Business Today

Return to Reform

Arun Jaitley is bringing in much needed structural reforms, but their follow through will present major challenges.
Anilesh S. Mahajan   Delhi     Print Edition: October 23, 2016
Return to Reform
(Photo: Shekhar Ghosh)

It was a single line reference in the agenda of the Cabinet meeting on September 21, seeking amalgamation of the Railway and General budgets. Readily endorsed by those attending it, the decision brought the 92-year-old practice of having a separate Railway budget to an end. The same Cabinet meeting also cleared Finance Minister Arun Jaitley's proposal to advance the budget presentation date from the last week of February. It further agreed that Plan and non-Plan expenditure should be merged.

These tradition-upturning decisions had been in the works for the past six months, with lengthy discussions between key officials of the finance ministry and the prime minister's office (PMO). The phasing out of the Railway budget stemmed from the recommendations of the Bibek Debroy Committee on railway restructuring submitted late last year. In August, Railway Minister Suresh Prabhu was sounded out and promptly agreed to the proposal. The advancing of the budget announcement is expected to speed up budgetary processes - especially fund transfers to ministries - in forthcoming financial years. So, too, the consolidation of Plan and non-Plan expenditure had been recommended by many expenditure reform committees in the past including the 14th Finance Commission headed by former Reserve Bank of India (RBI) governor, Y.V. Reddy and is expected to provide a quicker and better idea of how overall government finances are spent.

Some experts note that these reforms could well have been announced two years earlier, at the time when the Planning Commission was transformed into Niti Aayog, and that valuable time has been lost. Others point out that for the decisions to make a real difference, states will also have to follow suit. Still, there is no discounting the importance of the steps taken.

How Changes Will Help

In fact, there have been a number of critical policy interventions by the government in the past three months. The most important of these was obviously the passing of the Goods and Services Tax Bill, a culmination of years of dialogue and negotiation with the states and Opposition parties. Many more sectors have been opened up to foreign direct investment (FDI), some of them despite opposition from the RSS. Debt recovery has been made easier by amending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. "These are all good moves, but real change will come only when we have real expenditure reforms," says former finance minister Yashwant Sinha. "Ministries must become more efficient at quarter-wise planning and execution. At present, most spending targets are met in the last quarter of every year. This has to stop."

Finance Ministry officials maintain this is precisely what they are working towards. "But it can only happen step by step," says one of them. With the accrual system replacing separate Plan and non-Plan budgeting, more finances will be freed up for areas such as infrastructure. The gross budgetary support (GBS) for the plan outlay in the current year is Rs 5.5 lakh crore, 15.26 per cent higher than last year's. The paradox is that while the finance ministry has been hard put to raise the money, it cannot use the savings due to low fuel prices and reduced subsidies on fuel and food because they are part of non-Plan expenditure.

Currently budget processing, once it has been announced, continues until May-end or even mid-June, so an earlier announcement can make a big difference. "In principle, we favour finishing the entire financial business of the government before March 31 so that implementation can begin from April 1," Jaitley has said. This will also test the expenditure prudence of government departments and force them to plan better. "At present, infrastructure-related ministries, such as Road Transport and Highways, get their allocations only by June," says D. K. Srivastava, Chief Policy Advisor, EY. "The monsoons soon follow, so no work can be started till October, when a good six months have been lost."

The Ministry of Consumer Affairs, Food and Public Distribution is also happy about the change. "This will allow us to predict how much foodgrain we need to import, how much money we need for it and from where to buy," says a ministry official. "In certain cases, this may help to curtail food inflation, too." However, there is also a flip side. "One can anticipate the coming year's economic cycle better if the budget is presented in end-February," says Sinha. "One can also make a better assessment of the previous year's performance."

New Challenges

No doubt the changes will also bring new challenges. The building blocks of the 'outcome budget' - measurement of performance indicators, specification of standards, costing of programmes, and a monitoring and evaluation system - are still evolving in India. Statistics are still dependent on data provided by states, which are not always reliable. The Pradhan Mantri Ujjwala Yojana, for example, under which the government provides LPG cylinders to families below the poverty line (BPL), is based on the Socio Economic Caste Census figures, which Petroleum Minister Dharmendra Pradhan himself admits is not perfect. Similarly, Power Minister Piyush Goyal finds the data on electricity demand sent by states, suspect.

There are also some ministries such as Human Resource Development or Parliamentary Affairs, where capital expenditure is low or negligible. "We need to ascertain how funds should be allocated to ministries where there is no return on investment," says a finance ministry official. In the states, too, there are many centrally sponsored schemes for which the state pays salaries without creating any asset of its own. Again, there is the challenge of achieving a balance between capital and revenue expenditure in the new system. This may not be difficult for the Centre, since the Seventh Pay Commission's recommendations have already been taken care of in the current budget, but many states may face problems doing so since their pay commission recommendations are still in process.

Integrating the Railway Budget

The main challenge will be to align accrual-based accountancy with existing projects. The finance ministry is not really keen to take on the Railways' liabilities. "For the present, the Railway budget proposals will be merged in the general budget speech," says a senior official. "The rest of the integration will take place over time." The dividend paid by the Railways to the finance minister for capital invested will also cease, saving it Rs 9,700 crore this year.

But there are other difficulties. Apart from the finance ministry's GBS, the Railways have also been raising debt from the market through its subsidiary, Indian Railway Finance Corporation (IRFC). If IRFC's accounts are merged with the budget, its substantial borrowings could affect the national debt and fiscal deficit numbers. Separately, Railways is also moving towards accrual accounting. Its Ajmer division is the first to adopt the new system. It will take the Railways at least two more years to shift to accrual-based accounting. Turning the Railways into a holding company instead of a department of the government, as the Debroy Committee suggested, however, could be a way out, though it is yet to be seen how the powerful railway unions will react to the idea. Already, the RSS-affiliated Swadeshi Jagran Manch is suspicious. "It worries us that the government is trying to alter the structure of the Railways," says Ashwani Mahajan, its co-convenor.

Yet another vital recent decision has been to start the process for winding up 17 loss-making PSUs. A detailed plan to revive 76 other PSUs, whose finances have gone awry, is also being worked out. Strategic stake sales of a number of PSUs are in the pipeline. Initial estimates are that the sales could help mop up around Rs 20,500 crore. Many more reforms related to expenditure, labour and the functioning of public sector enterprises are also said to be in the offing.

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