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Belied budget hopes and a wish list

Details of any special drive to collect revenue arrears along with an estimate of such collections should be made available

AN INNOVATION: Union Finance Minister, P. Chidambaram, with the first Outcome Budget 2005-06 presented in August 2005. — File Photo

THE UNION budget for 2006-07 was preceded as usual by wish lists from different stakeholders. Here is an unusual post budget wish list. Before this is laid out some major positives in the latest budget have to be appreciated.

Tax rates have been kept stable without major changes or tinkering especially in personal and corporate income tax. A statement of arrears in collection of tax and non-tax revenue has been given for the first time as required by the Fiscal Responsibility and Budget Management Act 2003. A novel and welcome feature is the attempt, again for the first time, to indicate the magnitude of revenue forgone due to tax exemptions. On the expenditure side, increase in defence allocation, at least at the budget proposal stage, is not considerable contrary to apprehensions. Plan support gets a sizable increase.

Revenue items

Now for the unfulfilled expectations and the post budget wish list. On the revenue side, we would like to know the details of any special drive to collect these dues and the estimate of such collection reflected in the budget. The amount involved is large at Rs. 111,107 crore including Rs. 24,694 crore as interest dues from public sector undertakings. Apart from this, dues on repayments of Central loans have to be quantified and addressed. The amount forgone due to exemptions is placed at Rs. 158,661 crore and very large based on actuals for 2004-05. Serious follow up action is needed to review and weed out unjustified exemptions under a time bound plan. The system should be changed to bring this as tax expenditure in the budget and brought under the discipline of parliamentary and audit scrutiny.

Expenditure items

Taking the expenditure side, the items pressing for reform are more and hence a longer wish list. Instead of pleading helplessness and beseeching MPs for help in tackling subsidies, decisive action is called for from the Government. There are many areas of policy and management crying for implementation of reports of different expert groups.

For example, last year's budget speech promised to put under the scanner the administrative cost in food subsidy but there is no followup information. Allocation for petroleum product subsidies is reduced from Rs. 3,644 crore in BE 2004-05 to Rs. 2,930 crore RE and to Rs. 3,080 crore in for 2006-07. This is totally inexplicable in the context of rising crude oil prices and seriously erodes the credibility of budget deficit reduction targets. Special oil bonds have been approved and issued to oil companies to cover losses on this account (Rs. 20,000 crore) but are not reflected in the budget or deficits. On top of this, the cess on domestic crude has been increased and taken as revenue to the government!

Announcement of projects and schemes should be made only after due technical and financial scrutiny and tying funding arrangements in the budget year and beyond. The dismal record in project implementation needs specific corrective and preventive steps. As of July 2005, out of 648 live projects, 79 had cost and time overruns (Rs. 26,820 crore in cost). Recent examples of hasty announcement are the desalination and Sethusamudram projects in Tamil Nadu. Outcome budgeting has to be integrated with the main budget and credible and useful data given to link financial provisions and output and outcome. The first such regular budget has not been presented with the budget. Also, such a budget should not be confined to plan outlay.

Greater transparency is desirable on the special purpose vehicles and public private partnership (PPP) promoted in large numbers mainly to tide over financial constraints. The Government has to clarify their structure and impact on government funds and budget deficits, both direct and through guarantees and contingent liabilities. According to a World Bank study, poorly structured PPP projects generate considerable fiscal risks.

A synoptic statement on public sector undertakings and government budget can be a useful tool to assess the extent to which public sector enterprises are a support to or drain on the government. This should cover all inflows including government taxes and outflows including non-plan loans and grants. Such an overall picture can be projected for the Railways also.

The proliferation of autonomous institutions and setting up funds from government cess have to be examined to improve their transparency and accountability. Two examples are the National Scheduled Caste Finance and Development Corporation and the National Minorities Development Corporation. The discipline of output and outcome budgeting should apply to these also.

Credibility of medium term targets of deficit reduction will be enhanced if the supporting data are furnished. For example, we should know to what extent the mega schemes and projects have been accommodated in fixing the targets. Also, crucial assumptions such as oil prices and impact of pay commission need to be spelt out. The deficit as percentage of the GDP is a variable based on actual revenue and expenditure and actual GDP.

The budget documents explain how the original targets change with reference to actual revenue and expenditure. It is essential that such recasting is done on the basis of actual GDP figures even if these become available after a time lag.

This will reveal large deviations especially when the deficit targets are finely calibrated percentages. This post budget wish list may remain a wish list. But hope springs eternally in the human breast.

A. Rangachari

The author is Trustee, Public Expenditure Round Table (PERT)

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