One often wonders if the Union Budget is as big a deal amongst all sections of the population as it is in India. Usually, the budget is a somber boring exercise of number allocations and expense statements. In India however, it has become somewhat synonymous to big bang policy announcements and that time of the year for hand-outs to different sections of people, sectors and communities. In India, the budget is a big deal.
The Union Budget of 2016 may be a “political” budget. It has focused on the politically correct sections and sectors. Nevertheless, and contrary to opposition viewpoint that it lacks innovation, the budget did have some remarkably new ideas and allocations. This budget’s focus on water is well placed. Significant allocations made towards ground water management and irrigation is certainly a first. The focus on affordable housing is also in line with the government’s agenda of housing for all. An e-market platform linking agricultural spot markets across the country is a bold initiative, albeit one that may be very difficult to implement. The focus on start-ups and on encouraging entrepreneurship is also a move in the right direction, especially for Make in India. However, notwithstanding all of these excellent structurally significant reforms, there are three significant areas that budget has been silent on and shouldn’t have.
One, for the very first time, the budget speech did not have any mention of defence allocation. On examination of the detailed document, the budget’s overall allocation to defence has increased by less than a total of Rs. 3,000 crore, about 10 per cent. It comes as no surprise that the trend of resource requirements outlined by the defence services is met with even lower allocations. The revenue expenditure allocated for defence stands at Rs. 1,62,759 crore and capital expenditure stands at a meagre Rs. 86,340 crore, both giving a total of Rs. 2,49,099 crore which is barely a couple of thousand crores above the defence allocation total of Rs. 2,46,727 crore for 2015-16. The two major reasons for the slight increase in revenue expenditure (Rs. 1,62,759 crore as against the RE of Rs. 1,43,236 crore) is the inclusion of the One Rank, One Pension (OROP) and interim provisions made for the implementation of the 7th Central Pay Commission (CPC). However, the adjustment of this seems to have been made against decreased capital expenditure allocation for defence. Capital expenditure has been slashed by approximately 10 per cent from an allocation of Rs. 94,588 crore in 2015-16 to an allocation of Rs. 86,340 crore in 2016-17. This poses a serious threat to both the modernisation projects undertaken by the services as well as the ability of the country to keep up with its security needs. While government may try to rationalise this decision by quoting the RE figure of Rs. 81,400 crore as capital expenditure at close of fiscal, it is hardly in keeping with the Modi administration’s own promise of indigenising defence manufacturing and development (which will require vast financial resources).
In an increasingly volatile and violent neighbourhood, with continued militancy and terrorism from across our borders (as evinced by the recent attack on the Pathankot Air Base and the encounter with terrorists in Pampore, Jammu and Kashmir) national security has to be a top priority. The modernisation, training and indigenisation of the defence services’ processes, equipment and knowledge is of paramount importance. Yet, the budget has no mention of how to provide fillip to the defence MSMEs that form the backbone of indigenous manufacturing. This cannot be achieved if capital expenditure is continuously reduced year after year despite the Parliamentary Standing Committee on Defence upholding its recommendation from previous years that the Union Budget must not reduce defence allocations. The increasing gap between resource requirement and fund allocation could put an incredible strain on the security systems of the nation.
Two, the silence on renewables and its financing is surprising. India has pledged to meet 40 per cent of installed power capacity through renewables by 2030. This means producing 175 mW of capacity from renewable sources. In the last two years, solar energy has seen policy boosts, including finding its place under PSL lending, but wind energy seems to have lost momentum and production from hydro and biomass are practically negligible. Most of these sectors are still largely dependent on bank financing. Despite having collected significant amount (close to INR 18,000 crore) under the National Clean Energy Fund, disbursements have been very low. It is unclear how the government plans to meet its renewables target if no incentives are provided to the sector. To go a step further, renewables is but one small aspect of climate change and environmental sustainability. The budget, that did mention some initiatives to reinvigorate the corporate bond market, has not breathed a word on green bonds. The last financial year saw successful issuances of green bonds and the market is but warming to the idea. Green financing, through green bonds and responsible financing, must take centre stage in the government’s agenda. Tax breaks must be considered for subscribers and issuers of green bonds. “Green-friendly” companies can be offered lower rates of borrowing. Banks and NBFCs that adopt responsible financing standards must be given preferential status for recapitalisation. The recommendations are plenty and atleast some should have ideally found their way into the budget.
Three and by far the most significant, there is no action plan on how to increase the tax net. The government seems to be so focused (and yet unsuccessful) on bringing back black money, both domestic and foreign, into the economy, that it seems to have pushed the basic way of increasing revenue for the country to the back seat. Data suggests that only 3 per cent of the Indian population pay tax. This figure for most developed countries is between 40-50 per cent. There is little doubt that India is somewhere at the bottom of the scale. It is indeed ironical that the second most populated country in the world has such a low tax paying population. The middle class has been significantly miffed that tax slabs have not been increased and tax rates have not been reduced. In their defence, this has been promised by the Finance Minister, but in his defence, this will not be the correct thing to do with a precarious fiscal and revenue deficit. The only pragmatic alternative is to increase the tax base so that the tax rate can be reduced, and yet, the government seems clueless on this front. Introducing a limited period compliance scheme is hardly even a first step towards a solution.
There is no doubt that the budget will have many positive outcomes. It was important that agriculture, rural economy and infrastructure be given priority. These are high allocation sectors and if the Finance Minister is indeed serious about his fiscal targets, as he has demonstrated this time around, it does make sense to budget these large expenses this year, with atleast two more budgets to go, so that necessary adjustments can be made in the subsequent ones. However, if the Finance Minister loses sight of some of the budget misses of this year, many of the positives will quickly come undone. The good news is that there is still time and one hopes that some of this time’s misses will be addressed in the coming years.