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.
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.
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.
From UPSC perspective, the following things are important :
Prelims level : Government Debt and its composition
Mains level : Public debt and related issues
The government is planning to issue 10 year bonds denominated in foreign currency.
Why it is a good idea
Such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates.
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.
If foreign bond issuance was accompanied by a move towards greater capital account convertibility then it may be worth pursuing.
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.
Indian inflation has moved structurally downward over the last three years.
It will also help to significantly lower the real repo rate to respectable levels.
Problems with these bonds
Usually, the lower dollar interest rate is offset in the long run by higher principal repayments as the rupee depreciates against the dollar.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
Union finance ministry is all set to discuss its interim budget ahead of the general elections.
Lets have a look over what is:
The budget for the year approved by Parliament gives the government spending rights only till the end of the financial year ending March 31.
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.
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
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.
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.
This enables the government to fund its expenses for a short period of time or until a full-budget is passed.
Normally, the Vote on Account is taken for two months only.
The sum of the grant would be equivalent to one sixth of the estimated expenditure for the entire year under various demands for grants.
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?
In an interim Budget, the vote-on-account seeks parliament’s nod for incurring expenditure for part of a fiscal year.
However, the estimates are presented for the entire year, as is the case with the regular Budget.
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?
Constitutionally, the government can make tax changes in the interim budget.
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.
The government cannot present a full budget because in such a short session, there’s no time to debate proposals in Parliament.
Expenditure for new schemes will have to form part of the new budget, which can be approved only after April 1.
The newly formed government cannot be burdened by the previous government’s budgetary allocations.
While these are the technicalities, many look upon the vote on account as election rhetoric.
Many look at it as a window where the government highlights its achievements ahead of elections.
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.
This practice of off- budgeting masks the true extent of fiscal and revenue deficits.
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?
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.
And for implementation Accelerated Irrigation Benefits Programme, govt. borrowed from the NABARD under the Long Term Irrigation Fund.
Such off-budget financing are not part of calculation of the fiscal indicators despite fiscal implications.
Explained: Off-Budget Financing
This refers to expenditure that’s not funded through the budget.
For example, the government sets up a special purpose vehicle (SPV) to construct a bridge.
The SPV will likely borrow money to build the bridge on the strength of a government guarantee.
If it’s not a toll bridge, the SPV will need government support to meet interest obligations.
Why is it Problematic?
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.
Since it’s not, this doesn’t reflect on the fiscal deficit number as well.
Governments across the world use this to escape budget controls.
Implications of Off-budget financing
Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators.
But the cost is borne by the budget through some mechanism or the other.
Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.
In the above example, the borrowing by the SPV should ideally be included in the government’s debt.
To the extent that this spending is backed by a government guarantee, it entails a fiscal risk.
Hence, Parliamentary control on such spending is also reduced as its remains outside the budget.
CAG favors a Policy for Disclosure
In order to address these issues, CAG said the government should consider putting in place a policy framework for off-budget financing.
The framework should specify the rationale and objective of off-budget financing, quantum of off-budget financing and sources of fund, among others.
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.
Fiscal Responsibility and Budget Management (FRBM) Act
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
FRBM became an Act in 2003 which provides a legal-institutional framework for fiscal consolidation.
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.
Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09.
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.
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.
The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.
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
The Union government has proposed to amend the repealed Foreign Contribution Regulation Act (FCRA), 1976, retrospectively
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
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
FCRA, 1976, was repealed and re-enacted as the FCRA, 2010
Foreign funding not allowed
The Representation of the People Act and the FCRA bar political parties from receiving foreign funds
In 2016, the government amended the FCRA through the Finance Bill route, allowing foreign-origin companies to finance non-governmental organisations
This also cleared the way for donations to political parties by changing the definition of “foreign companies”
The amendment, though done retrospectively, only made valid the foreign donations received after 2010
Foreign Contribution Regulation Act
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
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
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
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
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
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
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
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
There is also a failure to absorb and deploy allocated resources at every level of government
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
Similar patterns can be seen across budget heads
The National Clean Energy and Environment Fund(NCEEF) has been the backstop for the Modi government’s strong push to renewable energy
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
The corpuses for other once-prominent schemes like the Nirbhaya Fund and Beti Bachao, Beti Padhao remain largely untapped
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
State budgets have not always responded adequately to the increased devolution of funds starting from the 2015-16 Union budget
There is often a substantial mismatch between fund allocation and outlay planning at various levels of implementation
The fund release timetable for the fiscal year can be a problem as well
The reliance on cesses must stop. They are meant to be budgetary band-aids—temporary levies to address a pressing need
Reducing the number of ministries is a must
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
The time is ripe to implement ‘minimum government, maximum governance’
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
This could have led to an understatement of the fiscal deficit and revenue deficit for that year
Key issues raised in report
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
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
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
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
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
The CAG also noted that there were several issues with the transparency of the government’s account statements
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
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
Government had subsequently changed the targets and deadlines without making the relevant changes in the Act itself
The annual reduction targets were not in accordance with the provisions of the FRBM Act/Rules
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
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
The government’s revenue collection in the current year is falling short of target, leading to concerns on the fiscal front
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?
Higher fiscal deficit for an economy means increased government borrowing, which in turn implies higher interest burden
India has a debt-to-GDP ratio of 68%, which is the highest among its emerging market peers
Many of the developed economies like the US and Japan have much higher debt-to-GDP ratio (108% and 240%, respectively)
However, their interest burden is much less as their governments are borrowing at much lower interest rates
Most of India’s government debt is internal (from domestic market), implying less external vulnerability
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?
Higher interest payment burden implies less headroom for developmental expenditure by the government
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
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?
This means that when economic growth is above potential, policymakers should reduce fiscal deficit
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?
There should be some flexibility to increase fiscal deficit if the economic scenario warrants
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
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
However, there was a pause button on the FRBM Act post the global financial crisis
Fiscal deficit shot up to 6% in FY09 and it was only in FY12 that a path to fiscal consolidation was recalibrated
TheN.K. Singh Committee on FRBM
It has recommended reducing the fiscal deficit-to-GDP ratio to 2.5% of GDP by 2022-23
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
These shocks include sharp drop in economic growth or structural reforms with fiscal implications
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?
Currently, the private investment scenario in the economy is languishing
Banks have been investing more than the mandatory requirement in government securities, reflecting the lack of better avenue for banks
Hence a higher government borrowing will not in anyway crowd out private investment
Higher government capital expenditure (capex) is badly required at this point to propel growth
Know more about government budgeting and various deficits here: Click2read
Prime Minister made an announcement which, in practical terms, amounts to the treatment of residual Andhra Pradesh as a Special Category state
The package is valid for five years- 2015 to 2020
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
Centre would authorise the State to take charge of the construction while it would meet the financial needs
CBDT would issue two specific notifications on tax concessions being extended to AP
Rail budget: The practice of presenting a separate Budget for the railways is to be scrapped from 2017
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
Plan v/s Non-Plan: Abolition of the distinction, to be replaced with capital and revenue expenditure, is also on cards
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
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
New financial year: Govt has already set up a committee to examine its feasibility, replacing the existing April-March period
Why? To complete the exercise before the beginning of the new financial year
Impact: There would be no need for a Vote on Account and a full Budget can be approved in one stage before March 31
Constitution: Does not mandate any specific date for presentation of the Budget
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
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
Stage 2: The Demands and Appropriation Bill, entailing full-year expenditure and tax changes, is then passed in April/ May
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
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
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
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
Change: Now, a search committee, namely Financial Sector Regulatory Appointment Search Committee (FSRASC) has been constituted with the approval of ACC
The committee will recommend names for appointment of Chairperson and Members of financial sector regulatory bodies, including those of the Governor and Deputy Governors
Context: Govt.’s bid to bring NPS on par with other pension products
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
Budget 2016: It made 40% of NPS accumulations tax-free
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
Annuity: An annuity product allows investors to get a steady monthly income on their accumulated corpus
News: The government introduced a National Capital Goods Policy
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
Objective: To increase production of capital goods from Rs. 2.30 lakh crore in 2014-15 to Rs. 7.50 lakh crore in 2025
To raise direct and indirect employment from the current 8.4 million to 30 million by 2025
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