Briefly discusses major challenges that face India's forthcoming annual budget for 2017-18

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Challenges for Budget 2017-18
Shantanu Basu
India’s General Budget 2017-18 will be interesting for several reasons. It would be a first for
two major reasons, viz. inclusion of Railway Estimates in the General Estimates, abolition of
the Plan and non-Plan distinction. How would each of these alter the complexion of the
Budget? Are these the only challenges?
Indian Railways (IR) presently runs operating ratios upward of 90%. This leaves precious
little for new capital works and extension, even less for maintenance, additions to rolling and
motive stock and accretion to reserves while deferred dividends would continue to multiply.
With general turndown in manufacturing activity, freight revenues would sag substantially.
For instance, declining demand from high-tension energy consumers has caused several
major coal-fired TPPs to back down. In turn, this is reflected in Coal India’s stagnant, even
declining, production figures. The same holds true for almost all other ores and equivalents
that account for perhaps half of IR’s freight earnings. Although global commodity prices
have taken a severe knocking and even anti-dumping duties are not too serious a deterrent,
yet with an overall decline in manufacturing activity, reduction in bulk imports will have
invariable negative fallout on IR’s freight revenue. At the same time, the commercial
exploitation of IR’s land and immovable assets has major limitations. For one, audit,
vigilance and investigation justifiably scare proposing officers. Second, much of such assets,
notably land, are located in areas where land prices are already low owing to lack of demand.
Encroachment over the decades has substantially reduced the price and availability even
more. On the passenger front, rapidly expanding budget and feeder airlines are steadily
gnawing at air-conditioned class travel. Volvo and long-distance sleeper buses offering
dynamic fares on point-to-point connectivity between passenger railheads would probably
add to the further diminution of IR’s revenues. Safety and comfort remain standing bugbears
for passengers. Inter-city bus services, run by states and private operators, have also been
steadily adding to their fleets and augmenting the number of daily services, something IR is
unlikely to be able to match. Clearly, all these will cast tremendous negative impacts on the
General Budget.
The second issue is a welcome step, having been proposed by the Dr. C. Rangarajan
Committee about five years ago. However, there are several grey areas, notably in
recognizing capital and revenue items that is governed mainly by the woolly distinction
between the two items laid out in Rule 79 of the General Financial Rules (GFRs), 2005.
Presently, there are several thousand project and contract posts that are funded from capital
funds and get carried over from project to project, oblivious of their often eternal timelines,
assuring lifetime career opportunities. Likewise, there are many revenue expenditure-based
projects, such as R&D ones, that include high-value project stores and several thousand
personnel that ought to be classified as capital expenditure but are not even though such R&D
projects/establishments work to create permanent assets for India. If the revenue-capital
divide is indeed genuinely enforced, shouldn’t government’s permanent assets be valued and
revalued every five years as well? After all these are national assets, aren’t they? In any case,
GFR 79 is adequately loosely worded to leave it open to convenient interpretation/re-
interpretation. How would the new classification change the way business is done in
government? Would it result in more capital expenditure? Past practice is not very
encouraging for a guide.

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However, there are other major challenges, far greater than the two issues above. Several
economic and policy factors may severely constrain public expenditure proposals in the
forthcoming budget. The deepening manufacturing crisis (including the real estate and
infrastructure sectors) would cast malevolent pressure on excise and other related revenues.
With large decline in business earnings by falling sales (such as the automotive sector by a
fourth), corporate taxation contribution in real terms would decline. Gradually reviving
global oil prices over 2014 levels are already casting pressure on oil PSU margins and will
reduce dividends available for transfer to Govt. of India. With manufacturing in the
doldrums, even non-oil PSUs are already hard-pressed to meet the rising demand for
unsustainable dividend from Govt. of India and by buy-back of govt. shares that would have
added to non-tax revenues of the govt. Coal companies, for instance, have been hit by the
backing down of many coal-fired power stations owing to low industrial consumer demand
and shift to alternative energy sources. The delay in implementing GST would only add, in
substantial measure, to the scarcity of government’s fiscal resources.
Public sector banks (PSBs) that have been assured Rs. 70000 crore over 2016-201 by the
Govt. of India, need manifold more for achieving Basel-IV norms of liquidity that is unlikely
to be available. At the same time, recovery suits are bogged in mostly understaffed Debt
Recovery Tribunals while the volume of NPAs is steadily rising. If corporate debt
restructuring (CDR) cases were added, the real volume of NPAs could potentially skyrocket.
Adding to these are giant public deposits arising from remonetisation on which banks would
have to fork out 4-5% interest per annum. At the same time, lowering of lending rates for
commercial borrowers seems to have limited takers owing to low consumer demand. In
effect, the banks would be saddled with idle funds on which 4-5% interest at least would be
payable. Any further rise in US Federal bank rates carry a potential backward migration of
foreign investments in India, particularly those that have no long-term moorings.
A major set of reasons for the scarcity of government funds is the overweening emphasis on
revenue generation by sale/lease of state/natural resources such as telecom spectrum and FM
stations. The entire process of public auction to the highest bidder is ruinous, indeed
antithetical, to the interest of the nation. Such assets are public properties to be devoted to the
common good. A deliberate decision of Govt. of India to arrive at a minimum reserve price
for spectrum, for instance, after factoring certain conditions, such as embargo on mobile
call/data tariff plans beyond 5% per annum, specified density/sq. km of mobile towers,
downtime/slow speed penalties, free Internet connectivity for educational and health
institutions, 50% tariff (of urban tariffs) for rural and semi-rural areas, etc. would have
pegged price of spectrum to more realistic levels as would a reverse price auction from such
benchmark. This would also have partly offset malfeasance in very large revenue-sharing
deals and made monitoring of contracts relatively easier. This was a major reason why the
recent spectrum auction was able to collect barely 10% of the targeted license fee and which
left a gaping hole in the Union’s projected finances by nearly Rs. 6 lakh crore. This plagued
the auction of FM stations too.
Adding to this web, are pending wage revisions, both in the public sector as also in states as a
cascading effect of the partial acceptance of the 7th Central Pay Commission’s
recommendations by the Govt. of India. Another major sector is the defence services that
need urgent upgrades in war materiel, technologies and provisions. Central and state police
forces too need proportionate upgrades. Even the Make-in-India programme for the defence
1 Ministry of Finance: INDRADHANUSH: PLAN FOR REVAMP OF PUBLIC SECTOR BANKS, Dept. of
Financial Services, Aug 14, 2015, p. 5 extracted on Jan. 25, 2017 from
http://financialservices.gov.in/PressnoteIndardhanush.pdf

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services would demand guaranteed defence purchase budget allocations and waiver of
competitive bidding for a private entrepreneur to invest several thousand crore Rupees in
captive manufacturing facilities for at least 20-25 years (like the Maruti-Suzuki ancillary
units in Gurugram in the 1980s and 1990s). The same would hold true of all sectors where
government purchases alone would sustain private manufacture. Budgetary uncertainties
would equally affect defence PSUs like GRSE, BEL, BDL, etc. that mostly live off
government-funded orders from the defence services, most so if they have to compete with
private manufacturers of military terrestrial transport and the like. In fact, the only way Make-
in-India may succeed is by a giant scale of operation, akin to the Chinese model, from where
it was evidently borrowed and given the Indian moniker.
The end result is that the total liabilities of the Govt. of India more than doubled from Rs.
31.59 lakh crore in 2008-09 to Rs. 66.89 lakh crore in 2015-162, and by 2013-14 constituted
46% of GDP general govt. liabilities (including states) rose to 65.30% of GDP while public
debt as a percentage of all liabilities rose to a whopping 87.30% and internal debt to 92.50%
of all public debt in 2014-15 with dated securities comprising Rs. 39.76 lakh crore nearly
double the 2010-110 figure of Rs. 21.57 lakh crore with an average weighted coupon rate of
about 8%. Although the average annual growth of liabilities has slowed to about 8% from
2012-13 to 2015-16, this is more a pointer to the severe limitations of continued government
borrowing and indebtedness to fuel its annual budget. Interest payments by the Govt. of India
have risen from Rs. 234022 crore in 2010-11 to Rs. 427011 crore in 2014-15, i.e. by 55%
cumulatively or by an average of 11% per annum that is commensurate with the rise in the
internal debt of the government as mentioned above3. Printing more fresh currency without
stoking inflation is not an alternative either.
RBI, commercial banks and insurance companies account for 70% of all dated securities in
2013-14. Although commercial banks are now flush with funds arising from remonetisation,
yet the omnipresent danger is that future govt. borrowings could actually end up as revenue
expenditure and contribute little to growth of GDP. With India’s GDP projected to fall by at
least a percentage in 2016-17 and 2017-18, the percentage of borrowings and repayments
would proportionately rise. Declining central revenues, delays in GST implementation, rising
cost of tax collection and future wave of tax litigation, etc., particularly in the post-
remonetisation phase, and severe limitations on raising taxes much further would adversely
impact states’ share of central taxes, leaving major across-the-board caps of 25-30% on
govt.’s revenue expenditure as one of the few mitigating factors. The challenges are
gargantuan and solutions not facile. Second-hand bargain hunting, vintage solutions and
accounting ingenuity are no longer options in circumstances that are not far less in magnitude
from the 1990-91 crises.
The author is a senior public policy analyst and commentator
2 Ministry of Finance: DEBT POSITION OF THE GOVERNMENT OF INDIA, extracted on Jan. 25, 2017
from http://indiabudget.nic.in/budget2015-2016/ub2015-16/rec/annex5.pdf
3 _______________; Ststus paper of Government Debt, dec., 2014 extracted on Jan. 25, 2017 from
http://finmin.nic.in/reports/govt_debt_2014.pdf