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17 March 2016, Gateway House

Budget 2016: the challenge begins now

Two weeks after Finance Minister Arun Jaitley announced the Union Budget 2016-2017, it continues to be a hotly discussed topic. This pro-farmer budget has laid down great plans, but in a nation where Mars Missions and farmers suicides occur simultaneously, aspirations will have to take a backseat until the way forward has been paved.

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Ever since Finance Minister Shanmukham Chetty presented India’s first budget in 1947, budget presentation is eagerly awaited as the first big ticket political event each year. Consequently, it is no surprise even a fortnight after current  Finance Minister Arun Jaitley presented the 2016–17 budget, commentaries continue as to whether it was finally the long-awaited budget or devoid of the much-needed big bang vision.

This oscillation between applause and disappointment is equally understandable as it reflects perceptions of how realistic the government’s aspirations are and whether it would achieve the stated objective. This is because a budget is essentially a statement by the government of what its priorities are for the year. The budget document is, in other words, an allocation of funds and the sectors for which allocations have been made. Allocations are not, however, a sanction for expenditure.

Expenditure is incurred on the basis of prescribed administrative and financial procedures that need to pass audit scrutiny, failing which it becomes an audit objection and, in the worst-case scenario, features in the comptroller and auditor general’s report that is presented to Parliament. To that extent, actual expenditure incurred usually falls below allocations because of reticence in giving approvals. Fear of reprisals after a change of government or investigations by vigilance on the basis of complaints of misappropriation of funds can be a significantly demotivating factor for bureaucrats in approving proposals. Delays become the norm. Consequently, at the revised estimates stage, progressive expenditure statements and the ability to spend determine fund allocations and tend to be substantially lower than budget estimates.

This is the real challenge that governments face. In short, will central government spending for the financial year utilize fund allocations or will funds lapse, as has been the case on innumerable occasions in the past with successive governments? Utilization and, thus, implementation will be the litmus test of the government’s resolve to match its aspirations with achievement. Shortfall will attract criticism that the government falsely raised expectations.

To that extent, all budgets face the critical challenge of implementation. Consider some allocations in the 2016–17 budget, for instance. Under the Accelerated Irrigation Benefits Programme (AIBP), the finance minister reported there were 89 pending projects and their completion would require Rs. 17,000 crores next year and Rs. 86,500 crores in the next five years. On the floor of Parliament, he conveyed the commitment of the government in ensuring 23 of the projects would be completed before the end of the financial year. It bears recalling that the majority of these projects have been languishing for years. What miracle wand will now ensure fast-tracking and, thus, completion? Indeed, the genuine fear is that incurring expenditure would be confused with project completion when, in reality, it would only push open the door to corruption even wider. Ensuring that the allocations go to the intended beneficiaries within the stipulated time frame will be the biggest challenge the central government would face.

Similarly, Prime Minister Modi’s pledge to double the income of farmers by 2022 was rejected by former Prime Minister Manmohan Singh as being “an impossible dream” while being a big idea. Indeed, Modi himself indicated the goal would be achievable only if the state governments gave priority to agriculture. As the history of India’s centre-state relations repeatedly demonstrate, this is an uneasy relationship where state governments in opposition to the central government rarely sing the same tune. Consequently, the sole big idea might fall by the wayside as its success is entirely dependent on the proactive manner in which state governments take interest in the rural sector and agriculture.

Consider the ease of doing business. At a talk recently delivered at the Mumbai campus of the S P Jain School of Global Management, Mark Thirlwell, chief economist with Austrade, in response to a query on how India was perceived by Australian companies, said that when Australian companies were asked to identify the top five exciting destinations in the world for investment, India would invariably feature. At the same time, if Australian companies operating abroad were asked as to which were the top five most difficult places to do business, India would invariably feature! In other words, India represents a clear mismatch between expectation and delivery. The importance of addressing how important it is to improve conditions for doing business in India cannot be overemphasized.

The government has announced the ease of doing business among its top priorities, but  a number of amendments are required to the Companies Act for this, with the approval of Parliament. Experience suggests this is not likely to be an easy task, given the manner in which Parliamentary proceedings have been stalled over the past several months and the passage of important bills, especially the Goods and Service Tax Bill, delayed. It is, however, good news that the opposition has agreed to the passage of some bills. The government’s commitment to fiscal consolidation is also excellent news. All this impacts the way India is perceived by foreign investors.

Two important challenges confront all governments: firstly, the ability to spend allocations and ensure the funds reach the intended beneficiaries; and secondly, the ability to view the budgetary exercise as being in conjunction with a series of other enabling executive actions. For transformative change to take place in the Indian economy, tough economic reforms are required. A pro-poor budget does not work without an economic liberalization programme that attracts domestic and foreign investment. The government also needs to visibly demonstrate political will in tackling corruption at all levels, especially the connivance between local politicians, law enforcers, contractors, and the multiple gatekeepers who thrive on speed money. Unless corruption is addressed, investors will not back the India story.

A dream budget is one that can be implemented. At the end of the day, a budget and its implementation need to be seen as setting the tone for inclusive growth in a country where the Mars Mission and farmer suicides take place simultaneously. Unless this is a collective end objective, India will again represent the inability to deliver on aspirations. Yet again, the people will have lost.

Amit Dasgupta, a former diplomat, heads the Mumbai campus of the S P Jain School of Global Management.

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