Economy

Why the Budget Doesn’t Tell Us Much about a Government’s Priorities

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With so many features of the Government’s spending becoming non-negotiable, do different political ideologies really translate into different economic ideologies? Credit: Sudipto Sarkar. CC BY 2.0/Flickr

The near-doubling of spending on farmers in the 2016-17 budget made big news, indicating that the government’s laissez-faire stance had mellowed to a more socio-rural one. This increase meant that the share of Agricultural ministry in total expenditure had shot up from 1.29% in 2015-16 (RE) to 2.25% in 2016-17 (BE), a big change by any measure.

Soon, however, informed commentators pointed out that this was a sleight of hand. In fact, Rs. 15000 crore under interest rate subvention had merely been shifted from the finance ministry to agricultural ministry. Strictly speaking, the share of agricultural ministry has gone up to only 1.59%, a much more modest increase compared to its sophist counterpart.

Allowing a tiny bit of digression, it is interesting to note that the share of spending on agriculture crashed from 2.35% in 2000-01 to 1.04% the very next year, and stayed around that level throughout Vajpayee’s term. It was the UPA that slowly brought it up to around 2% during its second term. Could that have been a major reason behind Vajpayee’s unexpected defeat, and a motivation for Modi to raise spending on agriculture?

Coming back, the pattern of spending on different ministries/departments raises an intriguing question: can ministerial/departmental allocations in the union budget really bring about a significant change from the previous year(s), or even signal the incumbent government’s priority areas?

The short answer is: yes, but to a very limited extent. A more detailed discussion follows.

General trends

This author has looked at the ministry/department-wise expenditure between 2000-01 and 2016-17 (BE), leaving out the relatively insignificant ministries/departments. All data are for real accounts, except for 2015-16 (RE) and 2016-17 (BE).

The only major calculation involved was finding out spending on each ministry/department as a percentage share of total expenditure (GDP was not chosen because it’s not really under government’s control, and small changes in this humongous number could skew percentage shares). This revealed some interesting trends for each ministry/department, the most major of which is that share of spending on any particular ministry/department varies very little, even over the 15-year period I looked at.

The first graph below indicates the range of spending shares (maximum share in any year – minimum share in any year) attained by each ministry/department since 2000-01. The maximum range, an impressive 7 percentage points, has been attained by the petroleum and natural gas ministry. However, this is because the petroleum ministry incurred hardly any expenditure in 2000-01 and 2001-02, after which heavy subsidies were disbursed via this ministry. Its share has again dropped in light of falling oil prices.

Chart2

Alongside petroleum ministry, the top-ranking ministries/departments as per range of spending share are all those that include significant subsidies. Their share has fluctuated with the quantum of subsidies given. The only exception is Rural Development ministry, whose share was bloated by the introduction of MGNREGA, thereby clearly indicating the erstwhile government’s priorities. The Defence ministry also shows a relatively big range of 3.57 percentage points, but that’s mostly because of the huge share of spending taken up by this ministry.

The range of spending on health is as low as 0.55 percentage points, whereas that on education is a bigger 2.53 percentage points. For all the hue and cry over the modest expenditure on education, it has actually gone up from 2.15% in 2003-04 to 3.64% in 2016-17 (BE). However, this is still minuscule, and has itself dropped from the peak of 4.68% in 2012-13.

The graph below depicts the maximum and minimum share of each ministry/department since 2000-01.

 

Chart1

Committed expenditure

It is interesting to ponder over why there is so little fluctuation in spending despite the passing of several governments, claiming opposing economic ideologies, during this long period.

In reality, the government doesn’t control the whole budget. As the graph below shows, anywhere between 25%-30% of the total expenditure is taken up by interest payments – a form of committed expenditure. This share had dropped to under 20% in 2009-10, but the huge deficits India ran after that period have made sure that interest payments are back to the 25% mark.

chart 3

Besides interest payments, the majority of budgetary expenditure is devoted to salaries, pensions, and other forms of committed expenditure, which renders the budget largely an incremental exercise (desperate to meet the fiscal deficit targets, the government seems to be reneging on even some of the committed expenditure).

Moreover, subsidies have come to be almost a non-negotiable feature of the budget, even under the supposedly reformist current government. The share of subsidies touched a high of 18.66% in 2012-13. Though the total subsidies in 2016-17 (BE) – pegged at 12.66% of total spending – are Rs. 8250 crore lower than those in 2014-15, this is almost solely because crash in oil prices has reduced petroleum subsidies by Rs. 33,000 crore over this two year period. Most of this breathing room has been used by the government to hike food subsidies. That said, the current government must be credited for lowering subsidies from 2015-16 (RE), since the change in petroleum subsidies isn’t significant from last year.

Back of the envelope calculations show that only about 30%-35% of the total budget is available to any sort of tinkering, which means the budgetary allocations can make only incremental changes.

Impact of 14th Finance Commission

2015-16 was the first year that saw recommendations of 14th FC being put in place. The huge devolution to states meant partial or complete axing of funds allocated to most of the CSS initiated by UPA government. Naturally, this lowered the share of spending on ministries under which the affected Centrally Sponsored Schemes (CSS) fell. This impact is most starkly visible in case of Panchayati Raj ministry, whose allocation went from Rs. 7000 crore in 2014-15 to almost nothing the very next year, largely due to scrapping of Backward Regions Grant Fund (BRGF). The share of Ministry of Drinking Water and Sanitation also dropped considerably in 2015-16 due to huge cuts in spending on National Rural Drinking Water Programme (NRDWP).

Some of the CSS, such as Pradhan Mantri Gram Sadak Yojna (under Ministry of Rural Development), have seen renewed spending in 2016-17 (BE), thereby restoring the share of the respective ministries.

Current government’s priorities

Clearly, infrastructure is being prioritized. The combined share of roads and railways ministry is the highest ever at 5.19% in 2016-17 (BE). It has beaten the high of 4.43% in 2015-16 (RE). The combined share was a paltry 3.54% in 2013-14.

Infrastructure spending might also be a way for the government to create jobs, as the revenue expenditure component of road and transport ministry has gone up while the capital spending component has dropped.

Department of Women & Child development and Drinking Water & Sanitation have also drawn the government’s attention, as is evident by the sharp increase in the spending on them in 2015-16 (RE), as well as their allocations in 2016-17 (BE).

The allocation to the newly rechristened Ministry of Environment Forests and Climate Change has skyrocketed nearly 20 times from 2015-16 (RE), which might be reflective of India’s ambitious renewable energy targets for the near future.

The complete picture

The budget is not the only medium of government expenditure. PPP, FDI and Special Purpose Vehicles (SPVs) are just some of the off-the-budget means for the government to spend/invest, or get others to do it. Modi government is using these means to spend mainly on infrastructure. M. Govinda Rao and Indira Rajaraman talk about some of these issues here and here, respectively.

To get a good idea of the incumbent government’s priority areas, merely looking at the budget is an incomplete exercise at best, and a futile one at worst. It must be accompanied by a close reading of the spending done through extra-budgetary resources. Besides the spending, the policy decisions made during the course of the year are critical, too.

Prabhat Singh works for the Finance department of Andhra Pradesh government. He tweets at @singhK_P