Centre’s plan for Budget overhaul doable?

Centre’s plan for Budget overhaul doable?

India’s Union Budget is set to see sweeping changes. The finance ministry set the ball rolling a couple of weeks ago with the announcement that it would merge the General and Rail Budgets. And most recently, it has declared its intention to present the budget a month earlier from the customary last working day of February. Plans to do away with the distinction between Plan and non-Plan expenditure and replacing it with capital and revenue expenditure are also on the anvil. The overall idea is to streamline processes and make the budget more relevant.

The declaration to join Rail and General Budget, for example, is a landmark move. Warranted, ironically, by the same conditions that resulted in their separation 92 years back – fund shortage. Despite being the largest contributor to revenue, the railways was acutely cash starved circa 1925. Money required for expansion, development and maintenance was never adequately allocated. To solve the problem, the then British rulers decided to separate the Rail Budget to give the railways autonomy to spend its own money. 

The move helped resolve the crisis temporarily, years down the line, the plan failed to produce desirable results. Subsidised fares and politicisation of issues meant development and expansions did not materialise on the scale envisaged. So, on the recommendation of the current railway minister Suresh Prabhu, the government has decided to go for a merger. It would relieve the Indian Railways the annual dividend to the tune of Rs 10, 000 crore that it pays to the government to avail Gross Budget Support. A five-member committee has been formed to work on the modalities and submit its report on 31 August. How it pans out in the long run, remains to be seen.

Besides the merger, the government is also envisaging presenting the Budget a month earlier. Up until now, the Union Budget has been presented at February-end and the entire process dragged on till mid-May. The Finance Bill, incorporating Budget proposals - full year expenditure as well as tax changes – is not passed until April-end or middle of May. But, as India’s financial year begins on April 1, in March, the government needs the Parliament’s approval through vote-on-account, to allocate a fraction – sixth to be precise – of the funds for the first three months of the forthcoming financial year.

The advancement of the Budget presentation to January-end, would obviate the need for a vote-on-account as the passing of the Finance Bill would be accomplished by the start of the financial year. Departments and state-owned firms would not need to wait for the Budget to be passed by the Parliament to learn of the amount allocated to them and could start spending right from the beginning of the fiscal year. Tax payers, especially businesses, would benefit too as they would get to know of their tax liabilities at the onset of the fiscal year.

The move could also help government prepare for the implementation of the Goods and Services Tax (GST) – an indirect tax that would subsume the multitude of existing taxes – scheduled to be rolled out from April 1, 2017. With the GST materialising, the second part of the budget, containing tax proposals, would get slimmer with only direct tax proposals being mentioned alongside a few others like Customs, which would still exist.

As part of the budget overhaul, the government, further, is planning to scrap the distinction between Plan and non-Plan expenditure with the 12th Five-Year Plan (2012-17) ending this fiscal. Planned expenditure is that which helps to increase the productive capacity of the economy, like allocated spend on sectors like rural development and education. Non-Plan expenditure, on the other hand, is simply expense on account of interest on Government debt, pension, subsidies, salaries and defence. The centre intends to replace it with capital expenditure and revenue expenditure to better differentiate between money spent on creating assets and money spent on running the government. States are being consulted for capital and revenue expenditure classification. An internal group is working on the same.

With all the ambitious plans of an overhaul, the question is: can the centre seamlessly push the changes before the April 1 deadline? Experts point out that data – comprehensive revenue and expenditure data – gathered till December, when preparations start in full swing, may not be sufficient enough to draw the budget. Currently, data on revenue and expenditure trends for nine months (April to December) of the financial year is available by the time the Budget is finalised in mid-February. With the Budget presentation advanced to January, just about half-a-year’s data would be available to frame it. This would pose a challenge.

Besides, monsoons play a crucial role in preparing the Budget – effective Budget planning depends on the monsoon forecasts for the coming fiscal. With dates being rescheduled earlier, proper forecasts would not be available, making the process even more challenging.

So far, the budget cycle typically started around September-end. But with a new target date, preparations need to begin right away so that the Centre does not overshoot the deadline. How doable the overhaul exercise will be and what results it will produce, only time can tell.

 

Happy Investing

Source:Moneycontrol.com