The Union Budget for FY18 will be very different from the ones presented hitherto. Three changes have been accepted by the Cabinet which will have far reaching implications for the way in which fiscal business is conducted. To top it all if the Goods and Services Tax (GST) is a reality in April 2017, then it would be an icing for this new format.
The three changes that we will witness are that the date of presentation will no longer be February 28. Second, the railway budget will be merged with the Union Budget, and last the distinction between plan and non-plan expenditure will go. To begin with it must be said that there is nothing wrong or right in any such change in system and the points for discussion are only their implications as it will mean substantial changes in the way in which we formulate and execute the Budget.
First, the advancement of the timing of the budget is a big change as it will mean moving even further away from the new financial year. There has been some talk earlier on whether the date should be closer to March 31, to be more realistic.
But then this thought has been kept aside on grounds that given the Parliamentary processes to be followed, it could lead to a delayed implementation as it would go well past April of the next fiscal year. Hence, holding the budget in January or early February provides that much time for both house of the Parliament to discuss and pass the budget.
The issue with such advancement is that a lot of data which is required when drawing up the Budget would not be available and hence there could be several guestimates rather than estimates. The GDP numbers of the first half would be firm, while the third quarter may not be out and the fourth quarter performance would be based on even more distant estimates. GDP growth is essential for all fiscal ratios as revenue is based on how we think the economy will grow while the two vital indicators of prudence, revenue and fiscal deficit are linked with the GDP. The risk we have is that the numbers could be way off-mark. The counter-argument is that since we are anyway making guesses for the year, it may not really matter if we are distant by another month.
While the future will be fraught with uncertainty, the past too would be hard to guess. The previous year’s numbers serve as benchmarks for the future projections. Hence, FY17 (revised) serves as the basis of FY18 (budget). There is nothing really amiss here except for the fact that since we are overwhelmed by the fiscal targets, on account of this uncertainty, there will be a tendency for us to be more conservative with expenditures.
The way it goes is that when the government has to meet a target of 3.5 percent for fiscal deficit and on February 28, we know that we are at say 4 percent then we cut back on expenditure in March to ensure that this target is met. Now, with the Budget being announced one month in advance, this number will be more uncertain and there could be a situation where all departments could be asked to cut back their expenses one more month in advance to meet the commitment.
As such, the March 15, advance tax payments causes uncertainty, which often leads to delays in refunds for the year. This could get exacerbated now. Hence, while having it early makes implementation easier, reconciling the present flows with the committed targets can cause to veer us towards over-caution.
The second change would be the merger of the Railway Budget with the Union Budget. This has been a long standing demand as it really did not add value to have separate budgets, which was more of a legacy issue. The final ‘net numbers’ did enter the Union Budget and hence it made little sense to keep them separated. The Railways Budget was introduced by the British to gauge their own capex for creating a railway system which was part of their own strategy to move troops and goods across the country. There can hence be no case against merging the budget now.
However, in terms of accounting the analyst will have a challenge as the numbers will come into the main accounts in terms of both earnings and expenditures. Some question marks would be on how would the overall borrowing of the government look like as the Railways are always borrowing? Second, would there be comparable numbers given for the past? For example, the salary bill will go up substantially now in FY18 as the Railways are the largest employer in the country. Third, will the fiscal deficit number be affected? Will the borrowings of railways from the government be treated separately? Therefore, there will be several accounting issues that need to be understood while interpreting the FY18 Budget.
Third, the declassification of expenditure under the headings of Plan and non-Plan was very much on cards and in a way it is good that it is being brought in. With the Planning Commission being closed and the concept of five year plan being done away with, having such a classification did not really fit in and looks anachronistic. In fact, there is a school of thought which believes that all expenditure is essential and by calling some categories ‘non-plan’ gives an incorrect impression. However, once again the government would have to provide comparable figures for the past 2 years to begin with where this classification is done.
The other issue is how the states are able to respond. Ideally all of them need to move in the same direction as there is substantial flow of funds from the centre to the states. Further, the state of preparedness is critical, both in terms of having the discussions that go into its preparation to the formulation of the same. Hence, there is a logistics dimension to it. Last, while there is discussion on moving the financial year to January-December, it could become less relevant now that the budget process is being geared to moving a distance from March.
On the whole these are good moves, which have to be followed up with reconciliation of data for the past with the current dispensation. But the possibility of government departments becoming even more conservative with their spending due to such advancement can make government expenditure shaky in the second half of the year.
The writer is Chief Economist at CARE Ratings. Views are personal