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No fiscal reform hopes from Budget

— FILE PHOTO

HIGH EXPECTATIONS: A view of the Parliament House in New Delhi.

The preparation of the Central budget for 2008-09 must now be under way. And this is the time to spell out what one expects from it in the hope, however remote, that this will provide an input for the Finance Ministry’s budget making exercise. Even under more normal circumstances, pre- budget wish lists for sound fiscal consolidation remained largely on paper only to become post- budget wish lists.

A detailed catalogue of specific revenue and expenditure issues requiring action was given in earlier columns vide Business Review in The Hindu (March 6, 2006, January 1, 2007, and September 9, 2007). Considering that this will be a pre- election budget of a coalition government, high expectations of any far reaching reform in fiscal policy and management will be unrealistic. Still a few suggestions for improving the budget format, contents and procedure may be in order.

The areas for consideration are transparency in the budget , a more user friendly budget for the non- expert, budget procedure and accountability for budget implementation.

It is difficult to cull out from the budget speech and the voluminous budget documents the real significance of the budget numbers. A prime example is the likely impact of the $100 a barrel price of crude oil on the government’s fiscal health. The subsidy and support to oil companies have been kept out of government expenditure through the issue of oil bonds. The bill for food and fertilizer subsidies is also not shown as government expenditure. Thus, the deficit shown in the budget is grossly understated.

There was not even a mention in the Budget speech on this device of bonds which itself is a violation of the cash budgeting envisaged in the Constitution and the fiscal law.

The credibility of the claim of achieving the statutory deficit targets can be assessed only if all these factors are sifted out, a task beyond the general public. It is hoped that the coming budget will be transparent and show the correct fiscal position. Similar openness will be useful to evaluate the full impact of numerous special purpose vehicles (SPVs) on the budget deficit.

It is common knowledge that the government is giving every year substantial exemptions from taxes to achieve various objectives. But one cannot know from the budget documents the amount involved and the cost to the government of these exemptions, placed at more than one lakh crore rupees. This is because the revenue foregone due to exemptions is not reflected under revenue estimates which give only a net figure after deducting the revenue foregone. It will be easier to understand the budget if the estimate for this is indicated separately in the budget documents. In fact it will be better if this is shown as a tax expenditure, thus subjecting it to specific parliamentary approval.

Another area meriting clearer presentation is the impact of the public sector on the budget. An overall statement indicating the budgetary estimate of the financial contribution to the government and the reverse flow from the government budget. It will also be useful to indicate the extent of overdues from PSUs with year wise breakup.

Budget deficits are given as a percentage of GDP in the budget estimates. For earlier years the presentation is on the basis of actual expenditure and revenue but not apparently with reference to actual GDP of those years. This is not done presumably because final GDP data are not available on time. Some corrective action is called for.

A notable feature of budget procedure is the secrecy surrounding it till it is presented to Parliament. This is understandable for new tax proposals. Leakage of these may lead to evasion, hoarding and other undesirable consequences. But this consideration does not apply to expenditure estimates. There is a case for submitting, prior to budget presentation, a draft budget in overall terms that can serve to elicit public opinion and views.

Sufficient time should be allowed in Parliament for discussing the budget proposals. Also, expenditure estimates should receive more attention as the discussions tend more towards taxation items.

The success of a budget ultimately depends on its efficient implementation. The accountability aspect deserves more attention at all levels. The reports of the Estimates Committee and the Public Accounts Committee of Parliament deserve greater publicity and follow up. The time lag and the extent of coverage of these committees needs fresh examination. Executive accountability for implementation, especially of projects, has to be given more importance and action taken to punish erring officials and improve project implementation. Media attention to this will be welcome.

RANGACHARI ARAVAMUDHAN

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