  • A PBO provides prospective, forward-looking economic and fiscal projections, as well as policy costings.
  • This distinguishes it from an auditor general, which provides useful information, but only after the fact.

Global examples

  • Internationally, similar offices have been established across the world, with the most prominent being the Congressional Budget Office in the US which provides impartial advice to both upper and lower houses of the legislature.
  • Offices in the Netherlands, Korea, Australia and the UK have also been established for varying lengths of time. PBOs are also making an appearance in emerging economies in Sub-Saharan Africa and Southeast Asia.
  • In some countries, including Australia and most recently, Canada, PBOs have been playing the unique role of costing electoral platforms during an election campaign.
  • In this period, PBOs provide independent cost estimates of electoral platform measures to political parties.

India needs such office

  • A PBO, or a similar independent fiscal institution, will not solve all these problems but is a relatively cost-efficient way to arrive at a solution.
  • As the process toward the Union Budget 2020 has already kicked off, it would be prudent for parliamentarians to examine the case for a PBO more deeply.
  • The amount of information parliamentarians need to scrutinise in Budget documents has exponentially increased and a PBO would assist parliamentarians in this process of scrutiny.
  • Legislatures across the world have witnessed an increasingly stronger executive try to wrest away its rightful power of the purse.
  • A PBO would help resuscitate these powers that have fallen into disuse.

Way forward

  • What distinguishes India’s democracy, besides its diversity of views and opinions, is its ability to evolve and remain dynamic.
  • What is gravely in danger is evidence-based discussion around important policies that affect the trajectory of our Republic, discussions which can quickly blur the line between fact and fiction.
  • This is why India’s Parliament and government need to work quickly and energetically to establish such an office; it is in everyone’s interests to do so.
Government Budgets

[op-ed snap] Allocations are keyop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : What are the priority areas in economy now


The budget must focus on the priority areas for the budget allocations. It is expected to provide funds and an assurance that the allocations would be rule-based.

  1. Rural distress needs to be allocated to funds.
    1. Drinking water
    2. Improving the efficiency of existing irrigation systems
    3. Rural finance — including temporary waiver of loan repayments — 
  2. Job creation
    1. It will depend on the revival of industrial production, continuing growth of exports and an agricultural revival. 
    2. Most policies have a lag of around four to six months.
    3. In the short run, the money will be needed for the MGNREGA. 
    4. The budget should concretely raise public investment to revive private investment to reverse the declining growth rate in every quarter.
  3. Fiscal Deficit
    1. The fiscal deficit is a real issue and leads to pressures on the bank rate and exchange rates. 
    2. The need is to raise resources by taxation and not cutting consumption by the government and non-government sectors. 
  4. Banking sector
    1. The cleanup of the banking and NBFC sectors should be immediate and it needs funds.
    2. Though these are outside the budget, they determine the fiscal deficit.
  5. Raise government investment at the central, state and parastatal level.
  6. The economy is suffering from a decline in investment ratios. This is reflected in the declining growth rate, which is below the potential of 8%. 
  7. The last round of the NSS data shows that girl child dropped out of school more than earlier. If she goes to college, marries late, the first child comes later the real demographic dividend starts.

Case study and way ahead

  1. Gujarat’s experience shows that a high manufacturing physical output growth rate reduces the workforce dependent on agriculture.
  2. The allocation for Self Help Groups with a trust fund is a clear solution.
Government Budgets

[op-ed snap] Borrow abroad and profitop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Government Debt and its composition

Mains level : Public debt and related issues


Context

The government is planning to issue 10 year bonds denominated in foreign currency.

Why it is a good idea

  1. Such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates.
  2. Our debt to GDP ratio is not very high, the exchange rate is stable, and foreign exchange reserves are high. So foreign borrowing, if its long term, is not a problem.
  3. If foreign bond issuance was accompanied by a move towards greater capital account convertibility then it may be worth pursuing.
  4. A country pays a country premium for borrowing in dollars; currently, the US 10-year bond is trading at 2%. A complex set of factors determine the country’s premium, but the magnitude of reserves and foreign currency debt are important attributes. India has less debt denominated in foreign currency, close to 5%. Thus, we should be able to borrow at a somewhat lower premium than 150 bp, possibly 130bp.
  5. Indian inflation has moved structurally downward over the last three years.
  6. It will also help to significantly lower the real repo rate to respectable levels. 

Problems with these bonds

  1. Usually, the lower dollar interest rate is offset in the long run by higher principal repayments as the rupee depreciates against the dollar.
  2. Loss of sovereignty and may lead to currency depreciation

No country has grown at “trend” rates with a real repo rate of around 3.4%, not even 2.4% or 2%. Issuing bonds now is an idea whose time has come.

Government Budgets

Fiscal Performance Index by CIIDOMRPriority 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CII, FPI

Mains level : FRBM


  • Confederation of Indian Industry (CII) has come out with a ‘Fiscal Performance Index’ to assess quality of budgets presented by the Centre and state governments.

Fiscal Performance Index (FPI)

  • The composite FPI developed by CII is an innovative tool using multiple indicators to examine quality of Budgets at the Central and State levels.
  • The index has been constructed using UNDP’s Human Development Index methodology which comprises six components for holistic assessment of the quality of government budgets.

Why need such an index?

  • A single criterion such as the ‘fiscal deficit to GDP ratio’ does not tell us anything about the quality of the Budget.
  • Hence, the Government should use multiple indicators to measure the quality of Budgets at the Central and the State levels rather than a single indicator.

Components of FPI

  1. Quality of revenue expenditure: measured by the share of revenue expenditure other than interest payments, subsidies, pensions and defence in GDP
  2. Quality of capital expenditure: measured by share of capital expenditure (other than defence) in GDP
  3. Quality of revenue: ratio of net tax revenue to GDP (own tax revenue in case of States)
  4. Degree of fiscal prudence I: fiscal deficit to GDP
  5. Degree of fiscal prudence II: revenue deficit to GDP and
  6. Debt index: Change in debt and guarantees to GDP

Other measures of FPI

  • As per the new index, expenditure on infrastructure, education, healthcare and other social sectors can be considered beneficial for economic growth.
  • At the same time, tax revenues are sustainable sources of revenue for the government as compared to one-time income sources.
Government Budgets

[op-ed snap] Realising grand objectivesMains Onlyop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Issues which need immediate attention for India's safety and growth.


CONTEXT

While the broad directions of India’s foreign relations — with the neighbourhood, Afghanistan, the U.S., China, Indo-Pacific, Russia, and Europe — have been set over the past several years, the main factors inhibiting India’s performance are ultimately domestic in nature. Three stand out.

1. Trade

  • The first is trade.
  • It often surprises people that India’s trade-to-GDP ratio is higher than China’s or the U.S.’s. India’s market, and access to it, remains a valuable lever with other countries.
  • But much of India’s commerce involves raw materials and low value-added goods, and is still insufficiently integrated into global supply chains.
  • With global trade stagnant and the World Trade Organization at a standstill, the only way for India to seize a larger share of exports is through well-negotiated preferential trade agreements.
  • India’s past record in this department has been poor, leaving some sectors exposed to dumping and others unnecessarily cloistered.
  • A smarter trade agenda will not only create jobs and drive reforms at home, it could become a potent strategic tool in international affairs.

2. Defence

  • The second concerns defence.
  • India has the world’s fifth largest defence budget but is also the world’s second largest arms importer.
  • Not only does this compromise national security, it means that India cannot offer an alternative as a defence supplier to countries in its region.
  • Defence indigenisation will require financing for defence capital expenditure; assessments of costs, technology transfer capabilities, and export potential early in the procurement process; and fair competition between the Indian private and public sectors.

3. Overseas Project Implementation

  • The third concerns overseas project implementation.
  • India’s outgoing aid budget has been relatively flat, reflecting a scepticism of grant aid from India’s own experience as a recipient.
  • Instead, it has now started to explore other financing options. Indian overseas credit has increased significantly, with over $24 billion extended primarily to South Asia, Southeast Asia, and Africa.
  • But building on several recent steps will significantly increase the country’s delivery and regional credibility.
  • These include better project planning, more attractive and competitive financing terms, more reliable disbursal of funds, and enhanced coordination and communication with the private sector for implementation.

Conclusion

Many regional policy challenges would be addressed with these three major fixes. None will be easy as they will require tackling vested interests. While the first Modi government made its strategic objectives known and set out a clear direction, key policy interventions in these three areas will now be necessary for India to realise its grander objectives.

Government Budgets

[op-ed snap] Redactive pricing audit and the CAG’s dutiesMains Onlyop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CAG

Mains level : Redactive Pricing approach in CAG's Report harm transparency in democratic institutions.


CONTEXT

The Supreme Court’s observations in connection with the Rafale fighter aircraft deal by citing the Comptroller and Auditor General of India’s (CAG’s) report on redacted pricing, and subsequent media reports and the controversy over “stolen files” brought back into the spotlight the role of the supreme audit institution of India.

Questions surrounding the report

  • What is redactive pricing?
  • Does the constitutional mandate provide redactive pricing to be included in the CAG’s audit reports submitted to the President to be placed before Parliament?
  • Do any supreme audit institutions (SAIs) such as the National Audit Office, the Government Accountability Office or Commonwealth countries follow redactive pricing in audit reports?

Redaction

Redaction is the selection or adaption by ‘obscuring or removing sensitive information’ from a document prior to publication.

Duties of CAG

  • The CAG is mandated to audit all receipts and expenditures of the three-tier governments in India and report to the legislature judiciously, independently, objectively in compliance with applicable laws, rules and regulations, without fear and favour.
  • He conducts financial compliance and performance audits and submits his reports to the legislature to help people’s representatives in enforcing legislative oversight and public accountability of the executive.
  • Legislative committees such as the Public Accounts Committee and Committee on Public Undertakings examine the CAG’s selected reports.

Explanations regarding redactive Pricing

  • In the preface of the audit report, the CAG stated that redactive pricing was unprecedented but had to be accepted due to the Ministry’s insistence citing security concerns.
  • Consequently, the full commercial details were withheld and the figures on the procurement deal were blackened.

Not Transparent measure

  • It was unprecedented that an audit report submitted by the CAG to the President under Article 151 of the Constitution suppressed relevant information.
  • Whether the Ministry’s insistence citing security concerns could have been accepted by the CAG can be examined only by the Supreme Court in the light of the constitutional provisions on the CAG’s duties and parliamentary privileges and prerogatives.
  • Redactive pricing is nowhere used in SAI audit reports.
  • It does not seem to have been used in a government audit by any SAI of any country.
  • Redactive pricing in the ‘Performance Audit Report of the Comptroller and Auditor General of India on Capital Acquisition in Indian Air Force (Union Government – Defence Services, Air Force, Report No. 3 of 2019)’ suppresses more than it reveals.
  • For example, in the Rafale deal, Parliament, its committees, the media and other stakeholders of the CAG’s reports cannot obtain complete, accurate and reliable information due to redactive pricing.
  • The reduction in the original requirement, to 36 aircraft, a waiver of the earlier decision to involve Hindustan Aeronautics Limited, observations of the Indian Negotiating Team, cost escalation due to inclusion of bank guarantee and performance guarantee were not compared properly to arrive at the audit conclusion.

Pricing is Pivotal to procurement

  • Pricing is an integral part of the procurement decision-making process of any equipment, product, goods or service.
  • Therefore, price integrity and comparative competitiveness are at the heart of any procurement decision.

Way Forward

  • Given the dynamics of international competition in competitive products and pricing in today’s modern market scenario, pricing, delivery and post-delivery service and other conditions are essentially covered in an SAI audit.
  • It is a complex audit, demanding exceptional insight, expertise, knowledge and skills.
  • Seek expertise – In case the CAG’s office lacks expertise to conduct a performance audit, expertise can be sought from the pool of resources or credible organisations to be coopted in the audit team.
  • No resorting to redactive Pricing – Pricing decisions must be subjected to detailed analysis, without resorting to redactive pricing.
  • The privilege of Parliament – Parliament is constitutionally privileged to know what the executive had done and how and under what conditions a procurement was decided. The CAG’s audit is expected to highlight value for money in purchase decisions.

Conclusion

A performance audit is done to establish whether the procurement activity was executed keeping in mind economy, efficiency, effectiveness, ethics and equity. Only a thorough pricing audit can bring out the credibility and integrity of a purchase decision, thereby achieving an SAI’s constitutionally mandated responsibilities.

Government Budgets

[op-ed snap] Managing the stimulusop-ed snap


Note4Students

Mains Paper 2: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Government Budgeting.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the highlights of the budget 2019.

Mains level: The news-card analyses the income transfer scheme introduced in budget 2019 and its impact over the economy, in a brief manner.


Context

  • According to Budget 2019, the decline in fiscal deficit ratios has stalled and at nearly 6 per cent, India continues to have one of the highest general government (states plus Centre) deficits globally.

Crowding out, leaving more for the private sector

  • A measure of “crowding out” is government borrowing from bond markets as a share of incremental deposits in the banking system.
  • This ratio is now down to 33 per cent as the net bond issuance budgeted for the next financial year is unchanged from levels seen eight years back, a period in which the economy has grown substantially.
  • That is, the government’s excess spending, funded through borrowings, is now appropriating a smaller part of the financial savings and leaving more for the private sector.

Not all a rosy picture

  • In the current financial year, extra-budgetary spending was Rs 1.4 trillion higher than what had been budgeted.
  • Ninety per cent of that amount was from the Food Corporation of India.
  • While higher inventory holding likely explains a large part of this Rs 1.2 trillion increase, one wonders if some unfunded food subsidy may have contributed too.
  • Governments also have this tendency to give aggressive tax collection targets that make the deficit appear low, but then later in the year are forced to make course corrections.

Are the tax targets for the next year too aggressive?

  • They appear to be somewhat stretched but achievable.
  • The economic growth estimate of 11.5 per cent, taking the GDP to Rs 210 trillion, may be slightly optimistic, given how weak inflation has been in the past several months, even if the government’s consumption stimulus shores up activity levels.
  • Budgeted growth in direct tax collections at 15 per cent appears high, but is lower than what has been achieved over the past two years and thus more credible, given the significant widening of the tax base, and some recovery in corporate earnings.

Estimated growth for GST

  • The 18 per cent estimated growth for GST collections seems to assume an improvement in compliance.
  • According to the government, GST collections thus far have been nearly completely voluntary.
  • There has been very little enforcement and follow-up.
  • Post elections, the government may re-start the move towards e-way bill or invoice-matching, and also permit tax officials to question the accuracy of the self-assessments made by entities.

Income transfer scheme for farmers

  • The highlight of the budget was the Rs 750 billion income transfer scheme for farmers.
  • Even though this was widely anticipated, this is a policy innovation whose impact is hard to model.
  • Most income transfer schemes so far have been experiments on small sets of people in particular villages or townships.
  • The impact of a scheme with 117 million farmland owners is likely to be significantly different.

Concerns

  • How will the recipients use these transfers?
  • Will some microfinance companies create loan products where these payments become the instalments, and the recipient gets Rs 25,000 upfront instead of Rs 2,000 thrice a year?
  • Will these funds be used to repay existing loans from money lenders?
  • Will these funds be used to buy Rs 500 of better food every month, send the kids to a private school, invest in sowing the next crop, or used to buy a bicycle?
  • Will they save all or part of it?
  • Each of these choices will very likely be made by some individuals, but the collective impact would depend on how many chose to do what.

Will the income transfer scheme for farmers be inflationary?

  • Theoretically, a sudden rise in demand where supply takes time to respond should create inflation.
  • If for argument’s sake, everyone used these funds to send children to private schools, there could be a shortage of schools and teachers and the price of schooling would rise.
  • But this risk is low: At about a third of a per cent point of GDP, this is small.
  • The diffused nature of this transfer (a small sum to a large number of people), makes it unlikely to cause a demand surge for any particular good or service.
  • Rs 6,000 per year may mean a 30 per cent addition to some households’ income, and 5 per cent to others: This would show up in how they spend these funds as well.
  • If this had been structured as a monthly income scheme, with double the transfer per recipient for half as many beneficiaries, the impact on inflation may have been higher.

Scheme would boost food demand and growth

  • Such a scheme would have most likely boosted food demand: This is nearly 60 per cent of the consumption basket of the target population.
  • If you have ever asked how a country with one of the lowest milk consumption per capita can have an oversupply of milk for several years, the answer is that milk at current prices is unaffordable to many.
  • If the demand for milk, meat, fruits and vegetables, that is, more expensive calories, was boosted, the stalled channel of income transfer from the rich to the poor, which is food prices, would have restarted.
  • This stimulus should boost growth, which has been fading rapidly in the last several months.

Conclusion

  • An income transfer scheme was somewhat inevitable, and such a scheme will likely continue for many years.
  • After a certain stage of economic development, it becomes difficult for average per-capita agricultural incomes to keep pace with the rest of the economy, as land productivity becomes a limiting factor.
  • Moving workers away from agriculture is the only sustainable solution: In the interim, such schemes can provide temporary relief.
  • But given how little we understand about its potential impact, policy-makers need to be agile in making design changes to maximise the gains without having damaging side-effects.
Government Budgets

[op-ed snap] Socio-economic issues focus area of Budget 2019op-ed snapPriority 1


Note4students

Mains Paper 2: Economic Development| Government Budgeting.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of Budget 2019.

Mains level: The news-card analyses the major focus areas of Budget 2019, in a brief manner.


Context

  • Budget 2019 seems to be a budget for the masses as the government has announced several relief measures for farmers, informal workers and other marginalized communities.

Farmers’ and informal workers’ benefit programmes

  • To relieve farmer distress the budget unveiled the Pradhan Mantri Kisan Samman Nidhi, an assured income support programme, for 120 million small and marginalized farmers with an outlay of ₹75,000 crore per year.
  • This is a good move, however, with an annual relief of only ₹6,000 per year, it may not make any meaningful impact.
  • The extension of 2% interest subvention to animal husbandry and fisheries farmers, using Kisan Credit Card for loan, will be beneficial.
  • Similarly, the extension of 2% interest subvention for the full loan term to farmers seeking loan rescheduling on account of natural calamities, will ease pressure faced by them.
  • In case of timely repayment, they will get an additional 3% incentive for the entire period of reschedulement of loans.

Unorganized sector

  • The Pradhan Mantri Shram Yogi Maandhan pension scheme for unorganized sector workers with an income of up to ₹15,000 is a welcome move, as it will offer them a monthly pension of ₹3,000 with a nominal per month payout.
  • This is a good initiative, as it will bring 100 million such workers and labourers under a social security net, and will also be the first step towards generating formal data on the kind of jobs being created in this sector.

Social schemes

  • The allocation for the welfare of Scheduled Castes and Scheduled Tribes has been substantially increased, which will help in improving the condition of these marginalized communities.
  • The allocation of ₹60,000 crore for Mahatma Gandhi National Rural Employment Guarantee Act for the economically weaker sections of society will also bring some relief.

Education

  • In the area of education, the budget allocation for the National Education Mission has gone up.
  • The government has announced approximately 200,000 extra seats in educational institutions to ensure availability for various reserved classes.
  • This should help in creating equitable educational opportunities.
  • Similarly, the additional allocation for the Integrated Child Development Scheme will provide better preschool education and primary healthcare, as well as improve nutrition in young children and their mothers.

Focus on women

  • The allocation of ₹1,330 crore for the Mission for Protection and Empowerment for Women is timely and will help in creating a safe and secure environment for women.
  • It is encouraging to note that over 70% of the beneficiaries of the Pradhan Mantri Mudra Yojana are women, who are engaged in creating their own businesses.
  • Under the Pradhan Mantri Ujjwala Yojana, 60 million liquefied petroleum gas connections have been provided to rural women, thus improving their quality of life.

Infrastructure

  • The allocation of ₹19,000 crore for the Pradhan Mantri Gram Sadak Yojana will improve rural connectivity.
  • While the government claims that India is the fastest highway developer in the world with 27km of highways built each day, road infrastructure in urban cities needs immediate attention.
  • The use of inland waterways for freight movement is a good beginning and, with adequate allocation, it could provide an effective alternative to the surface transport system in the country.

Digital India push

  • This area have certainly seen some progress.
  • The government’s plans to create 100,000 digital villages over the next five years will give impetus to the Digital India programme.
  • The announcement of a national programme on artificial intelligence, which is based on NITI Aayog’s research work over the past one year, is a welcome move.
  • Such an initiative will go a long way in addressing the skills gap in this area.

Healthcare

  • However, the biggest disappointment has been the absence of any meaningful incentive given to the healthcare sector to enable the government’s agenda of making healthcare affordable and accessible.
  • The government should have looked at goods and services tax exemption on cancer and diabetes drugs, which would have benefited millions of patients.

Conclusion

  • Therefore, though socio-economic issues has been the major focus area of Budget 2019, the absence of any incentive for healthcare sector has been a major disappointment.
Government Budgets

Explained: Interim BudgetPriority 1


Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Interim Budget

Mains level:  Difference between normal and interim budget


News

  • Union finance ministry is all set to discuss its interim budget ahead of the general elections.

Lets have a look over what is:

Interim Budget

  1. The budget for the year approved by Parliament gives the government spending rights only till the end of the financial year ending March 31.
  2. If for any reason the government is not able to present a full budget before the financial year ends, it will need parliamentary authority for incurring expenditure in the new fiscal year until a full Budget is presented.
  3. Through the interim Budget, Parliament passes a vote-on-account that allows the government to meet the expenses of the administration until the new Parliament considers and passes the Budget for the whole year.

Vote on Account

  1. Through the interim Budget, Parliament passes a vote-on-account that allows the government to meet the expenses of the administration until the new Parliament is elected.
  2. It is a grant in advance to enable the government to carry on until the voting of demands for grants and the passing of the Appropriation Bill and Finance Bill.
  3. This enables the government to fund its expenses for a short period of time or until a full-budget is passed.
  4. Normally, the Vote on Account is taken for two months only.
  5. The sum of the grant would be equivalent to one sixth of the estimated expenditure for the entire year under various demands for grants.
  6. As a convention, a vote-on-account is treated as a formal matter and passed by Lok Sabha without discussion.

How does the interim budget differ from a regular budget?

  1. In an interim Budget, the vote-on-account seeks parliament’s nod for incurring expenditure for part of a fiscal year.
  2. However, the estimates are presented for the entire year, as is the case with the regular Budget.
  3. The incoming government has full freedom to change the estimates completely when the final Budget is presented.

Can the government levy new taxes and propose new policies?

  1. Constitutionally, the government can make tax changes in the interim budget.
  2. However, the 12 interim budgets since Independence have respected the fact that the government is a custodian for a few months and have refrained from announcing big-ticket changes or new schemes.

Significance

  1. The government cannot present a full budget because in such a short session, there’s no time to debate proposals in Parliament.
  2. Expenditure for new schemes will have to form part of the new budget, which can be approved only after April 1.
  3. The newly formed government cannot be burdened by the previous government’s budgetary allocations.
  4. While these are the technicalities, many look upon the vote on account as election rhetoric.
  5. Many look at it as a window where the government highlights its achievements ahead of elections.
Government Budgets

Explained: Off-Budget FinancingPriority 1


Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, Off-Budget financing, FRBM Act,

Mains level:  Deficit Financing Mechanisms


News

What’s the issue?

  1. The Comptroller and Auditor General (CAG) of India has pulled up the government for increased use of off-budget financing for schemes and subsidies in its Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act report for FY17.
  2. This practice of off- budgeting masks the true extent of fiscal and revenue deficits.
  3. The CAG of India recommended that the government to institute a policy framework for off-budget financing, which, should include a disclosure about its rationale and objective to parliament.

Why in news?

  1. In terms of revenue spending, off-budget financing was used for covering the fertilizer bills through special banking arrangements; food subsidy bills of the Food Corporation of India through borrowings.
  2. And for implementation Accelerated Irrigation Benefits Programme, govt. borrowed from the NABARD under the Long Term Irrigation Fund.
  3. Such off-budget financing are not part of calculation of the fiscal indicators despite fiscal implications.

Explained: Off-Budget Financing

  1. This refers to expenditure that’s not funded through the budget.
  2. For example, the government sets up a special purpose vehicle (SPV) to construct a bridge.
  3. The SPV will likely borrow money to build the bridge on the strength of a government guarantee.
  4. If it’s not a toll bridge, the SPV will need government support to meet interest obligations.

Why is it Problematic?

  1. Even though the borrowing and spending is outside the budget, it has implications for the budget and for all practical reasons should be included in that document.
  2. Since it’s not, this doesn’t reflect on the fiscal deficit number as well.
  3. Governments across the world use this to escape budget controls.

Implications of Off-budget financing

  1. Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators.
  2. But the cost is borne by the budget through some mechanism or the other.
  3. Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.
  4. In the above example, the borrowing by the SPV should ideally be included in the government’s debt.
  5. To the extent that this spending is backed by a government guarantee, it entails a fiscal risk.
  6. Hence, Parliamentary control on such spending is also reduced as its remains outside the budget.

CAG favors a Policy for Disclosure

  1. In order to address these issues, CAG said the government should consider putting in place a policy framework for off-budget financing.
  2. The framework should specify the rationale and objective of off-budget financing, quantum of off-budget financing and sources of fund, among others.
  3. CAG further said the government should also consider disclosing the details of off- budget borrowings through disclosure statements in Budget as well as in accounts.

Back2Basics

Fiscal Responsibility and Budget Management (FRBM) Act

  1. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government
  2. FRBM became an Act in 2003 which provides a legal-institutional framework for fiscal consolidation.
  3. The rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government.
  4. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09.
  5. It is the responsibility of the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of a breach.
  6. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify.
  7. The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.
Government Budgets

FCRA amendment in Finance Bill


Note4students

Mains Paper 2: Polity | Salient features of the Representation of People’s Act

From UPSC perspective, the following things are important:

Prelims level: Foreign Contribution Regulation Act, Representation of the People Act

Mains level: Political funding and incidental corruption


Proposal to amend the repealed Foreign Contribution Regulation Act (FCRA), 1976

  1. The Union government has proposed to amend the repealed Foreign Contribution Regulation Act (FCRA), 1976, retrospectively
  2. The move will benefit the ruling Bharatiya Janata Party and the Congress held guilty by the Delhi High Court for receiving foreign funds from two subsidiaries of Vedanta, a U.K.-based company
  3. The amendment to FCRA provisions for foreign funding would come into effect from the 5th August, 1976, the date of commencement of the FCRA, 1976
  4. FCRA, 1976, was repealed and re-enacted as the FCRA, 2010

Foreign funding not allowed

  1. The Representation of the People Act and the FCRA bar political parties from receiving foreign funds
  2. In 2016, the government amended the FCRA through the Finance Bill route, allowing foreign-origin companies to finance non-governmental organisations
  3. This also cleared the way for donations to political parties by changing the definition of “foreign companies”
  4. The amendment, though done retrospectively, only made valid the foreign donations received after 2010

Back2Basics

Foreign Contribution Regulation Act

  1. The Foreign Contribution (Regulation) Act, 2010 is an act of the Parliament of India to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies
  2. It prohibits acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto
  3. The central government has the power to prohibit any persons or organizations from accepting foreign contribution or hospitality if it is determined that such acceptance would likely “affect prejudicially”

(i) the sovereignty and integrity of India,

(ii) public interest,

(iii) freedom or fairness of election to any legislature,

(iv) friendly relations with any foreign State, or

(v) harmony between religious, racial, social, linguistic or regional groups, castes or communities

Government Budgets

[op-ed snap] Promise and delivery: on Union Budget 2018op-ed snap


Note4students

Mains Paper 3: Economy | Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, MSP, APMC, National Health Protection Scheme, LTCG tax

Mains level: Important terms and provisions in budget


Context

Balancing populism and fiscal prudence

  1. In its last Union budget for this term, government tried to strike a balance between fiscal prudence and populism
  2. Government has decided to ease off on fiscal consolidation as mandated by the FRBM Act
  3. The Budget has reported a fiscal deficit of 3.5% (of GDP) for FY18 and pegged it at a high 3.3% for next year

Root causes of distress

  1. Unremunerative farm incomes
  2. Unemployment
  3. Lack of social security nets and
  4. Squeeze on the middle-class taxpayer

Proposals for their resolution

  1. Unremunerative farm incomes
  • A ‘fool-proof’ mechanism has been mooted to avoid market prices falling below MSPs
  • Minimum support prices (MSPs) would cover all crops and assure farmers 1.5 times their production cost
  • Farmers’ markets will be set up to free small farmers from the tyranny of Agricultural Produce Market Committees (APMCs)

2. Unemployment

  • Government has promised of providing 70 lakh new employment to youth

3. Lack of social security nets

  • The National Health Protection Scheme, to provide a ₹5 lakh health cover to 10 crore households, is a much-needed social security intervention
  • It will benefit poor households that rely overwhelmingly on private healthcare

4. Squeeze on the middle-class taxpayer

  • Budget has been frugal in its giveaways to the middle class and the corporate sector
  • There is no increase in the basic exemption limit on income tax
  • The imposition of 10% long-term capital gains tax on profits from shares and equity mutual funds could dampen market sentiment in the near term

Way forward

  1. The Budget has a sense of direction that is difficult to find fault with
  2. It is to be hoped that as the revenue base improves and GST collections stabilise, future budgets can put the finishing touches on the welfare proposals
Government Budgets

Credit Enhancement Fund to be launched by March


Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Credit Enhancement Fund, IIFCL

Mains level: Measures  being undertaken to ease flow of credit to infrastructure sector


Fund to raise credit rating

  1. The Credit Enhancement Fund, announced by the Finance Minister in the last Budget, is expected to be operational by the end of this fiscal
  2. The India Infrastructure Finance Company Ltd (IIFCL) anchored fund will help raise credit rating of bonds floated by infrastructure companies and facilitate investments from long-term investors

Easy access to institutional financing

  1. The government has been thinking about credit enhancement to ease the flow of institutional credit to infrastructure projects
  2. Raising the credit rating of these companies would help easier access to institutional financing

LIC not anchoring the fund

  1. In the 2016-17 Budget speech, FM had proposed that the LIC will set up a dedicated fund to provide credit enhancement to infrastructure projects
  2. LIC could not anchor the proposed company because of regulatory issues
Government Budgets

[op-ed snap] The state is writing cheques it can’t cashop-ed snap


Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: CAG, Clean Ganga Fund, BRICS, Right to education (RTE), National Clean Energy and Environment Fund (NCEEF), Clean Energy Cess, Nirbhaya Fund, Beti Bachao, Beti Padhao

Mains level: Underutilisation of allocated funds by government departments and ways to reduce this tendency


Context

Unutilized funds

  1. A Comptroller and Auditor General (CAG) report made public earlier this week points out that the approximately Rs2,500 crore in the Clean Ganga Fund remains unutilized
  2. This failure points to a long-running problem in Indian governance—the inability of Union ministries and state governments to cash the cheques the Centre writes

Inadequate allocation

  1. In the 2017-18 Union budget, education spending came to about 3.71% of gross domestic product (GDP), a considerably lower percentage than, say, peer nations in the BRICS (Brazil, Russia, India, China, South Africa) grouping
  2. Government healthcare spending, taking both the Centre and states into account, has hovered around the wholly inadequate 1.5% of GDP mark

Problem not merely inadequate government expenditure

  1. There is also a failure to absorb and deploy allocated resources at every level of government
  2. A CAG performance audit tabled in Parliament in July this year pointed out that despite persistent demands for more right to education (RTE) funds from the Centre, state governments have failed to spend over Rs87,000 crore of the allocated corpus over the past six years
  3. Similar patterns can be seen across budget heads
  4. The National Clean Energy and Environment Fund (NCEEF) has been the backstop for the Modi government’s strong push to renewable energy
  5. In April this year, the government diverted the Clean Energy Cess on coal production, meant to be funnelled to the NCEEF, to compensate states for revenue lost under the goods and services tax
  6. The corpuses for other once-prominent schemes like the Nirbhaya Fund and Beti Bachao, Beti Padhao remain largely untapped
  7. Programmes like the National Rural Health Mission and Integrated Child Development Services have often failed to use their allocated funds in recent years

Reasons for such failures

  1. State budgets have not always responded adequately to the increased devolution of funds starting from the 2015-16 Union budget
  2. There is often a substantial mismatch between fund allocation and outlay planning at various levels of implementation
  3. The fund release timetable for the fiscal year can be a problem as well

Way forward

  1. The reliance on cesses must stop. They are meant to be budgetary band-aids—temporary levies to address a pressing need
  2. Reducing the number of ministries is a must
  3. The Central and state governments must follow through with devolution of funds as well as planning and implementation at both the panchayat level and for city governments
  4. The time is ripe to implement ‘minimum government, maximum governance’
Government Budgets

CAG picks flaws in Centre’s accounting


Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Comptroller and Auditor General of India, FRBM Act, fiscal deficit, revenue deficit, effective revenue deficit, revenue expenditure, capital expenditure

Mains level: Fiscal slippage and its effects on economy


FRBM audit shows FY16 fiscal deficit possibly understated

  1. The Comptroller and Auditor General of India (CAG) has highlighted several flaws in the Union government’s accounting procedures for the financial year 2015-16
  2. This could have led to an understatement of the fiscal deficit and revenue deficit for that year

Key issues raised in report

  1. The report highlighted the fact that the government had deferred payments amounting to more than ₹1.87 lakh crore in 2015-16, which would have also had an impact on its fiscal and revenue deficits for that year
  2. Though the accounts of the government are prepared on cash basis, yet the deferment of liabilities to subsequent year cyclically has a bearing on computation of fiscal indicators
  3. As a result of deficiency in estimating the expenditure on grants for creation of capital assets, the provision included in the Budget for grants for creation of capital assets was underestimated which has also impacted the correct estimation of effective revenue deficit
  4. The report added that due to the misclassification of revenue expenditure as capital expenditure and vice versa, the revenue deficit was understated by ₹1,583 crore during financial year 2015-16
  5. Amounts collected under levies and cesses were not transferred to the relevant funds, which led to an “understatement of revenue/fiscal deficit by an equivalent amount” during 2015-16

Issues with transparency

  1. The CAG also noted that there were several issues with the transparency of the government’s account statements
  2. Refunds of ₹1,29,482 crore were made from gross direct tax collections in FY2015-16 but no corresponding disclosure was available in the government accounts

Government failed to meet FRBM targets

  1. CAG pointed out that the government had failed to meet the FRBM targets for 2015-16 on both the fiscal deficit and the revenue deficit
  2. Government  had subsequently changed the targets and deadlines without making the relevant changes in the Act itself
  3. The annual reduction targets were not in accordance with the provisions of the FRBM Act/Rules
Government Budgets

[op-ed snap] The case for flexible fiscal targetingop-ed snap


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Note4students

Mains Paper 3: Economy | Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, fiscal consolidation, fiscal stimulus, FRBM Act, N.K. Singh Committee on FRBM,

Mains level: Changes required in framing fiscal policy


Context

Growing concern regarding fiscal deficit target breach

  1. There is growing concern that India will miss the fiscal deficit target of 3.2% of the gross domestic product (GDP) set in the Union budget for the year to 31 March
  2. The Centre has been on a path of fiscal consolidation, narrowing its deficit from a high of 5.9% in FY12 to 3.5% of GDP in FY17
  3. The government’s revenue collection in the current year is falling short of target, leading to concerns on the fiscal front
  4. With GDP growth slipping, there is increasing clamor for fiscal stimulus to revive the economy

What does missing the fiscal deficit target really mean for the Indian economy?

  1. Higher fiscal deficit for an economy means increased government borrowing, which in turn implies higher interest burden
  2. India has a debt-to-GDP ratio of 68%, which is the highest among its emerging market peers
  3. Many of the developed economies like the US and Japan have much higher debt-to-GDP ratio (108% and 240%, respectively)
  4. However, their interest burden is much less as their governments are borrowing at much lower interest rates
  5. Most of India’s government debt is internal (from domestic market), implying less external vulnerability
  6. In India, the government’s interest payment to total expenditure is around 24%, while for Japan and the US it is much lower at 9.5% and 11.2%, respectively

What does higher interest payment lead to?

  1. Higher interest payment burden implies less headroom for developmental expenditure by the government
  2. Capital expenditure accounts for only 12-14% of India’s total expenditure, whereas a high of 24% of government’s total expenditure goes into interest payment obligation
  3. The other disadvantage of a high debt-to-GDP ratio is that it has an impact on the country’s credit ratings and investor sentiments

Whether our fiscal management should be counter-cyclical?

  1. This means that when economic growth is above potential, policymakers should reduce fiscal deficit
  2. Similarly, when economic growth is poor, fiscal deficit should be allowed to expand (within a ceiling) in order to support economic growth

Is fiscal slippage permissible?

  1. There should be some flexibility to increase fiscal deficit if the economic scenario warrants
  2. At the same time, it is very critical to ensure that the fiscal slippage, if any, is not due to unproductive expenditure on populist measures
  3. The Fiscal Responsibility and Budget Management (FRBM) Act enacted in 2003 led to an improvement in the fiscal deficit of Centre from 5.7% of GDP in FY03 to 2.5% of GDP in FY08
  4. However, there was a pause button on the FRBM Act post the global financial crisis
  5. Fiscal deficit shot up to 6% in FY09 and it was only in FY12 that a path to fiscal consolidation was recalibrated

The N.K. Singh Committee on FRBM

  1. It has recommended reducing the fiscal deficit-to-GDP ratio to 2.5% of GDP by 2022-23
  2. Even though the committee has said that using cyclically adjusted deficits may not be practical for India at this point of time, they have suggested flexibility in fiscal deficit targets in case of exogenous shocks
  3. These shocks include sharp drop in economic growth or structural reforms with fiscal implications
  4. The committee has emphasized the need for increased focus on debt sustainability and recommended reducing India’s debt-to-GDP to 60% by 2022-23 from the current level of 68%

What is needed right now?

  1. Currently, the private investment scenario in the economy is languishing
  2. Banks have been investing more than the mandatory requirement in government securities, reflecting the lack of better avenue for banks
  3. Hence a higher government borrowing will not in anyway crowd out private investment
  4. Higher government capital expenditure (capex) is badly required at this point to propel growth

Back2Basics

Know more about government budgeting and various deficits here: Click2read

Government Budgets

FRBM panel report in December; may suggest new deficit goalposts


  1. A government appointed committee to devise a roadmap for fiscal consolidation is likely to submit its report by next month
  2. The NK Singh-led committee to review the FRBM roadmap was set up by the Finance Ministry in May
  3. The 5-member committee is likely to call for a new law to replace the Fiscal Responsibility and Budget Management Act, 2003
  4. It will also suggest new goalposts for the Centre and States’ fiscal deficits
Government Budgets

Union Budget to be presented around 1 February: Modi


  1. Source: PM Modi
  2. What: He confirmed that next year’s Union budget will be presented around 1 February
  3. Where: A PRAGATI (Pro-Active Governance and Timely Implementation) meeting
  4. The meeting was to review the work of projects and programmes of the government with state chief secretaries via video conferencing
  5. He asked the state governments to advance their budget schedule, too, so that they are aligned with the Union budget
  6. Last month, the Union cabinet decided to merge the railway budget with the Union budget
Government Budgets

Cabinet approves merger of Rail, General budgets


  1. Ending a 92-year-old tradition, the Union Cabinet decided to merge the Railway budget with the General budget
  2. Autonomy: The merger of budgets would not impact the functional autonomy of the railways, but help in enhancing capital expenditure
  3. The cabinet also agreed, in-principle, to advance the date of its presentation in Parliament from the usual February end
  4. The actual date for presentation of the General budget for 2017-18 will be decided by the Govt after taking into account the coming Assembly elections
  5. The Cabinet has also decided to do away with the Plan/ Non-Plan expenditure classification in Budget 2017-18 and replace with ‘capital and receipt’
Government Budgets

Special package announced for Andhra Pradesh


  1. Prime Minister made an announcement which, in practical terms, amounts to the treatment of residual Andhra Pradesh as a Special Category state
  2. The package is valid for five years- 2015 to 2020
  3. It revolves around various sections in the A.P. Reorganisation Act, the 14th Finance Commission report recommendations, oral commitment made by the then Prime Minister in February 2014 and the recommendations made by the Niti Ayog in 2015
  4. Centre would authorise the State to take charge of the construction while it would meet the financial needs
  5. CBDT would issue two specific notifications on tax concessions being extended to AP
Government Budgets

Overhauling the budgeting process- a reforms agenda


  1. Rail budget: The practice of presenting a separate Budget for the railways is to be scrapped from 2017
  2. Budget documents getting slimmer with indirect tax proposals finding almost no mention after excise duties, service tax and cesses are subsumed under the proposed GST regime
  3. Plan v/s Non-Plan: Abolition of the distinction, to be replaced with capital and revenue expenditure, is also on cards
  4. Time: Until 2000, the Budget was announced at 5 pm & the practice was inherited from the pre-Independence era, when the British Parliament would pass the Budget in the noon followed by India in the evening on the same day
  5. In 2001, the NDA Govt under Atal Bihari Vajpayee changed the ritual and the then finance minister, Yashwant Sinha, presented the Union Budget at 11 am
  6. New financial year: Govt has already set up a committee to examine its feasibility, replacing the existing April-March period
Government Budgets

Govt mulls presenting Budget by Jan-end


  1. Why? To complete the exercise before the beginning of the new financial year
  2. Impact: There would be no need for a Vote on Account and a full Budget can be approved in one stage before March 31
  3. Constitution: Does not mandate any specific date for presentation of the Budget
  4. Traditionally: The Union Budget has for decades been presented on the last working day of February and the two-stage process of parliamentary approval takes it to mid-May
  5. Stage 1: As the financial year begins on April 1, the Govt in March takes Parliament approval for Vote on Account for a sum of money sufficient to meet expenditure on various items for two to three months
  6. Stage 2: The Demands and Appropriation Bill, entailing full-year expenditure and tax changes, is then passed in April/ May
Government Budgets

New norms for clearing public-funded schemes


  1. News: The Finance Ministry has issued new norms for the appraisal and approval of public-funded schemes as well as to improve the delivery of goods and services to citizens
  2. Approval: No new scheme or sub-scheme can be initiated without the prior in-principle approval of the Department of Expenditure
  3. This will not apply to the announcements made in the Budget Speech for any given year
  4. Empower ministers to approve expenditure proposals of up to Rs 500 crore, up from the previous limit of Rs 150 crore
  5. Administrative Ministries should continuously endeavour to merge, restructure or drop existing schemes and sub-schemes that have become redundant or ineffective with the passage of time
Government Budgets

RBI Governor appointed by PMO on the recommendation of Finance Minister


  1. News: The RBI Governor is appointed by the Prime Minister’s Office (PMO) on the recommendation of the Union Finance Minister, the Centre informed Parliament
  2. While the Appointment Committee of Cabinet (ACC) guidelines for appointment of Deputy Governors are still the same, the composition of the search committee has been changed
  3. The RBI Act, 1934: Section 8(1)(a) provides that there shall be one Governor and not more than four Deputy Governors to be appointed by the central government on the central board of RBI
  4. Deputy Governors: Appointed on the basis of ACC-approved guidelines, which stipulate that the search committee constituted for the purpose will recommend the person to be appointed as a Deputy Governor
  5. Change: Now, a search committee, namely Financial Sector Regulatory Appointment Search Committee (FSRASC) has been constituted with the approval of ACC
  6. The committee will recommend names for appointment of Chairperson and Members of financial sector regulatory bodies, including those of the Governor and Deputy Governors
Government Budgets

More spending autonomy for Ministries


  1. News: The threshold of non-Plan project expenditure that can be approved by ministries has been raised from Rs 150 crore to Rs 500 crore
  2. The Finance Ministry’s nod will be needed for expenditure between Rs 500 crore and Rs 1,000 crore, beyond which Cabinet approval would be required
  3. Impact: Expected to expedite the appraisal and approval process in the central government ministries/ departments
Government Budgets

Tax receipts at Rs.14.6 lakh cr, exceeds estimates


  1. News: The govt collected Rs.14.6 lakh crore in taxes in financial year 2015-16, which is higher than the Budget Estimates and Revised Estimates for the year
  2. Reason: The bulk of the growth in total tax revenues was due to the increase in indirect tax collections
  3. Statistics: Indirect tax collections were 31.1% higher than in the previous financial year
  4. The total collection has exceeded the revised estimates and represents a growth of 17.6% compared to the last financial year
Government Budgets

Fertiliser subsidy bill set to shrink next year


  1. News: The next financial year will see the govt’s subsidy bill shrink by about Rs.10,000 crore
  2. Reason: Cut in nutrient-based subsidy rates and the lower price of gas, the key feedstock in urea production
  3. Impact: The reduction in the subsidy bill could help the govt narrow its fertiliser subsidy arrears of about Rs.35,000 crore, which had been carried forward since 2012
  4. Challenge: Achieving a balanced nutrient ratio still remains a far cry, because of price disparity between urea and phosphatic fertilisers
  5. Statistics: The fertiliser subsidy has been estimated at Rs.70,000 crore for 2016-17
Government Budgets

Even states are cutting capital expenditure


  1. News: Data on capital expenditure by the govts of 7 major states shows dramatic cut down in capex, just like the central govt
  2. These states include Tamil Nadu, Uttar Pradesh, Gujarat, Rajasthan, Kerala, Madhya Pradesh and Bihar, accounting for slightly over two-fifths of the country’s GDP
  3. Impact: The hope that states will revive capex is fast fading
  4. Statistics: The central govt in the Union budget for FY17 cut the capex growth to 4% compared with 21% in FY16
Government Budgets

India’s current account deficit narrows to 1.3% of GDP


  1. News: India’s current account deficit narrowed to 1.3% of the GDP in the fiscal 3rd quarter, as compared to 1.5% in the last year
  2. Reason: Trade deficit during the Oct-Dec quarter narrowed to $34 billion from $38.6 billion during the same period in 2014-15
  3. Challenge: India’s merchandise exports have been declining continuously since Dec 2014 due to sluggish global demand and low commodity prices
  4. CAD: It shows the difference between domestic savings and domestic investment, and conveys the extent of this gap that needs to be bridged by foreign savings
Government Budgets

Small savings rates slashed, PPF rate cut to 8.1% from 8.7%


  1. Context: In Feb, Govt. decided to revise interest rates on small savings every quarter
  2. News: Govt. has reduced the interest rates payable on small savings including PPF and Kisan Vikas Patra
  3. Impact: The move will hit the common man the most, as they are the ones who invest in small savings schemes
Government Budgets

NPS can now be ‘technically’ tax-free, says pension regulator


  1. Context: Govt.’s bid to bring NPS on par with other pension products
  2. News: The retirement savings accumulated under the New Pension Scheme (NPS) can now be totally tax-free at the time of withdrawal under certain conditions
  3. Budget 2016: It made 40% of NPS accumulations tax-free
  4. How? Under NPS, 40% of corpus is mandatorily annuitised and that is tax free, and with budget announcement, 40% lumpsum withdrawal is also tax free. So, if anyone annuitise 60% of their balance, then it becomes totally tax-free
  5. Annuity: An annuity product allows investors to get a steady monthly income on their accumulated corpus
Government Budgets

Proposal to tax EPF withdrawn


  1. Context: Govt.’s move to tax EPF withdrawals saw a severe backlash, both in and outside Parliament
  2. News: Govt. has withdrawn the proposal of taxing 60% of EPF withdrawals
  3. Reason: Govt accepted the argument that employees should have the choice of where to invest the EPF withdrawals
  4. Objective: The proposal sought to encourage people to join pension scheme, as withdrawal from the the EPF was tax free, if invested in annuity
  5. Criticism: Taxing EPF withdrawal will reduce the retirement savings of the working class
Government Budgets

Special cell set up to gather data on subsidies of other nations


  1. News: The govt. has set up a special cell to compile information on subsidies given by other countries to their industry
  2. Background: In order to tackle slowdown in global trade, several countries have taken measures to protect their domestic industries from unfairly low-priced imports
  3. Objective: The information will help impose duty on subsidised imports and protect local industry
  4. It will also enable Indian industries to file applications before the govt seeking imposition of anti-subsidy duties on subsidised imports of items
  5. Subsidies: Under the WTO norms, it refers to financial contribution by the govt or state agencies resulting in advantages to those players availing it
Government Budgets

Budget 2016: A pro-poor push in hard times


  1. News: Budget for 2016-17 attempted to address the distress in the rural economy that has hit demand creation and new investments
  2. Context: nearly Rs. 2.75 lakh crore enhanced outlays for programmes in the social sector, farmer welfare and the rural sector
  3. Target: Finance Minister chose to stick to the fiscal consolidation road map and set a 3.5 per cent of GDP target for 2016-17
  4. Other reforms: in taxation, foreign direct investment, dispute resolution in PPP projects and banking
  5. LPG connections: for BPL families, variable pollution cess on new cars, 60% of EPF savings to be taxable
  6. Healthcare scheme: to protect the poor from high healthcare costs with a cover of Rs. 1 lakh and an additional cover of Rs. 30,000 for senior citizens
  7. Aadhaar Bill: to give legislative backing to the Aadhaar scheme for identifying residents on the basis of their biometrics
Government Budgets

Be cautious on new accounting system: CGA


  1. News: The Controller General of Accounts has cautioned the govt before adopting the accrual methods of accounting, due to the costs involved and only few of its departments can benefit
  2. Importance: Accrual accounting is a means to the reforms in public financial management
  3. How? It includes greater accountability and a greater need for operations of the govt to be on commercial lines
  4. Challenge: It will require considerable preparatory work and capacity building of accounting personnel
  5. Criticism: There are inadequacies in the way the budget heads of accounts are currently classified, which needs to be modernised
Government Budgets

Private finance vital for India to reach climate goals: Survey


  1. News: India will find it hard to meet its variety of obligations to tackle climate change without substantial help from private sector
  2. Context: Successful implementation of the Paris Agreement, SDGs goals and the ambitious targets set out in INDCs will require huge financial resources, cannot be met through budgetary sources alone
  3. Relevance: Leveraging private finance along with public finance, both international and national, will be critical
  4. Benefit: This could benefit from the renewed global focus on adopting and developing green technology
  5. UN’s SDGs: Lay the onus on countries to make significant progress on a wide range of goals including ending poverty and hunger and combating climate change
  6. Survey also notes: Mission on Climate Change and Health is being developed and a National Expert Group on Climate Change and Health has been constituted
Government Budgets

Rich feed off subsidies worth over Rs. 1 lakh crore: Economic Survey


  1. News: India’s rich feed off subsidies worth over Rs. 1 lakh crore a year that are meant for the poor
  2. Subsidies on: 6 commodities, 2 public utilities — the Railways and electricity — and 1 small savings scheme, the Public Provident Fund
  3. Context: Form of explicit subsidisation, which is surprisingly substantial in magnitude
  4. Relevance: Rich avail of an 88% subsidy on kerosene and 86 per cent subsidy on LPG
  5. Survey classification: Population on the basis of consumption data collected by National Sample Surveys.
  6. Poor refer to the bottom 30 per cent of the population and the rich the top 70 per cent
Government Budgets

Economic Survey estimates 7 to 7.5% growth rate for 2016-17


  1. News: The Survey projected a 7-7.5% GDP growth rate in the next fiscal which could accelerate to 8% in a couple of years
  2. The fiscal deficit target of 3.9% of GDP seems achievable, despite the challenges and lower than projected GDP growth rate during 2015-16
  3. Expectation: There are two factors that can boost domestic consumption- increased spending, if the 7th Pay Commission is implemented and return of normal monsoon
  4. Challenge: Indian economy is currently facing the twin balance sheet problem – the impaired financial positions of the PSBs and some corporate houses
Government Budgets

Economic Survey against raising income tax exemption limits


  1. Context: The Economic Survey 2015-16 tabled in Parliament
  2. Proposal: The survey suggests that the govt should refrain from raising exemption limits on income tax
  3. Reason: A natural growth in income will lead to increase in the number of taxpayers, provided exemption limits are not raised
  4. Proposal: It called for a review and phasing out of the tax exemption raj
  5. Reason: It often leads to redistribution toward the richer private sector
  6. Challenge: A cross-country comparison shows that India currently has the lowest number of taxpayers, nearly 85% of the economy still remains outside the tax net
Government Budgets

Economic Survey bats for GM crops


  1. Background: Currently, commercial cultivation of Bt cotton is allowed and there is a moratorium on Bt brinjal
  2. Proposal: The survey favoured the use of hybrid and GM seeds along with better MSP, irrigation and national market facilities to boost crop yields
  3. How? The regulatory process needs to be evolved in order to address safety concerns of GM crops
  4. Proposal: Incentivise raising of production of pulses and oilseeds
  5. Reason: The country is heavily dependent on imports for such crops
Government Budgets

Project Insight to fight black money


  1. Context: NDA govt’s fight against domestic black money
  2. Project: It is focused on extensive data mining and processing the details of country’s 22.94 crore PAN allottees, with the specific intention of monitoring fund flows across identities and accounts
  3. Aim: To generate an actionable audit trail of high value transactions by way of sequenced transaction history of an individual or entity, where a PAN number has been quoted, in any part of the country
  4. It will be implemented phase-wise during the 3-year period spanning 2016-18
  5. Nodal Agency: Income Tax Department
Government Budgets

Govt. may penalise higher PF savings


  1. News: The upcoming Budget may penalise voluntary investments of more than Rs.1.5 lakh parked in the Employees’ PF and General PF accounts
  2. Reason: To channelize savings to other alternatives such as the National Pension System
  3. The PFRDA currently has assets of Rs 1.10 lakh crore under its watch and reports to the Finance Ministry
  4. The Employees’ PF Organisation works under the Labour Ministry and has over Rs.10 lakh crore under its administrative control
  5. Experts: It is not a good idea as it would be unfair to deprive an investor of the income that got accumulated on his investments
  6. Criticism: The tax treatment for NPS investments are currently taxable at the time of retirement as opposed to EPF savings that are tax-free
Government Budgets

FM inaugurates non-tax revenue e-portal


  1. Context: PMO’s target to switch at least 90% of all official transactions to paperless mode by the end of 2016
  2. Reason: One major way to curb black money is to discourage cash transactions in favour of electronic transactions
  3. News: Finance Minister launched a new e-platform for non-tax receipts
  4. Advantage: It will reduce a lot of the manual work and almost instantly enable the payment at the different categories
  5. Sources of Non-tax revenue: Dividends paid by PSUs, the Reserve Bank of India, etc
Government Budgets

Increase excise duty on oil, petroleum for more revenue


  1. Context: To accelerate India’s economic growth by increasing infrastructure spending in 2016-17 budget
  2. Where? Focus on low gestation projects like rural roads, canals, bridges which can result in immediate economic benefits
  3. Finances: Increasing its revenue by excise hikes on oil and petroleum products
  4. Bring revenue deficits under control through an effective tax implementation and collection system
  5. Impact: It can give the govt room to raise infrastructure-related spending
Government Budgets

Policy for capital goods introduced


  1. News: The government introduced a National Capital Goods Policy
  2. Purpose: To spur capital goods sector and the Make in India initiative. It aims to turn the country into a world class hub for capital goods
  3. Objective: To increase production of capital goods from Rs. 2.30 lakh crore in 2014-15 to Rs. 7.50 lakh crore in 2025
  4. To raise direct and indirect employment from the current 8.4 million to 30 million by 2025
  5. Key Elements: Availability of finance, raw material, innovation and technology, productivity, quality and environment-friendly manufacturing practices, increasing skill availability, promoting exports and creating domestic demand
Government Budgets

Fiscal management far better this year than earlier: CGA


  1. Context: Controller General of Accounts review of fiscal management in India
  2. The News: Expenditure by various departments was spread through out the year as opposed to the huge spending in last 2 quarters in previous years
  3. Criticism: Huge spending in last 2 quarters shows that it was wasteful expenditure; in order to exhaust the budget
  4. Challenge: Timely reporting of the consolidated picture of govt accounts is missing in India
  5. The present govt has ensured that funds are released right upfront, in the beginning
Government Budgets

Revenue target to be met, says Adhia


  1. Context: Centre expects to meet the target of Rs.14.49 lakh crore for revenue collection from taxes for the current financial year
  2. How? – The surplus in indirect taxes will be enough to make good the expected shortfall in direct tax collections
  3. Indirect Tax Collection: The govt expects to garner over Rs. 40,000 crore more than the target set for indirect tax collection
  4. This gives an indications of high level of economic activities taking place in the economy
  5. Direct Tax Collection:  The collection from direct taxes is up just 10.9% as compared to last year
Government Budgets

Jaitley asks States to raise infra outlay


  1. Finance Minister urged the States to boost spending on infrastructure creation and anti-poverty programmes
  2. Why – Govt. is under pressure to raise public investments to revive the economy
  3. How – By leveraging the increased devolution from the implementation of the 14th Finance Commission’s (FFC) recommendations
  4. State’s Demand –  To release the compensation for phasing out the central sales tax
  5. Do you know? – After FFC recommendations were implemented, the Centre’s share in 58 social development programmes was reduced
  6. This included the important schemes like Sarva Shiksha Abhiyan and the Integrated Child Development Services
Government Budgets

Govt. sets up Tax Policy Council headed by Finance Minister


  1. The Govt has created a Tax Policy Research Unit (TPRU) and Tax Policy Council to be chaired by the Union Finance Minister.
  2. The decision is based on the recommendation of the Tax Administration Reform Commission.
  3. Objective- To bring consistency, multidisciplinary inputs, and coherence in policy making.
  4. The TPRU will be a multi-disciplinary body with the objectives of carrying out studies on various topics of fiscal and tax policies.
  5. It will provide independent analysis, prepare and disseminate policy papers and background papers on various tax policy issues.
Government Budgets

India, U.S. clear 100 transfer pricing cases under MAP


The MAP programmes with other countries like Japan and UK are also progressing well with regular meetings and resolution of past disputes.

  1. One of the significant steps taken by CBDT to boost investment sentiments among MNCs is the landmark Framework Agreement signed with the Revenue Authorities of USA in January, 2015.
  2. This agreement was finalised under the Mutual Agreement Procedure (MAP) provision contained in the India-USA Double Taxation Avoidance Convention (DTAC).
  3. The agreement seeks to resolve about 200 past transfer pricing disputes between the two countries in the IT Services [ITS] and IT enabled Services [ITeS] segments.
  4. The success of the framework Agreement in short period of one year has led to the US Revenue Authorities opening up their bilateral APA programme to India.
Government Budgets

The progress of PMJDY- deposits cross $4.5 billion mark


  1. The PMJDY accounts have deposits of Rs 30,638.29 crore (about $4.5 billion).
  2. As many as 20.38 crore bank accounts were opened as on January 20, 2016.
  3. Accounts with ‘Zero Balance’ have actually shown a significant decline – from 76.81% in Sept 2015 to 32% in Dec.
  4. Also, 8.74 crore of the accounts were seeded with Aadhaar and 17.14 crore account holders were issued RuPay cards.
Government Budgets

Open multi-brand retail, e-commerce, education to more FDI: India Inc.


  1. Industry wants the govt. to further ease FDI norms, especially in sectors such as multi-brand retail, education and e-commerce.
  2. They also sought more liberalised norms for the insurance industry.
  3. They have raised concerns on the adverse impact of Free Trade Agreements on local manufacturing
  4. They also demanded support to boost manufacturing, exports and startups.
  5. On the education sector, it said 100% FDI should be allowed in all service companies ancillary to education
Government Budgets

Govt. must focus on demand creation: CII


  1. Industry wants govt. to focus on creation of demand in the Budget.
  2. Private sector is not investing because:
    • There is a lack of demand.
    • They have excess capacities due to past investments.
    • The lack of positive sentiments due to the failure to get GST going.
  3. This is reflected in reports that manufacturing is at a 2-year low now.
  4. If these are addressed, there will be definitely a big pick-up in the economy.
Government Budgets

Government to focus on access to social security for unorganised labour


The key challenges faced by Indian agriculture are the need to increase productivity by leveraging technology.

  1. To ensure access to health and social security benefits to three labour groups—organised, unorganised and those not employed or below poverty line.
  2. Need-based minimum wage is to be considered as essential part of social security.
  3. The trade unions recommended that contract or casual workers should not be deployed in jobs of a perennial nature.
  4. These workers should be paid the same wages and benefits as was being paid to regular workers doing the same work until they are regularised.
  5. In addition, the trade unions called for a control on spiralling prices and putting an end to government’s divestment in public sector companies.
Government Budgets

PMO seeks inputs from economists to stem slowdown, raise profitability


  1. PMO is seeking inputs from govt economists to reassess both the fiscal and monetary policy issues.
  2. There has been a slowdown in India’s nominal GDP growth with latest estimates from the Central Statistics Office.
  3. The Finance Ministry’s mid-year analysis has also put the slowdown into the spotlight.
  4. The mid-year analysis underscored the need for “carefully reassessing” both fiscal and monetary policy stances.
  5. The reason due to which the slowdown in the nominal GDP growth is more pronounced is the decline in the GDP deflator.
  6. The PMO’s move to gain insight into the state of the economy is expected to lead to corrective changes.
Government Budgets

Govt unveils medium-term debt strategy


  1. The govt. is planning to switch Rs 50,000 crore high cost debt into instruments of longer term maturity.
  2. The objective is to secure the govt’s funding at all times at low cost over the medium/long term while avoiding excessive risk.
  3. The MTDS is developed for the period 2015-16 to 2017-18 based on the outstanding govt market borrowing as on end March 2015.
  4. The borrowing cost in the domestic market is expected to be lower in 2015-16 due to reversal in the interest rate cycle.
Government Budgets

Govt. opacity leaves Rs. 8,000 cr expenditure unaccounted for


  1. The govt’s finances exhibit opacity in the way some of the funds have been spent.
  2. More than Rs 8,000 crore of expenditure have no accompanying explanation of how and where the money was spent.
  3. As per CAG report, there are 11 heads of govt. spending where more than 50% of the expenditure had no details.
  4. CAG has been highlighting this opacity to the govt. every year since 2008, but almost nothing has so far been done to address the issue.
Government Budgets

India well prepared to deal with US rate hike: Finance Ministry


India is well prepared to deal with the impact of the U.S. Federal Reserve interest rate hike and the end of uncertainties will actually help policy makers in emerging economies.

  1. The U.S. Federal Reserve last night hiked interest rates by 0.25 per cent.
  2. This is the first hike in about a decade, signalling a recovery in the US economy.
  3. End of uncertainty and accommodative outlook for future will help policy makers in emerging economies.
  4. Fed’s confidence on recovery is good news for India’s exports, especially for the IT sector.

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