Arun Jaitley presented his fourth budget on 1 February 2017. This budget would be remembered for historical breaks from its predecessors due to dropping of plan versus non-plan expenditure categories, merging of railway budget into Union budget and advancing of budget date by a month etc.
While these are important changes, a more fundamental question is whether the BJP-led NDA government’s budgets are radically different from Congress-led UPA’s budgets. Both these political formations have ruled the country since 1999.
Simply speaking budget is an exercise where the government announces its spending plans for the forthcoming year on the basis of projected earnings and gives an account of the same announcements it made in the previous two years. Therefore, budgets should fundamentally be judged by how spending is allocated and whether the government is able to honour these commitments.
Has the overall spending pattern changed?
To be sure, a large part of budgetary spending is pre-destined on account of interest payments, salaries and pensions, defence spending and subsidies; as was pointed out in an earlier Plainfacts column. The latest budget has allocated 61% of the total union budget spending on these four counts for 2017-18, same as previous year and actually slightly higher than the average value of 59% during the decade when UPA was in power.
Given this similarity, it is not surprising that broad trends in spending pattern of UPA and NDA budgets have not undergone much change.
One major difference which can be seen in the UPA and present NDA government’s spending patterns is the drop in share of social services spending in the overall budgetary expenditure. From a peak value of 10.2% in 2009, it has come down to 5.3% as per 2016-17 revised estimates (RE).
However, it would be unfair to put the blame for this reduction on the NDA government alone for two reasons. One, the decline had started under UPA II itself. And, two, after the 14th finance commission’s recommendations, increase in tax devolutions to states has been compensated by cutback on Centrally sponsored schemes, which might have led to reduction in social sector spending in Union budgets.
Having said that, the fact remains that welfare programmes such as Sarva Shiksha Abhiyan, Integrated Child Development Scheme and Mid-day Meal Scheme have seen a decline in their proportional share in budget allocations.
Which coalition has adhered to fiscal consolidation better?
The latest budget has been lauded by ratings agencies for broadly sticking to the fiscal consolidation roadmap. However, part of the credit is also due to the later years of UPA-II, which saw a steady decline in the fiscal deficit (as percentage of GDP) from 5.9% in 2011-12 to 4.5% in 2013-14, the last year of UPA.
Thus, the current round of fiscal consolidation, which began in 2012-13 appears similar to the period between 2001-02 and 2007-08, which saw a reduction in the deficit from 6% to 2.5% in a span of six years, divided between the later years of Vajpayee government (NDA-I) and the initial years of Manmohan Singh government (UPA-I). The onset of the financial crisis in 2008 led to the government’s abandoning of its fiscal consolidation framework, which led to a large increase in the size of fiscal deficit.
What distinguishes the NDA’s latest fiscal consolidation attempts from UPA II’s course correction is the fact that the Jaitley has done this by managing to realise (actually exceed) its tax collection targets unlike its predecessor.
Historically, actual tax revenue collections have often lagged budget estimates, while actual revenue spending has often exceeded initial estimates, thereby necessitating cuts in capital expenditure. An important reason for this success under Modi government has been low oil prices, which has brought in large amounts in excise duty collections on petroleum products, as was pointed out in an earlier Plainfacts column. With oil prices likely to increase, and government’s ability to raise additional revenue coming under squeeze, it remains to be seen whether this trend would continue.
One thing which differentiates NDA budgets from UPA is the former’s attempts to increase the share of capital expenditure in overall budgetary spending. NDA-I government left it at an all-time high in recent past, and the figure has been slowly climbing up under NDA II’s tenure. This year’s budget has also predicted an increase in this figure.
However, as was pointed out , two things could compromise this promise from materializing: assumption of a low growth in revenue expenditure (half of what it was in previous year), and little focus on the need to recapitalise and deal with bad debt.
It is on this count that the NDA government faces its most important challenge, in terms of providing stimulus to the economy as well as matching the record of Atal Bihari Vajpayee government as driver of large scale public investments in the country