JUNE 10, 2019

By TIOL Edit Team

MODI Government has put it's best foot forward right from the word go in its second tenure. It left a good impression even on critics by taking a slew of Cabinet decisions on the very first day of portfolio allocations to ministers. Decisions caravan continues to move at a good speed.

The Government has thus convened meeting of Governing Council of Niti Aayog on 15th June. This Centre-States interaction before the presentation of regular budget on 5th July 2019 assumes special significance. It might have something to do with allocation of expenditure on Central and centrally sponsored schemes in the forthcoming budget.

All eyes are, however, on the budget. Would it be another annual budget cast in the time-tested, archaic process or framework? Would Hon'ble Finance Minister Nirmala Sitharaman innovate the budget, if not the budget-making process? Would she unveil big-bang ideas that her predecessors avoided?

Everyone has many questions in his/her mind on the budget and its impact.

The biggest challenge for Mrs. Sitharaman is to present a budget that can deliver inclusive growth amidst global and domestic slowdown & heightened global uncertainty. The uncertainty resulting from global trade tensions, protectionism & US sanctions against Iran makes budget a risky venture. Its outcomes can be derailed by spurt in commodity prices especially in prices of oil and natural gas. Add to the risk of below-normal monsoon.

She is thus not well-placed as was Mr. Arun Jaitley, who presented his maiden budget amidst stable and highly benign global environment.

Moreover, she does not have the advantage of adequate time that is available in normal course to any finance minister. She is new to the portfolio, which is intertwined with expenditure/fiscal web of all ministries and their appendages.

Having acknowledged the background in which she would prepare budget, we can't expect her to ask all ministries to prepare budget proposals de novo, i.e., by invoking zero-base budgeting (ZBB) technique.

This was repeatedly tried and shelved right from the days of Rajiv Gandhi Government. ZBB's non-start is due to Government's obsession to live beyond its means and to avoid rigors of fiscal discipline.

In her maiden Budget speech, Mrs Sitharaman should, however, make ZBB mandatory for budget preparation for 2020-21. She can bank on report of group of secretaries on 'Innovative Budgeting and Effective Implementation' (IBEM). It was one of the eight groups constituted in December 2015 to plan Transforming India Vision and Action Plan.

IBEM recommended: "as a onetime measure it is necessary that Ministries and Departments be directed to take a zero based review of all existing projects and schemes (all major lines of expenditure in the budget including all institutions). This review should recommend continuation only if their future continuation is justified on the basis of a current assessment of costs and benefits ignoring all past costs as sunk as well as indicating a time frame for the next review".

She should, however, consider applying ZBB to proposals that she might announce in the forthcoming budget. IBEM suggested that all new schemes and projects must provide for a zero-based, mid-term review.

As put by IBEM: "The review, if it recommends continuation of the project/scheme must also indicate the date of the next review. This would certainly bring about clarity and improve implementation of new schemes and projects".

She would obviously give foremost importance to promises made in BJP's 2019 manifesto. This might require announcement of new schemes and projects. This is understandable from the standpoint of competitive populism.

What is not understandable is the successive Finance Ministers' reluctance to embrace transparency and accountability in letter and spirit. We hope Mrs. Sitharaman would depart from this rut.

We thus expect her to accept recommendations of Finance Commissions & other august bodies to constitute an independent fiscal council (FC). It is required desperately to enforce transparency and accountability. We need not elaborate this as enough has been said & written on FC's success globally.

An innovation that she can readily made in the budget is to give a statement on annual expenditure incurred but not reimbursed to implementation entities, be they State Governments or industries.

We all know how the Government manages fiscal deficit by deferring payments to States, public sector companies, contractors and subsidy conduits like fertilizer companies to the next year. Till this roll-over practice stops, a comprehensive picture should be presented in the budget. Same approach should be applied to off-budget transactions.

Ideally, Finance Minister should make an open commitment to follow principles of open budgeting. India scored 48 out of 100 marks in Open Budget Rankings 2017, an independent global initiative.

Open Budget Index (OBI) has grouped 115 countries into five categories with India placed in third category of nations with 'limited information available' or countries with limited transparency. This category houses countries that get 41-60 marks.

India should strive for improvement in OBI rank in the same way it does for 'ease of doing business' ranking. Investors look at multiple indices including OBI before deciding to invest in any country.

According to a 2017 report on India's budgeting process prepared by Global Initiative for Fiscal Transparency (GIFT), India fares poorly in terms of public participation with a score of 19 out of 100 as compared to the global average of 25/100. Efforts need to be taken to provide the public opportunities to engage in the budget process. In terms of budget oversight, India is viewed poorly in terms of legislature with a score of 39/100.

The report has proposed slew of reforms such as publishing a pre-budget statement.

We would urge Government to disclose in detail the rationale for favouring certain sectors with interest subsidies and tax concessions for many years and leaving other sectors high and dry.

As for tax reforms, the industry would, of course, welcome a roadmap for reforms that can guarantee stable and globally competitive tax regime.

The Finance Minister Nirmala Sitharaman should revisit rejected recommendations of Tax Administration Reform Commission (TARC) and other committees.

One recommendation from TARC that merits reconsideration is creating a separate budget for payment of tax refund to bring transparency and to avoid the general tendency to withhold refund, even when they are genuinely due.

We hope the budget would be prepared keeping in view the desired goal of attaining a sustained 10% annual growth rate to remove poverty by 2032.