The news of Modi – government seriously pursuing changing the date of presentation of Union Budget from the last day of February [a practice continued from the British era] to last day of January is music to the ears of every one who has lived with the pains and nuances of the extant dispensation.
The last time India de-linked from the vestiges of colonial raj [though that was more symbolic] was also under NDA – government then led by Vajpayee. In 2000, it switched over to presenting the budget at 11 AM instead of customary 5 PM on last day of February [a follow-up to presentation of British budget earlier in the day].
Reform is in DNA of NDA
Such changes happen only under NDA – dispensation; it is not just a coincidence. The key point to note is that ‘reform’ is in the DNA of NDA in sharp contrast to Congress which maintained status quo for most of the years under its rule, either solo or as commander of UPA – regime [the only exception was 1991-96 when reforms were forced on it, courtesy ‘conditionalities’ imposed by IMF/World Bank for seeking financial assistance of the duo].
Under Vajpayee, India went through reforms such as dismantling of administered price regime for oil products, strategic disinvestment of public sector undertakings [PSUs], major investment initiatives in highways and railways etc. Now, under Modi, sweeping reforms are seen in almost every sphere of activity – from governance to FDI [foreign direct investment] reforms and from investment in rural roads & irrigation to building highways & smart cities. The recent passage of constitution amendment bill on GST [Goods and Services Tax] is the most glittering jewel in its crown.
By advancing the date of budget presentation, Modi – government is taking this process forward. To understand what wonders it can do, at the outset, let us capture pitfalls of the extant dispensation.
Benefits of advancing budget date
Under existing arrangements, by the time the Finance Bill, budget demands and appropriation bill is passed by the parliament, already first 6 weeks of the financial year [April to mid-May] are over. To meet the essential expenditure viz., salaries, overheads etc during this period, the government is forced to seek a vote-on-account. This can be avoided with pre-ponement of budget presentation as then, it will have 2 full months to pass the mentioned bills enabling authorization of the full amount budgeted for the year.
But, the real big benefit will be by way of all ministries/departments getting to know well before start of the year as to how much money is available to them for spending during the year. This will enable proper planning of the schemes/programs, their implementation and expenditure pattern unlike under extant system wherein they either end up bunching most of the expenses during last two quarters or surrendering un-used balances out of the allocated funds.
This will also take away the leeway/maneuverability currently enjoyed [indeed, exploited] by ruling establishment to do window-dressing of accounts to trim fiscal deficit only to avoid slippages [albeit on paper] from the set target as per fiscal consolidation road map.
At present, revision in the income tax rates [personal and corporate] proposed in the budget though applicable from day one of the financial year start i.e. April 1, has to wait till the Finance Bill is passed. Due to uncertainty as to what rate will finally get approved, businessmen and individuals cannot make any definite provisions in regard to their tax liability. It also hampers their ability to manage cash flows.
In regard to indirect taxes [custom and excise], any revision in the rate say increase in excise duty [ED] takes ‘immediate’ effect i.e. March 1 [last day of February being the date of budget presentation]. Accordingly, all manufacturers have to revise invoices for product leaving factory from this date. If, the parliament does not approve the hike [or partially rolls it back], this leads to teething trouble for businesses across the supply chain.
At another extreme, revision in service tax [ST] takes effect ‘prospectively’ [unlike the income tax where changes are applied retrospectively from start of the year] after the finance bill is passed. For instance, the increase mooted in 2016-17 budget to 15% was effective from June 1, 2016 [up from 14.5% last year].
The government controls the maximum retail price [MRP] of crucial items like fertilizers and changes therein are normally announced in the budget speech. The revision in these prices takes ‘immediate’ effect. There were umpteen occasions in the past when increase in urea MRP had to be rolled back. This can be very painful for dealers who lift material during the interregnum.
The pre-ponement of the date of budget presentation will help remove all these anomalies by enabling completion of all legislative requirements before the start of financial year. This will ensure that all tax rate revisions take effect from April 1. The vote-on-account will be a thing of the past even as all ministries do proper budgeting and evenly distribute spending through out the year.
Focus on capital vs revenue expenditure
Another proposal of the government to re-classify its spending as ‘revenue’ or ‘capital’ as against extant ‘plan’ or ‘non-plan’ is also welcome. The latter is a relics from the planning era when development was inter-twined with planned schemes /programs. This led to an anomalous situation whereby any expense under non-plan [even if it is of capital nature] was considered as un-productive. At another level, a revenue expense could be perceived as productive just because it comes under plan category.
The proposed classification is not only in sync with contemporary realities of development propelled by a multitude of sources [it no longer revolves around planned schemes] but also would truly reflect the role played by the respective item. Thus, a higher capital expenditure would connote a boost to asset creation and hence, productive capacity of the economy. Any decrease in revenue expenses will be a sign of improved efficiency in working.
While, all these changes are good omen, the government should also put an end to a pernicious practice of deferring certain expenses [mostly subsidies on fertilizers, food and fuel] to the following year. For over two decades now, successive establishments postponed subsidy payments in tens of thousands of crores thereby camouflaging the true position of fiscal deficit. This creates a misleading image about their being fiscally prudent.
The government should build a cult of realistic projections about revenue and expenditures and ensure that all expenses including subsidy payments in any year are paid in full leaving minor [albeit logistically unavoidable] throw-forward to the following year. In the current era of electronic transfer wherein, all settlements are done on real time basis, deferment of even small amounts can be ruled out.
Shift to accrual-based accounting
To ensure that such discipline is fully enforced not leaving any thing to chance, the government should implement the recommendation of expenditure management commission [EMC] under Dr Bimal Jalan to switch over to ‘accrual’ based accounting from extant ‘cash-based’ accounting. This will nip in the bud any temptation for deferring payments purportedly to manipulate fiscal deficit.
The only flip side to the proposed dispensation could be that as on January when budget proposals are under formulation, the government won’t have fiscal data and GDP [gross domestic product] figures for the last quarter of previous year. However, considering that all economic and financial indicators will move on a more ‘predictable’ trajectory [due to better planning in regard to taxes and expenses], it can arrive at realistic estimates for this period. Even so, it is a minor hiccup as against manifold benefits that will flow from the change over.
Yet another milestone in reform journey
Together with GST slated to be operational from April 1, 2017, advancing the budget date by a month and focus on capital versus revenue [instead of plan vs non-plan] in financial statements holds the promise of making the Indian economy healthy and robust capable of taking on the challenge of double digit growth.
Kudos to Team Modi for crossing yet another milestone in the reforms journey!