Themes > Current Issues
7.03.2005
The Budget and the National Common Minimum Programme
Jayati Ghosh
Selective
amnesia is a common trait of governments. In particular, parties in power
often prefer to forget the promises they made while in opposition, or
on the campaign trail. But usually they try not to make explicit promises
once in power, which they then can be held down to. The recent penchant
among governments in India to declare programmes of action (as has been
done by the United Front government, the NDA government and now the UPA
government) has stemmed not from any deep desire to declare their intentions
so openly, but from the exigencies of coalition politics, and the nature
of support on which these governments have been based.
The problem with such stated programmes, of course, is that they make selective amnesia much more difficult. The promises made are no longer phrases uttered in the heat of campaigns; they are put down on paper and evident for all to see, including allies in the coalition and any parties who are supporting from outside. Therefore, when governments still choose to ignore or even go contrary to the declarations and promises made in the stated programme from quite early on in their tenure, they must be either rather stupid themselves, or else relying quite strongly on the stupidity of others.
The jury must still be out on the extent of which all or any of this is true of the current UPA government. But there is no doubt that the National Common Minimum Programme must be an increasing embarrassment for some of the most powerful ministers in this government, and the Finance Minister in particular. It is no secret that Mr. Chidambaram was not really involved in the drafting of the NCMP, and since then he has barely concealed his distaste for most of its provisions even in public. But the extent of deviation thus far of major areas of economic and fiscal policy, from the declarations of the NCMP, cannot be the result of personal predilection alone; it must surely indicate a deeper or wider lack of motivation in the highest echelons of government.
Let us consider some of the promises made in the NCMP that relate specifically to fiscal and budgetary policy, and juxtapose these against the available evidence so far. The Budget 2005-06 is particularly important in this regard, since it provides indications of intention for the future, but also tells us something about how the money was spent in the previous year, and so about the seriousness of the stated intentions.
Arguably, the single most important promise in the NCMP related to employment generation, which the government (to its credit) at least recognised as a major problem requiring direct public intervention. The NCMP promised: ''The UPA government will immediately enact a National Employment Guarantee Act. This will provide a legal guarantee for at least 100 days of employment to begin with on asset-creating public works programmes every year at minimum wages for at least one able-bodied person in every rural, urban poor and lower middle-class household. In the interim, a massive food-for-work programme will be started.''
What has happened thus far? The way in which the draft EGA bill now placed in Parliament has been diluted so that its provisions come nowhere near providing a genuine employment guarantee has been discussed widely and is now well known. But it is also clear that the Finance Ministry is hardly providing any allocation for such a scheme in any case. The government's own estimates are that such a scheme would cost at least Rs. 25,000 crore per year, while other estimates have gone up to around Rs. 45,000 crore per year.
But last year, the UPA spent only Rs. 1818 crore on the Food for Work scheme which is supposed to be the precursor of the EGA, in addition to the Rs. 4590 crore allotted to the Sampoorna Gramin Rozgar Yojana (SGRY). In the current budget, the proposed allocation for Food for Work is only Rs. 5400 crore, a relatively small increase, while the allocation for SGRY has actually been cut to Rs. 3600 crore! This suggests that even the piffling amount being set aside for EGA is at the cost of other employment programmes, rather than in addition to them.
The other area of declared policy priority of the UPA government has been agriculture. Various promises have been made relating to expanding institutional credit to agriculture and to the rural areas generally, and in this regard it is true that the direction of change has been positive, even though the pace of expansion of agricultural credit has not been as fast as desired. But the NCMP was also clear that public investment and public protection of domestic cultivators from import competition were also to be among the strategies employed to regenerate agriculture.
Thus, the NCMP stated that ''the UPA government will ensure that public investment in agricultural research and extension, rural infrastructure and irrigation is stepped up in a significant manner at the very earliest.'' Also, ''the UPA government will ensure that adequate protection is provided to all farmers from imports, particularly when international prices fall sharply.''
There is no question that both expenditure and allocations to agriculture have increased - the actual spending in the current year (at Rs. 4799) is estimated to be higher than the original plan outlay of Rs. 4643 crore and even more (Rs. 6425 crore) has been budgeted for coming year. But these are still trifling amounts, and this is because agriculture is still dominantly a state subject and most of the expenditure in this area - whether in irrigation, or in agricultural research and extension, or in the provision of related rural infrastructure, is undertaken by state governments.
This is where the overall thrust of the budget is likely to be adverse even for these stated goals of the NCMP. The Budget has effectively offloaded a substantial part of central borrowing onto the states, by requiring their borrowing to go up by Rs. 29,000 crore to finance their plan expenditure, instead of directly borrowing itself and handing the money to the state governments as was done earlier. This may simply be financial window-dressing, but if it affects the states' ability to borrow then it is also likely to affect this kind of critical expenditure.
Further, instead of providing much-needed protection to Indian farmers who have been battered by the extreme volatility and high subsidised prices prevailing in world markets, the Finance Minister has left unchanged the current tariff rates on agricultural commodities. The only exception is the in the case of cut flowers - which affects not even one per cent of farmers. Nothing has been done, for example, to protect cotton and oilseed farmers, who have been in great difficulties in recent times.
The only areas where there is some actual budgetary evidence of positive shift are in spending for the ''social sectors'', that is, health and education. The NCMP had made the following promises in this regard. For education: ''The UPA government pledges to raise public spending in education to least 6 per cent of GDP with at least half this amount being spent on primary and secondary sectors. This will be done in a phased manner.'' And for health: ''The UPA government will raise public spending on health to at least 2-3 per cent of GDP over the next five years with focus on primary health care.''
Certainly the central budgetary allocations and actual expenditure in these areas have gone up, although the pace is still too slow to meet the proposed targets. But here once again, the real issue relates to state finances, since state governments are the primary providers of both education and health services. And here, as seen above, the budget is far from ensuring adequate finances for the states.
A major claim of the NCMP was with respect to food security. ''The UPA will work out, in the next three months, a comprehensive medium-term strategy for food and nutrition security. The objective will be to move towards universal food security over time, if found feasible. The UPA government will strengthen the public distribution system (PDS) particularly in the poorest and backward blocks of the country.''
In the past eight months, such a food security strategy has not been unveiled. It could be argued that this is not the job of the Finance Minister anyway. But what is true is that the budgetary strategy of moving many items off-budget actually ends up putting the burden on public sector organisations such as the FCI. The FCI is being made to provide the entire food component of the Food-for-Work programme (around Rs. 5600 crore) and the SGRY (around Rs. 3000 crore) without any compensation. Not only is this absurd, it amounts to weakening both the FCI and the PDS over time.
The NCMP places great emphasis on infrastructure investment. ''Public investment in infrastructure will be enhanced, even as the role of the private sector is expanded. Subsidies will be made explicit and provided through the budget.'' Quite the opposite, in fact, is what is happening. Capital expenditure of the central plan in the current year was only Rs. 22,712 crore, which represents a shortfall of 14 per cent from the outlay. And in this Budget it is slated to go up by only 3 per cent compared to last year's outlay.
Instead, once again, the attempt is to move such items off-budget, by creating a Special Purpose Vehicle (SPV) to finance infrastructure projects in specified sectors. This will lend funds (presumably created through deficit financing) of longer term maturity, but these will not be counted in the budget! There is nothing wrong with such spending, of course, (although the limit is still quite meagre, at only Rs, 10,000 crore) but the fact that it is not accounted for in the budget once again raises issues of lack of transparency and lays the seeds for future budgetary problems.
In a sense, all this creative accounting and downright cooking of books stems from the obsession with fiscal discipline which results from the reliance on the Fiscal Responsibility and Budget Management Act. A softer version of this was mentioned in the NCMP: ''The UPA government commits itself to eliminating the revenue deficit of the centre by 2009, so as to release more resources for investments in social and physical infrastructure.'' This would be fine if the government showed the political will to raise tax revenues, which is eminently feasible in the current economic context. But if tax revenues are not increased as a share of GDP, a focus on fiscal discipline necessarily means reducing expenditure. The fear of openly financing deficits through money creation is leading to the same occurring by the back door - which is fine in macroeconomic terms but raises other problems over time.
What the Finance Minister is trying to do is to please everyone at once by supposedly providing more resources for spending, while maintaining the veneer of ''fiscal responsibility'' by moving many expenditure items off-budget. This is not a recipe for fiscal health or the viability of public enterprises; nor is it sustainable for more than a few years at best. The interests of those whom the Finance Minister claims to serve - the poor in general and farmers and workers in particular - would be much better served by an open process of increased spending in critical areas accompanied by increased tax revenues.
What is interesting is that all these failures, or acts of commission and omission which directly contradict the NCMP, have been accompanied by much pious verbiage of the opposite nature, as the Finance Minister has spent long paragraphs in his Budget speech emphasising his concern for the poor and extolling the need for pro-poor fiscal and development policies. The problem, quite simply, is that Mr. Chidambaram has not really put his money where his mouth is.
The problem with such stated programmes, of course, is that they make selective amnesia much more difficult. The promises made are no longer phrases uttered in the heat of campaigns; they are put down on paper and evident for all to see, including allies in the coalition and any parties who are supporting from outside. Therefore, when governments still choose to ignore or even go contrary to the declarations and promises made in the stated programme from quite early on in their tenure, they must be either rather stupid themselves, or else relying quite strongly on the stupidity of others.
The jury must still be out on the extent of which all or any of this is true of the current UPA government. But there is no doubt that the National Common Minimum Programme must be an increasing embarrassment for some of the most powerful ministers in this government, and the Finance Minister in particular. It is no secret that Mr. Chidambaram was not really involved in the drafting of the NCMP, and since then he has barely concealed his distaste for most of its provisions even in public. But the extent of deviation thus far of major areas of economic and fiscal policy, from the declarations of the NCMP, cannot be the result of personal predilection alone; it must surely indicate a deeper or wider lack of motivation in the highest echelons of government.
Let us consider some of the promises made in the NCMP that relate specifically to fiscal and budgetary policy, and juxtapose these against the available evidence so far. The Budget 2005-06 is particularly important in this regard, since it provides indications of intention for the future, but also tells us something about how the money was spent in the previous year, and so about the seriousness of the stated intentions.
Arguably, the single most important promise in the NCMP related to employment generation, which the government (to its credit) at least recognised as a major problem requiring direct public intervention. The NCMP promised: ''The UPA government will immediately enact a National Employment Guarantee Act. This will provide a legal guarantee for at least 100 days of employment to begin with on asset-creating public works programmes every year at minimum wages for at least one able-bodied person in every rural, urban poor and lower middle-class household. In the interim, a massive food-for-work programme will be started.''
What has happened thus far? The way in which the draft EGA bill now placed in Parliament has been diluted so that its provisions come nowhere near providing a genuine employment guarantee has been discussed widely and is now well known. But it is also clear that the Finance Ministry is hardly providing any allocation for such a scheme in any case. The government's own estimates are that such a scheme would cost at least Rs. 25,000 crore per year, while other estimates have gone up to around Rs. 45,000 crore per year.
But last year, the UPA spent only Rs. 1818 crore on the Food for Work scheme which is supposed to be the precursor of the EGA, in addition to the Rs. 4590 crore allotted to the Sampoorna Gramin Rozgar Yojana (SGRY). In the current budget, the proposed allocation for Food for Work is only Rs. 5400 crore, a relatively small increase, while the allocation for SGRY has actually been cut to Rs. 3600 crore! This suggests that even the piffling amount being set aside for EGA is at the cost of other employment programmes, rather than in addition to them.
The other area of declared policy priority of the UPA government has been agriculture. Various promises have been made relating to expanding institutional credit to agriculture and to the rural areas generally, and in this regard it is true that the direction of change has been positive, even though the pace of expansion of agricultural credit has not been as fast as desired. But the NCMP was also clear that public investment and public protection of domestic cultivators from import competition were also to be among the strategies employed to regenerate agriculture.
Thus, the NCMP stated that ''the UPA government will ensure that public investment in agricultural research and extension, rural infrastructure and irrigation is stepped up in a significant manner at the very earliest.'' Also, ''the UPA government will ensure that adequate protection is provided to all farmers from imports, particularly when international prices fall sharply.''
There is no question that both expenditure and allocations to agriculture have increased - the actual spending in the current year (at Rs. 4799) is estimated to be higher than the original plan outlay of Rs. 4643 crore and even more (Rs. 6425 crore) has been budgeted for coming year. But these are still trifling amounts, and this is because agriculture is still dominantly a state subject and most of the expenditure in this area - whether in irrigation, or in agricultural research and extension, or in the provision of related rural infrastructure, is undertaken by state governments.
This is where the overall thrust of the budget is likely to be adverse even for these stated goals of the NCMP. The Budget has effectively offloaded a substantial part of central borrowing onto the states, by requiring their borrowing to go up by Rs. 29,000 crore to finance their plan expenditure, instead of directly borrowing itself and handing the money to the state governments as was done earlier. This may simply be financial window-dressing, but if it affects the states' ability to borrow then it is also likely to affect this kind of critical expenditure.
Further, instead of providing much-needed protection to Indian farmers who have been battered by the extreme volatility and high subsidised prices prevailing in world markets, the Finance Minister has left unchanged the current tariff rates on agricultural commodities. The only exception is the in the case of cut flowers - which affects not even one per cent of farmers. Nothing has been done, for example, to protect cotton and oilseed farmers, who have been in great difficulties in recent times.
The only areas where there is some actual budgetary evidence of positive shift are in spending for the ''social sectors'', that is, health and education. The NCMP had made the following promises in this regard. For education: ''The UPA government pledges to raise public spending in education to least 6 per cent of GDP with at least half this amount being spent on primary and secondary sectors. This will be done in a phased manner.'' And for health: ''The UPA government will raise public spending on health to at least 2-3 per cent of GDP over the next five years with focus on primary health care.''
Certainly the central budgetary allocations and actual expenditure in these areas have gone up, although the pace is still too slow to meet the proposed targets. But here once again, the real issue relates to state finances, since state governments are the primary providers of both education and health services. And here, as seen above, the budget is far from ensuring adequate finances for the states.
A major claim of the NCMP was with respect to food security. ''The UPA will work out, in the next three months, a comprehensive medium-term strategy for food and nutrition security. The objective will be to move towards universal food security over time, if found feasible. The UPA government will strengthen the public distribution system (PDS) particularly in the poorest and backward blocks of the country.''
In the past eight months, such a food security strategy has not been unveiled. It could be argued that this is not the job of the Finance Minister anyway. But what is true is that the budgetary strategy of moving many items off-budget actually ends up putting the burden on public sector organisations such as the FCI. The FCI is being made to provide the entire food component of the Food-for-Work programme (around Rs. 5600 crore) and the SGRY (around Rs. 3000 crore) without any compensation. Not only is this absurd, it amounts to weakening both the FCI and the PDS over time.
The NCMP places great emphasis on infrastructure investment. ''Public investment in infrastructure will be enhanced, even as the role of the private sector is expanded. Subsidies will be made explicit and provided through the budget.'' Quite the opposite, in fact, is what is happening. Capital expenditure of the central plan in the current year was only Rs. 22,712 crore, which represents a shortfall of 14 per cent from the outlay. And in this Budget it is slated to go up by only 3 per cent compared to last year's outlay.
Instead, once again, the attempt is to move such items off-budget, by creating a Special Purpose Vehicle (SPV) to finance infrastructure projects in specified sectors. This will lend funds (presumably created through deficit financing) of longer term maturity, but these will not be counted in the budget! There is nothing wrong with such spending, of course, (although the limit is still quite meagre, at only Rs, 10,000 crore) but the fact that it is not accounted for in the budget once again raises issues of lack of transparency and lays the seeds for future budgetary problems.
In a sense, all this creative accounting and downright cooking of books stems from the obsession with fiscal discipline which results from the reliance on the Fiscal Responsibility and Budget Management Act. A softer version of this was mentioned in the NCMP: ''The UPA government commits itself to eliminating the revenue deficit of the centre by 2009, so as to release more resources for investments in social and physical infrastructure.'' This would be fine if the government showed the political will to raise tax revenues, which is eminently feasible in the current economic context. But if tax revenues are not increased as a share of GDP, a focus on fiscal discipline necessarily means reducing expenditure. The fear of openly financing deficits through money creation is leading to the same occurring by the back door - which is fine in macroeconomic terms but raises other problems over time.
What the Finance Minister is trying to do is to please everyone at once by supposedly providing more resources for spending, while maintaining the veneer of ''fiscal responsibility'' by moving many expenditure items off-budget. This is not a recipe for fiscal health or the viability of public enterprises; nor is it sustainable for more than a few years at best. The interests of those whom the Finance Minister claims to serve - the poor in general and farmers and workers in particular - would be much better served by an open process of increased spending in critical areas accompanied by increased tax revenues.
What is interesting is that all these failures, or acts of commission and omission which directly contradict the NCMP, have been accompanied by much pious verbiage of the opposite nature, as the Finance Minister has spent long paragraphs in his Budget speech emphasising his concern for the poor and extolling the need for pro-poor fiscal and development policies. The problem, quite simply, is that Mr. Chidambaram has not really put his money where his mouth is.
© MACROSCAN 2005