Burdens from 2015

As the Narendra Modi government prepares for the 2016 Budget, here is a look at developments that will shape the Centre’s expenditure next year. The first full budget of the National Democratic Alliance (NDA) last year did not make any bold reform attempts nor did it articulate focus areas for the government. However, it started the fiscal decentralisation process after accepting the recommendations of the 14th Finance Commission.

The current budget to be presented on February 29 is being eagerly pursued. More to it, this is the second full budget of the NDA, coinciding with the second year of its governance. But there are tough situations that will have a definite influence on the Budget. Below is a compilation of a few developments that should influence the Union Budget 2016.

During 2016-17, nine states will go to the polls, including major states such as West Bengal and Uttar Pradesh. Politically, this puts the government under tremendous pressure to play the “populism” card.

But at the same time, a five-year term government usually keeps the last two budgets as preparation for the next elections. This means, for the NDA this is the only space left to articulate its reforms as well as to fight the perception of being anti-poor. It is a tough call.

India is witnessing a deep agrarian crisis with agricultural growth hitting almost zero. This is the second consecutive year of monsoon failure and half of the country is under drought. It was preceded by an unseasonal rainfall that damaged crops over 15 million hectares. As cases of farmer suicide are being reported widely, the rural wage rate—an indicator of bad economic situation—is dipping, thus threatening the national economic growth. The government has to spend well in rural areas not only to arrest the crisis but also to boost the national economy.

On Friday, after the Economic Survey was released, a careful reading of the document revealed an admission. The survey has made it clear that the economy would only grow at up to 7.5 percent provided there is a normal monsoon in 2016. Otherwise, the growth forecast is 7 percent, less than the last fiscal year.

The survey has detailed how the global economy is not going to help much. After identifying the various reasons for a good economic growth scenario, the survey has heavily attributed the continuation of India’s current economic growth rate to a normal monsoon.

Agriculture grew at -0.2 percent in 2015-16, according to the survey. This is the second consecutive deficit monsoon that Indian farmers are enduring. This has also impacted the overall economic growth of the country. Amidst the chorus of an Indian economy that is completely delinked from the monsoon’s influence, this is a big admission and shows why the government needs to be more prudent with investment in agriculture.

The government hopes that the current El Niño that has been impacting the Indian monsoon and is the strongest since 1997 would be neutral this year. In the Economic Survey, there is vivid detailing of the weather phenomenon and how it could be coming back to neutral status to ensure the monsoon to be normal this year. At the same time, it warns the government to be proactive as there is no certainty over a normal monsoon.

“Declaring minimum support prices well before Kharif sowing operations, incentivising farmers to produce crops most prone to domestic supply pressures (such as pulses), and timely contracting of imports of sensitive commodities would be essential components of this strategy,” it says.

The Government of India does not have much money or the wherewithal to source money to increase public spending significantly. Private investment is not picking up and banks are under tremendous pressure of non-performing assets (NPAs) or bad loans. This means they do not have the capacity to lend any further. It is certain that to tide over the NPAs, banks will also bring down agriculture loans that will affect farmers. As revenues are strained, the government will also not be able to spend big way in rural development. However, if it chooses to do so, it has to cut down on some sectors, like incentives to corporate sectors.

After the spectacular devolution of taxes in the last budget to states, the Central government will continue to do so in this budget also.

But this means, like the last budget, less money at hand, thus directly resulting in cutting allocations across sectors. Due to such cuts during the last budget, the government faced widespread protests from civil society organisations and the perception of the NDA being anti-poor gradually set in. This year, it will face the problem to an even greater extent as the social sector needs spending to boost the economy as explained above. From where will the government get the money?

With the fiscal devolution, states are practically the biggest spenders in the social sector. In turn, they also hold the key to enhancing rural consumption/spending by allocating more funds to rural programmes. But till now, that has not been the case. How will the government, this time, ensure that states actually spend the money for the right causes? There are no legal binding terms on the states to spend on a specific sector as the devolved funds are untied. This further restricts the Central government’s scope for increasing rural spending.

Many states, particularly the ones with large poor population and heavy social spending, have complained that the sharing of Central pool of taxes will not be adequate. Data shows that BIMARU states like Bihar and Rajasthan have not benefited from fiscal decentralisation. 

Though their share in tax pool has increased, the slash in Central grant-in-aid to states meant the actual funds available to poor states like Bihar and Rajasthan remains largely unchanged. These states are also not known to spend on development on their own.  For example, Bihar’s share in Central tax pool has increased by 21 percent, but the central grants that the state received dipped by 42 percent.  As a result, there is a net loss of around Rs 4,000 crore in the state’s budget. For Rajasthan, the share in tax pool went up by 27 percent while it saw a dip of 28 percent in Central grant-in-aid. “From the point of view of states, there has not been much increase.

 However, the composition of money share has changed. Now states have the autonomy to manage a significant share of the central tax pool,” says Sudipto Mundle, a member of the 14th Finance Commission.