The Hindu : An under-funded budget?

Online edition of India's National Newspaper
Monday, Mar 10, 2003

Opinion

Opinion - Editorials

An under-funded budget?

IT HAS BECOME a part of tradition for the Union budget to present an over-optimistic and unrealistic picture of the state of Government finances. The budget for 2003-04 breaks with this convention in one respect, but it has at the same time unfortunately adopted a different approach that ends up reinforcing the overall tradition of generating unrealistic estimates. The budget has been relatively modest in its revenue projections. The Centre's gross tax revenue has been projected to grow by 13 per cent in 2003-04. This is a reasonable projection considering that last year's budget estimated that these receipts would increase in 2002-03 by an unrealistic 20 per cent, when in actual fact growth has turned out to be less than 13 per cent. There remains an exaggerated optimism in some areas (such as disinvestment proceeds which are expected to grow four-fold from Rs. 3,360 crores to Rs. 13,200 crores), but overall there appears to be a refreshing integrity in the budgetary estimates of receipts.

A similar integrity is not to be found on the expenditure side. Indeed, it now appears that the Union Finance Minister, Jaswant Singh's first budget has hugely underestimated Central Government expenditure in the next fiscal year. Certain commitments have been made to the States for which there is no financial provision in the budget. Certain promises have been made to boost infrastructure investment, which have not been backed up by funding for the Central Government's share. And certain unrealistic projections have been made of funding for the Central Plan in 2003-04. The fallout of this widespread under-funding of the Union budget could be that the Government is forced to go in for much larger borrowings, which will further bloat the estimates of the revenue and fiscal deficits and perhaps even raise interest costs in the economy. The largest area of under-funding is in the compensation that the Centre has said it will pay the States for the halving of the Central Sales Tax and any difference that may arise in collections between sales tax and its replacement, the proposed value-added tax. It is astonishing that the budget has not made any provision for either compensation. Since collections from the CST now run at Rs. 14,000 crores a year, this means that resource requirements of the two forms of compensation will add up to at least Rs. 10,000 crores in 2003-04. Another large hole in the budget is in the Rs. 60,000-crore major infrastructure programme that will begin next year and will be organised under the proposed public-private partnership. There is no provision whatsoever for the Centre's share of this project in 2003-04. Even the higher cess on diesel and petrol will only finance projects outside the partnership, namely the rural roads and the North-South, East-West Highway projects. The third area is in Central Government funding of the Central Plan, which is expected to be a modest 8 per cent larger than in 2002-03. The larger share of funding for the Plan will come not from budget support but from the internal and external budgetary resources of public enterprises. In the current fiscal year there will be an 11 per cent shortfall in these internal resources, arising mainly in the three Ministries of Power, Communications and Road Transport. But this has not prevented the budget from making optimistic projections of internal resource mobilisation next year.

Many of these gaps in funding have been pointed out by two former Finance Ministers, Manmohan Singh and P. Chidambaram. While the holes that they have picked in Mr. Jaswant Singh's exercise have emerged as part of the annual political debate on the budget, the flaws that have been highlighted are real. Only the Finance Ministry will know the true extent of under-funding in the budget for 2003-04. But the numbers involved could well add up to more than Rs. 15,000 crores. This would be a major gap in funding, equivalent to as much as 50 per cent of the Rs. 30,414-crore primary deficit (the fiscal deficit less interest payments) that has been projected for next year. If this turns out to be the case then what we have is not a growth budget but an under-funded budget.

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