Budget 2019: How FM Nirmala Sitharaman can impress : 21-06-2019

After BJP’s rousing Lok Sabha victory, can we expect a remarkable maiden Budget from Finance Minister Nirmala Sitharaman? This is the question on the minds of most Indians for whom the Budget starts and ends with the Budget speech. If the past is any indication, the speech could outline the broad policy direction that GoI wishes to pursue over the next five years to boost the economy and create more jobs. 

For purists, however, the Budget is foremost a fiscal policy and accounts statement. It must focus on the three fundamental components of the fisc: revenues, expenditure and borrowings, flowing in and out of the Consolidated Fund of India. 

A perusal of Budget speeches over the years shows the gradual shift of focus from fiscal to broader economic and politico-economic issues, increasingly veering towards the US president’s State of the Union Address. It covers a gamut of areas that range from foreign policy, trade to legislative goals, focusing on achievements and policy agenda. “Presidents must receive the support of a majority in the House, and oftentimes a super-majority in the Senate, to enact their legislative proposals. By appealing directly to the public, a president can use popular leverage to convince Congress to adopt his policy agenda,” states a Congressional Research Service paper, ‘The President’s State of the Union Address: Tradition, Function and Policy Implications’ (Colleen J Shogan, bit.do/eVBPz). 

With an overwhelming majority for BJP in the Lok Sabha, the passage of India’s constitutionally mandated components of the Budget — money Bills — would pose no challenge. But given the fiscal challenges facing India, there is merit in re-calibrating the focus of the Budget speech to the fisc. To do that effectively, Budget preparation must be done within the mid-term framework. 

Can the Budget afford to ignore the NBFC liquidity crunch leading to a solvency problem for infrastructure and real estate players, and to losses for mutual fund investors? Growth is aworry, and people expect jobs. How are the tall promises on infrastructure and healthcare to be funded? An explanation is in order to the extent public money is used to fund these schemes. Separate discussions can follow on other economic issues. 

What are the constitutional and legal requirements? India’s Constitution has no mention of ‘Budget’. Only three mandatory documents — the Annual Financial Statement, Demand for Grants, and the Finance Bill —find specific mention. 

Sitharaman’s Budget speech must centre around articulating GoI’s medium-term fiscal strategy and goal, keeping in view the report of the N K Singh Committee on Fiscal Responsibility and Budget Management (FRBM), committing to a credible path to attaining debt sustainability. Several times in the past, GoI has taken liberty with the roadmaps laid down in the Budget. In doing so, it will need to focus on increasing the tax-GDP ratio, without raising tax rates or compliance burden. 

On the expenditure side, the way forward could be to work on improving the efficiency of expenditure as suggested by the Bimal Jalan-led Expenditure Management Commission. GoI passed the FRBM law in 2003 to lower the Centre’s fiscal deficit to 3% of GDP by 2008. But this target to measure fiscal prudence has been pushed back to 2020-21. 

February’s interim Budget of 2019-20 budgeted the fiscal deficit at 3.4% of GDP, taking into account the impact of the income support scheme. GoI is likely to spend more now that it has extended the scheme to all farmers. A slippage at the state level due to taking on the debt of bankrupt electricity boards and loan waivers could push up the combined Centre-state fiscal deficit to 8% of GDP. The fiscal deficit may also have been understated, as the Centre didn’t take into account the debt of state undertakings serviced entirely from the Budget. 

The Budget must do away with such practices to maintain the sanctity of Budget numbers. A robust accounting and reporting system to estimate the outstanding extra-budgetary resources flowing into the consolidated fund is needed. 

Any off-Budget financing — used to cover, say, arrears of the Food Corporation of India (FCI) — must include disclosures to Parliament on the underlying principle for funding. Revenue estimates that include divestment receipts must be credible. 

The outcome-output framework for schemes is a useful metric. A holistic evaluation of outcomes achieved through spending on flagship schemes is needed to improve the quality of implementation. Budget outlays should also be based on detailed project reports that are well defined on final targets, milestones and exact funding requirement at every stage, whether it is building highways or toilets. 

GoI should be watchful, as any increase in fiscal deficit when investment picks up, will create inflationary pressures. The consequences of fiscal imprudence will be adverse for India that needs to revive growth. An announcement of a credible plan for fiscal consolidation would make Sitharaman’s Budget impressive. 

Source : Financial Express