UNION BUDGET
FOR 2012-13: AN EVALUATION
by
G.THIMMAIAH
Former Member, Planning Commission
About
Government Budget
1. A government budget is a statement
of expected revenue and proposed expenditure of the government for the ensuing
(coming) year.
2. It has got to be presented before
the (legislature) Parliament for approval before the commencement of the
financial year, (from 1st April to 31st March
of next year).
3. Government revenues consist of
taxes, non-tax revenues and borrowings.
4. Government expenditures consist of
current expenditure and capital expenditure.
5. Both current and capital
expenditures are categorized into plan and non-plan expenditures.
Plan expenditure is investment and non-plan expenditure is consumption expenditure
of the government.
6. They are further categorized into
development and non-development expenditures. Capital expenditure on
defense is non-development expenditure.
Some Fiscal Concepts
1.
Excess of
expenditure over revenue receipts is budget deficit. Excess of Revenue receipts
over expenditure is budget surplus.
2.
Excess of
current (or revenue) expenditure over revenue receipts is revenue deficit.
Excess of capital expenditure over capital receipts is capital account deficit.
3.
Fiscal
deficit is the excess of government’s total expenditure over total government’s
revenues. This is filled by net borrowing by the government. That is why fiscal
deficit is equated with net borrowings of the government.
4.
Revenue
deficit is the excess of total current (revenue) expenditure over current
revenues.
5.
Primary
deficit is Fiscal deficit minus expenditure on interest payments.
6.
Fiscal
deficit of the Union government was 5.9 per cent of GDP in 2011-12. It is
proposed to be brought down to 5.1 per cent of GDP in 2012-13.
EVOLUTION
OF OBJECTIVES OF GOVERNMENT BUDGET
1. First Stage: Government budget was expected to meet
the day-to-day expenditure required for running the government including
legislature, judiciary and the defense forces. This was
called minimal government as the objectives of the budget were minimum.
2. Second Stage: The budget was expected to provide
welfare assistance such as rehabilitation of citizens affected by
natural calamities like floods, droughts and earthquake.
3. Third Stage: The budget was used to provide more
comprehensive welfare benefits like education, health,
housing, transport, old age pension etc.( Welfare State functions)
4. Fourth Stage: The government started using budget to
undertake investment activities, (public enterprises), to
provide infrastructure, employment and to provide incentives for
private sector economic
activities which generate employment and revenues.
5. Fifth Stage: Government budget is used for mobilizing votes
in favor of the party in power by announcing and
implementing populist programmes. (Public Choice Theory).
6. The present practice
is that the government in power first assesses the prevailing economic/political/
social problems in the country at the time of formulating the budget and uses the budget to announce
appropriate economic and fiscal policies to solve them by using budgetary tools like taxes, expenditures, borrowing
and lending.
UNION BUDGET FOR 2011-12: BACKGROUND
1.
Indian
economy has been facing inflation, unemployment, agricultural deceleration,
lack of adequate infrastructure. Though the economy started recovering from
slowdown as reflected in GDP
growth of 8.6 per cent in 2010-11, it could not be sustained as it declined to 6.9 per cent in 2011-12. These
are the domestic problems facing the economy.
2.
There was
and still is economic uncertainty in the western countries as their economic recovery is slow
and the political unrest in oil exporting countries have added
further uncertainty for the
growth of Indian economy.
3.
Against
this background of economic problems facing the country, the Union
budget for 2012-13 was formulated.
4.
The budget
proposes to reduce the fiscal deficit from 5.9 for 2011-12 o 5.1 in 2012-13.This
is not a realistic target in the light of all round uncertainties facing the
country.
UNION BUDGET FOR 2011-12: SUSTAINING GROWTH
1. Indian economy escaped from ‘Hindu rate of growth’
of 3.5 per cent after the introduction of structural economic reforms and
achieved an average annual growth rate of 8 to 9 percent of GDP. But this
growth rate dipped to 6.7 per cent in 2008-9 because of global recession. It
recovered to 7.2 per cent in 2009-10, and to 8.6 in 2010-11. Encouraged by this
recovery, the Union budget for 2011-12 has formulated policies to push it up to
9 per cent in 2011-12.
2. The earlier policy of encouraging private sector and
public-private –partnership (PPP) model has been continued. The policy of
disinvestment from PSUs is also continued.
3. The policy of attracting foreign capital both in FDI
and FII is further boosted in 2011-12 budgets by allowing foreigners to invest
in mutual funds and infrastructure and corporate bonds. The limit is raised
from $5 billion to 25 billion. Tax exemption up to Rs 20000 is continued for
investors.
4. Infrastructure investment is boosted by exempting
domestic investors in power generation from excise duty, increasing government
investment in railways, roads and by encouraging PPP model for ports and
airports.
5. The Union government has proposed to spend Rs 2
14000 crores on infrastructure development in 2011-12. This is in addition to
tax free bonds to be issued by Railway Finance Corporation, National Highway
Authority of India and HUDCO.
6. Under infrastructure for agriculture development,
tax incentives are announced for construction of cold storage capacity and
warehousing silos.
7. Besides, the corpus of Rural Infrastructure
Development Fund is raised from Rs.16000 crores to Rs.18000 crores.
8. Housing sector is allowed to develop in private
sector (except housing for the low and middle income groups), by continuing tax
incentives.
9. Irrigation infrastructure is allocated increased
investment funds under Bharat Nirman programme apart from plan funds under
state sector.
10. The Union budget for 2011-12 has also allocated
Rs.300 crores each for raising the
production of millets, palm oil and pulses to control food inflation from
supply side.
UNION BUDGET FOR 2011-12:
AGRICULTURE
1. Agriculture is a state subject and hence we cannot
expect much expenditure on it by the central government. Even so the central
government is assigned the task of spending on agricultural research, extension
and new technology for agriculture. Under this responsibility, the central government
initiated policy measures for introducing green revolution. Ever since then,
the central government has been spending on agricultural development also.
2. Agriculture employs 64 per cent of labourforce but
contributes about 18 per cent to GDP. This
indicates that there is large scale underemployment there. Surprisingly agriculture output grew at 5.4
percent in 2010-11. In order to sustain higher growth of GDP of 9 per cent,
agricultural growth of at least 4 percent is necessary. For sustaining a
minimum 4 per cent growth rate of agriculture which also helps creation of both
farm and non-farm employment, several schemes have been announced in the Union
budget for 2011-12.
3. Rs, 7860 crores have been allocated to Rashtriya
Krishi Vikas Yojana which includes schemes for the development of agriculture.
4. A scheme for encouraging growing of palm for
producing edible oil, a scheme for encouraging millets like jowar and ragi, and
a scheme for increasing the productivity of pulses have been launched.
5. Provision of Bank credit for agriculture has been
enhanced to Rs.475000 crores at 4 percent interest.
6. Agriculture marketing infrastructure is proposed to
be developed in collaboration with private corporate sector under PPP model.
Agro-processing attracts tax incentives
UNION BUDGET FOR 2011-12:
FISCAL DEFICIT DEBATE
1. Union Finance Minister has reported that he has
reduced the fiscal deficit from 5.5 percent
of GDP projected in the budget for 2010-11 to 5.1 per cent now and has
projected to reduce it further to 4.6 per cent in 2011-12.(Most part of fiscal
deficit is structural and not cyclical.)
2. This claim has come to be disputed on the ground
that the reduction of fiscal deficit from 5.5 per cent to 5.1 per cent was the
result increase in GDP by 8.6 per cent
and
further even for the next year the projected
reduction to 4.6 per cent will be because of projected increase in GDP by 9 percent.
3. There is another angle to this debate. The actual
Fiscal deficit in rupee terms for the year 2009-10 was Rs.428462 crores. The
fiscal deficit projected in the budget for 2010-11 was Rs.381406 crores. In the
revised estimate for the same year the fiscal deficit increased to Rs.400998
crores in spite of one time bonanza from 3G spectrum auction. The estimated
fiscal deficit for 2011-12 is Rs.412817 crores and it is expected to come down
to Rs.343000 crores apart from treasury bill borrowing of Rs.15000 crores. In other
words, fiscal deficit being net borrowings of the government are in rupees and
the amount in rupee terms has not come down. Only when related to GDP which is growing,
the ratio shows decline. This is a
statistical juglary.
GROWTH VERSUS SOCIAL
DEVELOPMENT DEBATE
1. The government of India has been over emphasizing
the objective of achieving higher growth rate of GDP on the assumption that it
will reduce poverty through ‘trickle down’ mechanism and ‘inclusive growth’
strategy. This is evident from several policy measures like tax reforms,
subsidy reforms and reforms in FDI inflows announced in the Union budget for
2011-12. This policy emphasis has been endorsed by many international economists
like Professor Jagadish Bhagavathi and Aravind Panagariya.
2. But Professor Amartya Sen has argued that such
obsession with growth has made India backward in terms of social development.
He has argued that India lags behind even Bangladesh in literacy, infant
mortality and far behind China in many social development indicators. His
argument is that it is not enough if India achieves higher growth rate of its GDP.
It should use more public funds for expanding and improving education, health, nutrition
and for reducing infant mortality.
3. Professors Bhagavathi and Panagariya defend
government’s emphasis on high growth rate and argue that high growth rate of
GDP will bring in higher government revenue which should be used for developing
social sector.
4. Some economists think that the government of India
has been exempting incomes/profits of private corporate sector to encourage
their investment for achieving higher growth rate in industrial sector. A case
in point is exemption of SEZ developers as well as units located in SEZ from
income tax. Instead of totally exempting them, it can tax them moderately and
use the revenue obtained for spending on social development.
5. How does the
Union budget for 2011-12 respond for
these criticisms?
6. The union budget has increased funds for education
to Rs.52057 crores in 2011-12 of which
Rs.21000 crores is for universalisation of primary education. In view of the
operationalisation of right to education, the amount has been increased by
Rs.6000 crores. It is necessary to note here that this Rs.21000 crores comes
from education cess levied on income tax and not from general revenue of the
government.
7. But the allocation for health has not been
impressive. It has allocated Rs.26760 crores of plan funds. This is an increase
of 20 per cent over last year’s allocation. The Union Finance Minister has
widened the scope of Rashtriya Swasth Bhima Yojana, (government health
insurance scheme), to include beedi workers and unorganized workers. This means
the increase is only to cover them and not for expansion.
8. The government of India has been encouraging private
sector in health services. Such a policy by itself is not bad. It would complement
the public sector health facilities. But the state governments which run the
government health facilities have not been able to expand and improve health facilities
for want of funds. All tax reforms go to reduce their revenue share. So the
talk about higher growth rate of GDP yielding higher revenue has not resulted
in higher allocation for education and health.
9. Added to this is the shortage of doctors and nurses
in India. The governments have been increasing the medical colleges without
ensuring teaching staff and modern medical infrastructure.
10. Both the Union and the state governments are
obsessed with the objective of achieving higher growth rate of GDP without
evaluating the fiscal consequences of economic reforms. Therefore, facts do
support Professor Amartya Sen’s apprehension that when governments get obsessed
with growth objective, they do not bother about social development and leave
the poor people to the whims of the market forces. This is sure way of sowing
the seeds of ‘jasmine revolution’ like revolt in India.
UNION BUDGET FOR 2011-12: TAX
MEASURES
1. Union budget has reaffirmed the long standing tax
policy of the government to widen the tax base, moderate the tax rates,
simplify the tax collection and tax payment procedures to raise more revenue.
2. The Union budget has kept constant peak rates of
customs duty, union excise duty and service tax at 10 per cent. This has
supported the government policy of controlling inflation. It has also paved the
way for smooth transition to DTC and GST regime.
3. Rates of excise duty on some consumer products have
been reduced which will leave Rs.11300 crores in the hands of the consumers.
4. Exemption limits of income tax for individuals have
been raised. Surcharge rate on corporate tax has been reduced to 5 per cent.
This will leave Rs.11500 crores in the hands of the taxpayers.
5. Both these tax measures create more demand for the
domestic economy and sustain economic recovery.
6. Though the rate of MAT has been raised from 18 to
18.5 per cent, it is intended to equalize the effective rate of income tax.
7. However, the tax holiday for STPI and SEZ has been
discontinued. The tax holiday for IT companies was continued for one year last
year to enable the IT companies to recover from recession. When the Finance
Minister continued the union excise duty at 10 per cent without rolling it back
to 12 percent for one year, he should have continued this tax measure also for
one more year.
8. It is also necessary to formulate a more rational
policy on STPI. It is a known fact that China and Philippines are giving tax
concessions to IT companies to enable them to compete in the world market.
Though big IT companies in India are capable of competing, there are hundreds
of small and medium size companies which deserve tax holiday for some more
years. The Union Finance Minister should consider giving tax holiday for small
and medium IT companies for a few more years.
9. Though
SEZs were exempted from income tax, suddenly the Finance Minister has levied
MAT on both SEZ developers and units located in SEZs. Such measures look ad hoc
and inconsistent with long-term predictable tax policy measures. If it is only
for raising some revenue to cover revenue deficit, it may be reviewed next year
when the revenues are expected to improve on account of higher growth rate of
GDP.
10. It
is announced that DTC will come into effect from April 1, 2012 which will be beneficial
to the ordinary tax payer and private sector in general. It will boost investment
by reducing not only tax incidence but also cost of tax compliance.
11. It
is also hoped that GST will also come into effect from 1st April, 2012. While
the implementation of DTC is certain, the fate of GST is uncertain. This is not
only because of likely revenue loss to the states which is compensated by the
13th Finance Commission, but more importantly for political reason
of state sovereignty regarding their revenue raising powers.
12. Even
if GST is introduced, there will be two GSTs, one by centre and another by
states. Both of them will reduce multiplicity of taxes levied by central and
state governments.GST is considered as the last item left in the series of tax
reforms which were initiated in 1991.
GOODS AND SERVICES TAX
1. Background
to Goods and Services Tax, (GST): In the Constitution, tax powers are divided
between the central and state governments.
Further, both central and state governments levy different taxes on the
same base. This makes cost of tax compliance prohibitive in India. It also
creates cascading effect, (tax on tax), of central and state taxes which add to
inflationary spiral.
2. In
order to overcome these adverse effects of multiplicity of taxes, both the central
and state governments agreed to levy Value added tax in place of union excise
duty and sales tax respectively. But VAT did not solve all the problems of multiplicity
of taxes. So it was agreed to introduce GST in place of most of the indirect
taxes.
3. It
is agreed to replace union excise duty, additional union excise duty,
supplementary excise duty, countervailing duty along with surcharges by one
Central GST.
4. Similarly,
it is agreed to replace sales tax, entertainment tax, luxury tax, entry tax,
additional sales tax along with surcharges by one state level GST.
5. Such
imposition of central and state GSTs require constitutional amendment which is
held up because of the opposition from some states. Once that hurdle is
cleared, it is proposed to introduce GSTs from April1, 2012.
6. The
13th Finance Commission has recommended compensatory grants for the
states if they experience any loss of revenue on account of this switch over.
UNION BUDGET FOR 2011-12:
WELFARE PROGRAMMES AND SUBSIDIES
1. Welfare programmes are in response to the mass
poverty and multiple economic and social disabilities like widowhood, old age and
hunger. In the absence of any dependable social security, those who face such
disabilities become destitute. So both the central and state governments have responded
to these disabilities by formulating schemes to provide relief to those who
face them.
2. Such welfare schemes include widow pension, old age
pension, pension for unorganized workers, health insurance for the poor etc.
3. There are also programmes and schemes meant for poor
people like subsidized food,(PDS), right to wage employment,(MGREGP),
livelihood gurantee,NLGS), etc.
4. Of late, both the central and state governments have
started populist schemes which are mainly intended to mobilize votes rather
than provide welfare benefits. A classic example is free color TV to people in
Tamil Nadu.
5. Now it has been realized that there is a lot of
leakage in the delivery of some essential welfare schemes and therefore, it is
proposed to give cash benefit to the identified beneficiary. The Union budget
proposes to give cash subsidy to kerosene, LPG and fertilizer subsidy
beneficiaries. This proposal is being debated as it is assumed to reduce
subsidy bill.
UNION BUDGET FOR 2011-12:
SUBSIDY DEBATE
1.
Subsidy
is non-plan expenditure and hence it is a major item which causes revenue deficit
and through it raises fiscal deficit.
2.
The
total subsidy expenditure of the central government was Rs.70926 crores in
2007-08 which increased to Rs.129708 crores in 2008-09 and further
to Rs.141351 crores in 2009-10.For the fiscal year 2010-11 the subsidy
amount was Rs.164153 crores. But for next year 2011-12 it is projected at
Rs.143570 crores. This has created a debate.
3.
The
Union Finance Minister has proposed to deliver kerosene subsidy, LPG subsidy
and fertilizer subsidy in cash so that leakage in delivery and reaching
undeserving people will be stopped. Such cash delivery is assumed to reduce the
amount of subsidy. Will it?
4.
In
subsidy distribution, first we have to identify the target group and persons.
Then we should design a leak proof delivery mechanism. In India both these have
failed and hence the subsidy bill has shot up sharply.
5.
Kerosene
subsidy is given to BPL ration card holders. They will receive the difference
between the market price and the subsidized price in cash .Head of the household
will receive the cash. What guarantee that he will spend on kerosene?
6.
LPG is a
little different may not involve many identification and delivery problems.
7.
Fertilizer
subsidy bristles with problems. Poor farmers receive cash subsidy and may use
it for something else thereby defeating the purpose of subsidy.
8.
Governments
are already giving widow pension, old age pension and other pensions in cash.
There are problems in identifying the target persons though they are now minimized.
Corruption continues in identification but subsidy does not leak.
9.
In
Brazil and Mexico conditional cash subsidy is given. It is reported to be
working well. That experience has encouraged the Indian policy makers to
deliver subsidy in cash.
UNION BUDGET FOR 2011-12:
BLACK MONEY DEBATE
1. Union budget for 2011-12 has not only mentioned the
problem of black money but also has indicated that the government is going to
formulate a five-fold strategy to unearth black money.
2. Black money is that which is not declared for tax
purpose. Since it is tax evaded, it has to be hidden in the form of assets like
gold and real estate /or kept abroad.
3. Nobody knows the extent of black money in India or
held outside India. The figures put out in media are all guestimates. The
government of India has asked some research Institutions in Delhi to estimate
it.
4. Going by the number of scams surfacing virtually
every month if not every day, scams and the resultant black money have
increased after the introduction of structural economic reforms which include liberalization
privatization and globalization. Statistical data support this statement.
5. Before economic reforms when the Indian economy was
governed by ‘license and permit raj’ and in the context of high rates of taxes,
people were forced to indulge in corruption and tax evasion and accumulate
black money. But liberalization and tax rates are brought down to international
level we thought corruption and tax evasion will come down .But they have increased
instead. Why? It is debated.
6. Before economic reforms when the Indian economy was
governed by ‘license and permit raj’ and in the context of high rates of taxes,
people were forced to indulge in corruption and tax evasion and accumulate
black money. But liberalization has done away with’ license permit raj’ and tax
rates are brought down to international level. After these reforms we thought
that corruption and tax evasion will come down and the menace of black money
will disappear. But they have increased instead. Why? Does it mean liberalization
and privatization are not good for curbing corruption and black money. This
policy implication should be debated.
7. The Union Finance Minister has allowed in the budget
for 2011-12 FIIs to invest in Mutual Funds and foreign investors are allowed to
invest in infrastructure bonds $25 billion. This would mean that all those who
have stacked away black money abroad can bring back by investing in Mutual
Funds and infrastructure bonds. Is this not a tax amnesty by the back door?
8. Tax amnesty is not allowed after the Supreme Court
ruled on a PIL that it is immoral. So the government of India has designed a
tax amnesty in disguise.
Thank you
