The Modi budgets- High achievements sans institutionalised changes

Budgets reflect the economic philosophy, near-term political economy pressures, and the long-term vision of a government. A review of budget metrics (table below) across the twilight years of the Manmohan Singh UPA government and the Modi government reveals a surprisingly elevated level of similarity, despite differentiated specific outcomes. In plainer words, the rulers changed but little else, not unlike Independence in 1947.

Consider that expenditure levels relative to current GDP reduced during the Modi years contrary to the popular narrative of lavish outlays for development. The UPA government was much more cavalier about living within the prescribed fiscal deficit (FD) of 2 percent of GDP under the Fiscal Responsibility and Budgetary Management Act 2003, whilst Finance Minister Arun Jaitley tried to follow the book closely and brought the FD down from the 4.5 percent of GDP that he had inherited to 3.5 percent by FY 2017.

BJP Finance Ministers tend to be conservative in maintaining fiscal stability—not a dreadful thing, since reducing subsidies, enhancing revenues through tax, user charges or monetising surplus assets, present near insurmountable political economy challenges.

Expenditure compression from the inherited 13.9 percent of GDP (FY2014) to 12.2 percent by FY2019 helped reduce the revenue deficit from the inherited 3.2 percent of GDP to 2.7 percent by 2016-17, though it subsequently increased to 3.3 percent on the back of unwinding the Union government guaranteed, off-balance sheet, additional debt obligations incurred by state owned entities, like the Food Corporation of India, as a substitute for adequate subsidy outlays.

BJP Finance Ministers tend to be conservative in maintaining fiscal stability—not a dreadful thing, since reducing subsidies, enhancing revenues through tax, user charges or monetising surplus assets, present near insurmountable political economy challenges. Tax revenues have remained unexceptionally stable FY 2012 to 2020 varying between 6.9 to 7.3 percent of GDP except an outlier 7.5 percent of GDP in FY 2013.

Budgets, consequently, can only play at the margin by tweaking cash flow between long-standing sectoral allocations, altering marginally the allocations for politically sensitive constituencies, rationalising tax rates and balancing the dire need for more public expenditure targeting the reduction of inequality and its worst manifestation—extreme poverty and improving the human capital index, on the one hand, whilst enhancing low-grade infrastructure facilities which drag down productivity enhancement and income growth.

Growth has been the weakest link in the Modi play book. It increased smartly from the inherited average of 6.05 percent of GVA in FY 2012-14 to 7.2 percent in FY 2015, to 8 percent in the succeeding two years, before a secular decline to 3.9 percent by 2019-20, the last normal year before the COVID-19 pandemic dislocations.

Prime Minister Modi’s considered remoteness from the parliamentary process, could have its roots in his not being a professional parliamentarian—despite being the BJP’s prime vote catcher with impressive rhetorical skills.

Uncharacteristically, the normally hands-on Prime Minister Modi has maintained a distance from the budget-making process. In the early days, the late Arun Jaitley helmed the Finance Ministry with panache. But when his illness (2018-2019) forced a change, Piyush Goyal the then minister for Railways presented the budget for 2019-20 before handing over to the present incumbent Nirmala Sitharaman. In contrast, when Morarji Desai resigned in 1969, Indira Gandhi as Prime Minister was also Finance Minister, for a year and presented the budget in 1970.

Prime Minister Modi’s considered remoteness from the parliamentary process, could have its roots in his not being a professional parliamentarian—despite being the BJP’s prime vote catcher with impressive rhetorical skills. He became an elected politician late, at the age of fifty-one. He first became Chief Minister Gujarat in 2001, and a member of the Legislative Assembly only subsequently. This is the route used to induct professional expertise into high executive office. Since then, he has continuously held high executive office, first as Chief Minister Gujarat and now as Prime Minister.

Prime Minister Modi remains a quintessential chief executive, leaving the groundwork of politics and parliamentary networking to others. Nor are budgets the forum used by him to announce major policies. He prefers his Independence Day address on August 15, from the ramparts of the Red Fort, for this purpose, when he also presents his government’s annual report card on implementation and achievements before an estimated online, live audience exceeding 25million.

Deglamorise the budget day event

Could PM Modi be heralding a trend, which deglamorises the budget day event, making it more professional and less rhetorical? Budget management should in any case be an open, collaborative effort with wide continuous consultations, including with state governments, throughout the year.

The Goods and Services Tax Council model provides a ready template for productive collaboration. Technology now makes such integration possible.

Finance Minister Nirmala Sitharaman has an eye for detail and is an advocate for transparency. The Finance Ministry could usefully step up as the core agency for joining-up Union, state, and municipality budgets. Such integration in fiscal design, can avoid wasteful overlaps in mandates and allocations and enhance project and program efficiency. The Goods and Services Tax Council model provides a ready template for productive collaboration. Technology now makes such integration possible. Moving from the functional Public Financial Management System to a Government Integrated Financial Management Information System (GIFMIS) would facilitate connectivity across inter-governmental accounting systems for seamless management support.

Formalise medium-term budgets

India already uses inflation, fiscal deficit, and debt to GDP benchmarks as macro fiscal guiderails. Earlier five-year plans provided the medium-term, micro fiscal outlays undergirding the aggregate fiscal metrics. With the end of planning, India, needs an alternative undergirding framework beyond the annual budget. Medium-Term Expenditure Frameworks can provide this undergirding. The good news is that India’s revenues are well-diversified and stable. Easy access to borrowings, courtesy fiscal rectitude, acts as the balancer. Some budget proposals already come with informal medium-term (three to five years) expenditure forecasts. Such forecasts should be part of the budgetary process. Locking in future fiscal space for specific programmes is a useful check on fiscal adventurism, thereby, assuring sustained financing for multiyear programmes like military purchases.

Planning for change

Locking in medium-term fiscal allocations would encourage implementing agencies to think long and comprehensively about the intended path to achieving outcomes, making sure to tie in all the cross-sector linkages necessary, both on the expenditure and the income side.

Locking in future fiscal space for specific programmes is a useful check on fiscal adventurism, thereby, assuring sustained financing for multiyear programmes like military purchases.

Disinvestment is a good example, where such medium-term thinking is crucial since the process is time intensive, taking up to two years to fruition. Similarly budgeting for future higher revenues from tax, requires the prior collection and analysis of data on tax behavior and setting up the institutional and digital tools for making tax assessment least cost and tax evasion expensive. A major tax reform like the Goods and Services Tax remained “under thought through,” imposing economic costs during implementation (2017-20)

Share budget execution reports

The existing budgetary process presents budgeting as a one-time event around the budget day. Continuous public engagement can come from publicly shared quarterly budget execution reports, which present data on how closely the finance ministry adhered to the proposed timing of cash disbursements and agencies adhered to the utilisation of funds. Such reports also enhance the transparency of budget management and encourage open and participatory governance.

Performance budgeting

Since 2017-18 an outcomes budget is part of the Budget documents set. But this voluminous document is underused and unhelpfully prepared. Output and outcome indicators are often confused. Output indicators should measure efficiency in the use of funds for achieving a result within the estimated cost. Outcome indicators measure how effectively a programme achieved change. Authentic verification of outcomes has been missing from programmes since the Twenty Point programmes of Prime Minister Indira Gandhi in 1975.

Continuous public engagement can come from publicly shared quarterly budget execution reports, which present data on how closely the finance ministry adhered to the proposed timing of cash disbursements and agencies adhered to the utilisation of funds.

Take Swachh Bharat and the associated outcome of “Open Defecation Free” areas. Programme data reports an accomplishment of 100 percent  (2020-21) in rural areas, whilst analysts point out that this is not corroborated by National Family Health Survey-5, 2019-20 data. This highlights that physical outputs (toilets, training sessions conducted, outreach) do not necessarily add up to outcomes (ODF), which requires behavioral change.

Institutional framework for programme monitoring and assessment

The associated framework for continuous fine tuning of policies and programs through intensive monitoring, assessment of outcomes and feedback loops for programme correction remain un-institutionalised. Developing the capacity for such new functions will require adding expert and technological resources to the architecture of public sector decision-making and implementation.

The Modi budgets 2014 to 2022 spurred the generation of public goods outputs to significantly higher levels in infrastructure (highways being the stellar example), railways, electricity, gas and digital grids, social protection, and insurance programmes and programmes to impart dignity to the poor.

The Finance Ministry can perform this role because of the complementarities between budget formulation and performance assessment. Alternatively, the NITI Aayog, already commissions surveys and index development (Aspirational Districts, municipal performance). A third option is the Comptroller and Auditor General (CAG) who already does historical performance audits of selected programmes, including at the request of state governments.

The Modi budgets 2014 to 2022 spurred the generation of public goods outputs to significantly higher levels in infrastructure (highways being the stellar example), railways, electricity, gas and digital grids, social protection, and insurance programmes and programmes to impart dignity to the poor. These are massive gains.

In the breathless rush for achieving, top-down, fragmented targets, foundational improvements in budgeting for and managing change have fallen behind. Bringing budget governance systems up to speed, can improve the optimum allocation of capital to programmes providing the highest returns in diluting poverty, reducing inequality, spurring sustainable growth, building India’s security capability, and developing partnerships overseas. But all this shall eat into the Prime Minister’s time and political capital.

This opinion piece was first published in http://www.orfonline.org January 28 2022

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