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NDA and UPA Budgets

This article attempts to judge the fiscal performance of the UPA and NDA governments from the point of view of broad macro-fiscal indicators. On the tax front, the UPA deserves credit for improved performance but there are severe misgivings about the lower proportions being allocated to capital expenditure in key social and economic services. The fact that the UPA has not curbed subsidies and is spending higher proportions on administration than the NDA are some obvious flaws. The performance of the UPA is well below expectations.

NDA and UPA Budgets

Continuity or Change?

This article attempts to judge the fiscal performance of the UPA and NDA governments from the point of view of broad macro-fiscal indicators. On the tax front, the UPA deserves credit for improved performance but there are severe misgivings about the lower proportions being allocated to capital expenditure in key social and economic services. The fact that the UPA has not curbed subsidies and is spending higher proportions on administration than the NDA are some obvious flaws. The performance of the

UPA is well below expectations.

MALA LALVANI

I Introduction

W
ith three budgets and two years since the United Progressive Alliance (UPA) government took charge, it is time to take stock and evaluate its fiscal performance. It would be interesting to juxtapose the UPA performance with that of the National Democratic Alliance (NDA) (data now available for the full term of the NDA government in “actuals”). It is against this backdrop that we assess the budget for 2006-07. However, let us hasten to put in place some caveatsbefore we go any further. We would like to underline the point that our analysis is an attempt to judge the different political regimes in a very limited sense, from the point of view of broad macro-fiscal indicators. Another important factor to bear in mind, when evaluating the performance of governments is the state of the fisc that the incumbent inherits. The Congress-led coalition inherited an economy in the grip of a fiscal crisis in 1991. This was followed by two years of political turmoil, when the Indian polity witnessed an unprecedented phenomenon of having three prime ministers within a span of two years. The UPA government, which took charge in May 2004, has been most fortunate by way of inheritance. India was seen to be “shining” with a real growth rate of over 8 per cent.

The latest budget for 2006-07 has earned the finance minister (FM) the reputation of the “god of small things”. Bringing in a little something for all to cheer about, and not attempting any heroics, could be looked upon as the clichéd half-full or half-empty glass. The recent (conscious) trend towards making budgets a more routine matter, making policy announcements just before and/or after the budget and reducing the secrecy that shrouds the exercise the UPA government, in general, and the FM in particular deserve applause.

With the emerging consensus of the state being looked upon more as a facilitator than as a provider, budgets too must (and to some extent have) acquired a somewhat different role. The budget now appears more as a policy statement of the incumbent, than a statement of accounts, thus making it important that we read between the lines and look for signals in addition to budgetary numbers. This makes analysing budgets a challenging task. Section II presents the big picture; Section III looks at details of expenditure allocations; Section IV examines the receipts side of the budget with 2006-07 being the focus. Finally, Section V concludes.

II Big Picture

The formation of coalition governments, the move away from national parties and towards smaller and more narrowly-based regional parties, reflects the transition in Indian polity. Nobody would deny that the evaluation of economic performance in general and budgets, in particular, is incomplete, if political reality is kept outside the mainframe. Given that budgets have acquired the status of policy statements, it is important that they be evaluated on a wider canvas. It is from this perspective that we classify the period over the last one and a half decades into three phases.

The first phase brought coalitions to the centre stage of the Indian polity in a big way with the Congress putting together a coalition under Narasimha Rao in 1991, which served a full five-year term. The two subsequent years saw considerable turbulence on the political front. The BJPled coalition under Vajpayee, lasted for 13 days. This was followed by a 14-party coalition led by the Janata Dal known as the United Front, under Deve Gowda. This government lasted less than a year with the Congress Party withdrawing support to it in March 1997. Gujral took over as the prime minister of a United Front coalition. In November 1997, the Congress again withdrew its support. The period between 1991-92 and 1997-98 was the first phase, which was characterised by a non-NDA and non-UPA government.

Elections in February 1998 brought the BJP the largest number of seats in Parliament, but fell far short of a majority. This marked the beginning of phase II. In April 1999, the coalition government fell, leading to fresh elections in September. The NDA, a new coalition led by the BJP, formed the government in October 1999. Contrary to many expectations, the NDA lasted its full term. The NDA has presented six budgets since June 1998. Fiscal years 1998-99 to 2003-04 were the period under the NDA regime.

Finally, the third phase commenced in 2004 when the UPA government under Manmohan Singh took charge following the surprise victory of the Indian National Congress in the 2004 Lok Sabha election. Fiscal years 2004-05 and 2005-06 (revised estimates) are years under the UPA government (although technically speaking the budget was presented in July). Budget estimates of 2006-07 signal intentions and hence have been kept out of the picture for the moment, since the objective of our simple econometric estimation is to evaluate the fiscal performance in the three different phases: Phase I (non-NDA and UPA): 1991-92 to 1997-98. Phase II (NDA): 1998-99 to 2003-04. Phase III (UPA): 2004-05 to 2005-06 (RE)

Phase II is considered as the reference period, vis-à-vis which phases I and II are evaluated. A model of the following form was set up:

Y = α +βT + γTD1 + γTD2 + ε where, T = Trend variable D1= 1 for the period 1991-92 to 1997-98 (non-NDA and non-UPA phase) 0 otherwise

Economic and Political Weekly April 8, 2006

D2= 1 for 2004-05 to RE 2005-06 (UPA expenditure hike. In hindsight one could coefficient of the TREND*D2 d ummy,
phase) say that, to some extent, the higher expenalthough positive, is insignificant (Eqn 7,
0 otherwise ditures during the NDA phase, especially col 5). Also, while the sign of th e UPA
Y = Dependent variables are variously the 10 per cent growth rate of capital dummy in the liabilities equation i s nega
defined to cover the following: expenditure, did serve to provide the much tive, it is not seen to be significant (Eqn 1,
(1) Liabilities of the central government needed push to the economy at that stage. col 5). The two years of the UPA regime
(2) Fiscal deficit Compulsions of coalition politics did cause do signal some small steps forw ard in
(3) Revenue deficit the shelving of some hard economic deimproving the health of the fisc, but capital
(4) Tax revenue cisions on subsidies and disinvestment. expenditures not receiving the much needed
(5) Total expenditure Here we believe opportunities were missed. thrust is a cause for concern. In t he first
(6) Revenue expenditure Contrary to the accepted view, it has been two years we could grant to the U PA the
(7) Capital expenditure observed in the literature that the coalition benefit of it being a “beginner” an d there
A logarithmic transformation of the form of government provides ample opbeing teething problems. Budget 2 006-07,
dependent variable was carried out, hence portunity for making headway with many however, is the coalition’s third budget
coefficients of the interaction dummies politically difficult but economically and hence needs to be evaluated against
represent growth rates. Once again, re “correct” decisions [see Echeverry-Gent high benchmarks.
emphasising the caution we sounded ear 1998; Lalvani 2005]. However, we would Having assessed the macro scen e on the
lier regarding our exercise being able to like to give the benefit of doubt to the fiscal front from a politico-ec onomic
evaluate the different governments only in majority party (BJP) of the NDA for not perspective, we proceed to some d etails of
a limited way, we proceed to present the wanting to take too many risks, given that expenditure allocations, res ources
results obtained in the table. it had witnessed the fate of its predecessor, raised and evaluation of budget 2 006-07
The first phase came on the back of the the United Front coalition. in sections III and IV.
fiscal crisis and incorporated the period The third phase began with the UPA
under the Congress-led coalition and winning the 2004 elections. It has been III
also the two years of political instability singularly lucky to inherit an economy on Expenditure Allocations
(1996-97 and 1997-98). Post crisis, no an upswing. There is no question of
dramatic changes were expected. Across denying that the two-and-a-half year old “The distinction between plan a nd non
the board expenditures needed to be pruned government has sought, albeit in small plan expenditures has progre ssively
to put the economy back on track. This is measure, to curb both fiscal and revenue become blurred…the plan, no n-plan
reflected in the negative and significant deficits. Total expenditures and revenue dichotomy of expenditures results in sev
coefficient on the non-NDA and non-UPA expenditures have a negative and signifieral inefficiencies” (Report of the Twelfth
interaction dummy in the expenditure cant coefficient, on the interaction dummy Finance Commission, p 21). Sin ce the
equation (Eqn 5; col 4). Results of the first TREND*D2 (Eqns 2,3,5 and 6, col 5), two different types of classificati on only
phase need to be interpreted with caution: which is a welcome sign (direction of serve to make the picture hazy, in the
No significant coefficient in the first phase expenditure cuts are detailed in Section III). remainder of this paper, we restr ict our
cannot be interpreted to mean that the Tax efforts too have received a positive selves to the more economically r elevant
Congress-led coalition, which bailed us thrust under the UPA (Eq 4, col 5), alrevenue/capital classification.
out of the fiscal crisis, put up a poor show. though less than one would have hoped for. Social sector: While revenue expe nditure
It was a remarkable achievement of the The other more worrying factor of the is the accepted “bad” component of expen
Congress-led coalition to put on track the UPA phase is that capital expenditures ditures, the one sector in which i t is ac
derailed economy and set the stage for a have not received the required fillip. The ceptable, is the social sector. Apa rt from
take-off.
The TREND variable captures the impact of phase II (NDA).1 A positive and Table: Results of Econometric Estimation Indep Constant Trend Trend*D1 Trend*D2 Adj R2
significant coefficient is obtained in all Var (Non-NDA and (UPA Phase)
equations (Eqn 1 to 7, col 3). During this Dep Non-UPA Phase)↓ →
phase expenditures (both on the revenue Var
and capital account) and consequently deficits and liabilities show a positive growth rate. Once again, caution needs to be exercised when interpreting the results. (1) (2) Eqn 1 Liabilities 12.657** (910.3) Eqn 2 Fiscal def 10.135** (78.89) (3) (4) 0.13217** -0.16358E-02 (91.04) (-0.7454) 0.12997** -0.16540E-01 (9.689) (-0.8157) (5) -0.14054E-02 (-1.248) -0.21336E-01** (-2.050) 0.9991 0.9196
Prima facie high fiscal deficits and revenue deficits suggest fiscal imprudence. Undoubtedly, greater fiscal restraint during the NDA phase would have helped Eqn 3 Rev def 9.7106** (79.38) Eqn 4 Tax 10.654** (193.8) Eqn 5 Total exp 11.395** 0.15621** -0.19780E-01 (12.23) (-1.024) 0.11299** 0.83214E-02 (19.68) (0.9590) 0.12435** -0.72165E-02** -0.43216E-01** (-4.361) 0.90592E-02** (2.034) -0.66261E-02** 0.9426 0.9830 0.9991
improve the health of the fisc. Having said this, we must not forget that the two years preceding the NDA phase was one of political turmoil and the economy was just (858.2) Eqn 6 Revenue exp 11.215** (378.7) Eqn 7 Capital exp 9.5937** (54.48) (89.70) (-3.444) 0.12800** -0.22125E-02 (41.40) (-0.4734) 0.10007** -0.36276E-01 (5.443) (-1.305) (-6.160) -0.99070E-02** (-4.130) 0.14640E-01 (1.026) 0.9955 0.8577
beginning to find its feet. Also, Fifth Pay Commission added significantly to the Notes: ** indicates significance at 5 per cent level. Figures in parenthesis are t-stats.

Economic and Political Weekly April 8, 2006

the salaries of teachers, doctors, etc, being considered as “productive”, these expenditures are also justified on the grounds that demand for these services falls far short of supply. Student-teacher ratios and doctor-patient ratios are well below accepted norms.

UPA allocated 0.97 per cent of GDP on social services in 2004-05 and has budgeted for this ratio to rise to 1.1 per cent in 2006-07. This small “improvement” can hardly call for celebration. Moreover, if we classify social services into revenue and capital expenditures, the UPA government is seen to fall short of the NDA on the capital expenditure front. In fact, it is planned in 2006-07 (BE) that a mere 0.04 per cent of total expenditures would be available for social services on the capital account, down from 0.08 per cent, the NDA average.

Specifically, let us look at education and health, two focal points of the budget speech of 2006-07. UPA in its first year in office (2004-05) allocated 2.7 per cent of total expenditures towards education (revenue and capital account). This rose to 2.9 per cent in the RE of 2005-06 and is expected to increase to 3.6 per cent in the BE of 2006-07, i e, the hike of a mere 1 percentage point is targeted by the UPA during three years of its tenure. Moreover, this entire hike is expected to happen only on the revenue expenditure side (2.3 per cent in 2004-05 to 3.3 per cent in 2006-07 (BE)). In terms of capital expenditure, the proportions allocated to education as a percentage of total expenditure is expected to remain constant at 0.01per cent between 2004-05 and 2006-07 (BE).

On the health front (on revenue account), the allocations were 0.61 per cent of total expenditure in 2004-05, 0.64 per cent in the 2005-06(RE) and were budgeted to increase to 0.71 per cent vis-à-vis an NDA average of 0.55 per cent. A steady 0.05 percentage point hike is being maintained. In terms of capital expenditure on health, the UPA has matched the NDA performance to allocate 0.01 per cent of total expenditure over 2004-05 and 2005-06(RE). Budget 2006-07 plans to hike this proportion to 0.02 per cent. Despite much attention being accorded to the social sector, budgetary allocations of 2006-07 show no major thrust in this direction. So gradualist is the increase for social sectors that continuity more than change is the phrase that comes to mind when we look at allocations during the NDA and UPA phases.

Karnik (2006) estimates a requirement (centre and states) of Rs 54,000 crore in 2005-06 and Rs 68,000 crore in 2006-07 in order to obtain allocations of 3 per cent and 6 per cent of GDP in health and education (assuming nominal growth rate of 14 per cent). Some possible measures suggested to mobilise the large and growing resource requirement includes: reorienting subsidies, tightly focused social welfare programmes, monitoring outcomes of expenditure on social sector programmes, aggressive disinvestments and an active civil society. Economic services: Given that the UPA government emphasised the lack of rural development and neglect of agriculture as its major plank in its election manifesto in 2004, it would be interesting to examine the allocations made towards these specific economic services by the UPA.

Surprisingly, the average proportions of total expenditure allocated to economic services by the UPA in 2004-05 and 2005-06 (RE) is lower at 34.26 per cent and 4.03 per cent on the revenue and capital side respectively vis-à-vis the corresponding proportions at 34.99 per cent and 4.06 per cent, the NDA average. The BE of 2006-07 expects the proportions of total expenditure kept aside for economic services (revenue account) to be lower by 3 percentage points and on the capital account, the ratio is targeted to be higher by a mere 0.15 percentage points vis-à-vis the RE of 2005-06. Specifically for agriculture and allied activities, the proportion allocated in the capital account is in fact lower by 0.01 percentage point vis-à-vis the NDA average. As regards expenditure on rural development, on the capital side of the budget this category no longer finds a place! One cannot help but wonder where is the “big” change is? Flagship programmes: A close look at the allocations under the flagship programmes shows significant hikes as per the promises made in the budget speech. However, despite these hikes, our analysis in the previous paragraphs show that the overall proportions allocated to rural India appear to have remained much the same, with greater amounts now under revenue expenditure and a worsened scenario on the capital account. Thus the story that is unravelled here is that there appears to have been a reallocation of funds allocated to rural India, such that funds are more focused and appear under the flagship programmes. This, we interpret, is the lesson which the UPA has learnt from the NDA’s defeat of 2004, which many believe could be substantially attributed to the poor marketing strategy of its programmes.

At the risk of sounding repetitive let us caution that since none of these indicators of social or economic services provide any information regarding progress on the delivery front, the evaluation of the political regimes is at best partial.

Yet another criterion for evaluating the NDA and UPA regimes is expenditures on administration and on subsidies. The UPA falls short of the average NDA performance on administration expenditures. Three per cent of total expenditures were allocated on this count under the NDA regime. This proportion rose to 3.13 per cent in 2004-05 under the UPA and further to 3.37 per cent in 2005-06(RE). The BE of 2006-07 expects to bring this ratio down to 3.27 per cent but it would still be higher than the average NDA of 3 per cent. Evaluation of the government here is partial as the quality of administration is not revealed via these numbers.

“The problem with subsidies is not so much of its existence as that of its targeting”, says Parthasarthy Shome (Financial Expresss, March 2, 2006). On the subsidies front, the UPA government has spent a larger share of total expenditure (9.23 per cent) in 2004-05 than the NDA average of 9.17 per cent. BE 2006-07, however, signals that this share is to reduce it to

8.18 per cent. The signal is a welcome one, but only time will tell how realistic it is. Also, since these numbers in no way indicate the progress on the targeting of subsidies, they are incomplete. Food subsidies: The UPA government reduced the share of food subsidies to GDP by 0.1 percentage point in the very first two years in office, i e, 2004-05 and 2005-06 (RE). In BE 2006-07 the government has decided to put on hold the recent cabinet decision to cut the food subsidy bill by 30 per cent, following protests from some of its allies and party members. The proportion of food subsidies to total expenditure is budgeted to increase to 1.37 per cent in 2006-07(BE). The bigger challenge is to put in place a system that would ensure that subsidies are transparent, targeted, and designed for effective implementation without any leakages [for some possible suggestions see Mehta and Aggarwal 2005]. Achilles heel of fertiliser subsidies:India’s fertiliser subsidy bill has escalated from a mere Rs 505 crore in 1980-81 to Rs 16,127 crore in 2004-05, i e, an increase of 32 times! The allocation kept aside in budget

Economic and Political Weekly April 8, 2006

2006-07 stands at Rs 17,252 crore, less by a mere Rs1 crore, vis-a-vis 2005-06 (RE). Wary of the fate of three of his predecessors, who had to roll back cuts in fertiliser subsidies, the FM has chosen to steer clear of this controversial issue. Riding on a high of over 8 per cent growth rate and with the general mood in the economy being upbeat, this major corrective step could have been attempted in a more meaningful manner. We believe that this is an important miss by the UPA. Oil sector milk cow: The contribution of this vital sector to the central exchequer by way of duties, royalties, dividends, etc, has risen from Rs 64,595 crore in 2002-03 to Rs 77,692 crore in 2004-05. In the absence of urgent steps, the government will not only have to forgo the taxes and dividends from these companies, but also “financially cripple” them [GoI 2006].

Budget 2006-07 has hiked the petroleum subsidy vis-a-vis 2005-06 (RE) by Rs150 crore. In addition, the central government also shoulders an off-budget burden via oil bonds issued by it. GoI has announced the issue of 7.33 per cent oil marketing company bonds, 2009 for Rs 2,000 crore;

7.47 per cent bonds, 2012 for Rs 2,000 crore and 7.61 per cent bonds, 2015 for Rs 1,750 crore. The Rangarajan Committee (RC) report has warned against the issuance of government bonds as “it merely postpones the problem”.

While the package of RC recommendations has largely been ignored in the budget, the one issue taken up by the FM is the hike in cess, but he has ignored the issue of its end use. The hike of Rs 700 per tonne would lead to ONGC and OIL bearing an additional subsidy burden of Rs 2,000 crore. Thus reliance on the oil sector to fund the budget continues despite its fragile health (Financial Express, March 1, 2006). Finally, for the purpose of completing the report cards of NDA and UPA regimes, we need to look at the receipts side of the balance sheet and it is to this that we turn to in Section IV.

Receipts Budget

The UPA government clearly surpasses the NDA in tax/GDP ratios. But once again this takes us back to the caveat stated at the outset that the macro environment is crucial to assessment: higher growth rates necessarily fetch higher tax revenues. While we cannot and must not deny the UPA government credit for sustaining this higher growth rate, we must not forget that the UPA inherited an upward-looking economy and for this NDA too must receive its fair share of credit.

As regards non-tax/GDP ratios, the NDA is seen to have fared better. Once again the macro environment was crucial for this performance. High interest rates resulted in interest receipts from loans and advances made to state governments contributing substantially to the kitty in the NDA phase. During the UPA phase, interest receipts have steadily fallen in importance due to benign interest rates, while dividend receipts have shown a significant increase. The task force on Fiscal Responsibility and Budget Management (FRBM) pointed out that that the scope for raising non-tax revenues is limited, thus implying that increasing the tax-GDP ratio is a must if the FRBM target of eliminating the revenue deficit is to be met [GoI 2004]. The UPA government, thus probably cannot be blamed entirely for not having performed as well as the NDA on the non-tax revenue front.

As regards specific taxes, the UPA’s performance has surpassed the NDA in case of corporation, service and income tax. It has fallen behind in customs and excise duties. These movements too are reflective of the macro environment. However, surprisingly, the growth rate of gross tax revenue expected in 2006-07 is seen to be even lower than that achieved by the UPA in 2004-05. What comes as an even bigger surprise is that service tax, the “tax of the future” is expected to register 50 per cent growth rate vis-à-vis 80 per cent achieved in 2004-05 and 62 per cent in RE of 2005-06. Also, UED is expected to grow at only 6 per cent although it is expected to have registered a 13 per cent in 2005-06 (RE). These numbers seem to hint that the FM has underestimated his revenues. The skill of the FM as a “fiscal marksman” will be known only when the “actuals” of 2006-07 are available, but given the track record of the past two years, revenues expected in the BE of 2006-07 clearly appear to be conservative.

V Conclusion

This paper has been an attempt to assess the budget for 2006-07 in the backdrop of the fiscal performance of the NDA and the two and a half year old UPA government. The assessment here is partial and limited only to macro-fiscal parameters.

On the tax front, the UPA government deserves credit for an improved performance over the two years, although it was helped by higher growth rates. On the expenditure side, we have severe misgivings about the lower proportions being allocated as capital expenditure, especially in key social and economic services. The lack of movement on curbing subsidies and the higher proportions being spent on administration are some obvious flaws. Disinvestment seems to have gone off the central government agenda for the moment. A mere mention of an effort towards “consensus” was as far as the FM could go. Continuity on the policy front is reassuring, but one cannot help feel disappointed since UPA had raised expectations and a change for the better is what one had hoped for. By and large the fiscal performance of the UPA in general, and budget 2006-07, in particular, could be summed up as having taken a few steps forward and a few steps back. However, these are well below expectations – or are we expecting too much?

rnr

Email: mlalvani@economics.mu.ac.in

Note

[Sincere thanks to Ajit Karnik for his valuable suggestions and for sharing with me his expertise on budgetary matters. I also wish to thank Abhay Pethe, whose insightful comments made me analyse the budgetary numbers from a fresh perspective. The usual disclaimers apply.]

1 A separate dummy for all three phases would have resulted in the problem of multicollearity.

References

Echeverri-Gent, J (1998): ‘Weak State, Strong Reforms? Globalisation, Partisan Competition and the Paradox of India’s Economic Reform’, paper presented at Annual Meeting of the American Political Science Association, Boston MA.

GoI (2004): ‘Report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act’, Ministry of Finance, Government of India, New Delhi, Available at http://www.finmin.nic.in.

– (2006): Report of the Committee on Pricing and Taxation of Petroleum Products, Chairman, C Rangarajan, Government of India, February.

Karnik, A V (2006): ‘Financing Social Sector Budgets’, paper presented at seminar on ‘Declining Social Sector Budgets’, Centre for Enquiry into Health and Allied Themes, March 6.

Lalvani, M (2005): ‘Coalition Governments: Fiscal Implication for the Indian Economy’,American Review of Political Economy, Vol 3(1).

Mehta, P and M Aggarwal (2005): ‘Food Subsidy: How to Reduce the Bill’, Business Line, August.

Economic and Political Weekly April 8, 2006

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