JULY 14, 2014

By Naresh Minocha, Our Consulting Editor

THE Modi Government's maiden budget has been hailed as please-all, investment friendly, growth-oriented, non-inflationary budget and in other positive descriptions by different stakeholders.

Even critics of NDA Government would privately agree that the Budget would stimulate savings and investments in economy especially in sectors such as housing that have been hand-picked for tax and non-tax favours.

The Finance Minister Arun Jaitley's strategy to manage fiscal deficit through enhanced plan investments and increase revenue through growth is commendable. It is better than his predecessor's approach to squeeze plan and non-plan expenditure that results in lower revenue receipts and jobless growth.

Now that the claptrap bandwagon has moved on, it is time to judge the Union Budget for 2014-15 against yardsticks other than the immediate objectives of rescuing the economy from downslide and restarting the investment cycle.

The Budget scores poor marks when judged against the norms of political will to take fiscal risks or initiate non-populist measures. It is bereft of taxation reforms including non-controversial ones such as merging surcharge and additional levies into the main tax. The Budget suffers from credibility deficit, which can be measured by the failure to implement the Government's intent as stated in the pre-Budget Economic Survey, Election Manifesto and the budget documents.

The Budget, of course, scores high marks when judged against the yardstick of populism, announcement of new schemes with measly allocations and capability to pass off old wine in the new bottle.

What is good about Mr. Jaitley is that he has forthrightly admitted that he does not want to initiate reforms that might trigger confrontations. Answering a question on avoidance of the word ‘disinvestment' in a post-budget interview, he replied: "Reforms are an art of the possible. Therefore you do not reform by entering into confrontations on day one. You must do what is doable. You must tactically do what is possible and what is going to lead to a roadblock, you can avoid doing that for the present. There is enough on the plate of this government. The UPA, believe me has left a lot of unresolved issues. Therefore I have a lot to act upon."

In another interview he stated: "If you see my speech - I deliberately didn't have paragraph after paragraph for disinvestment. I didn't want my friends from the Left or some other group to just walk into the well and disrupt the speech but in my Budget documents I have candidly mentioned it."

Mr. Jaitley also implicitly confirmed the political class' aversion to non-populist measures. He has indirectly confirmed their fatal weakness to splurge public money on freebies in preference to utilizing the underlying funds for promoting growth, creating jobs and enhancing revenue.

The confirmation can be discerned from Mr. Jaitley's reply to a question on subsidy reforms. He stated: "I n 66-67 years, India has not been able to find an answer to subsidies and they expected me to find it in 45 days. As far as subsidies are concerned, I will have an Expenditure Management Commission which will look into various expenditures including subsidies. It will look at subsidy rationalisation."

In his budget speech, Mr. Jaitley stated: "The Commission will give its interim report within this financial year. I also propose to overhaul the subsidy regime, including food and petroleum subsidies, and make it more targeted while providing full protection to the marginalized, poor and SC/STs. A new urea policy would also be formulated."

Commissions/Committees are the last refuge of power-glued, survival-seeking politicians. Mr. Jaitley, being an erudite politician, knows that governments of all political hues have resorted to these tactics to avoid or delay biting the tough reforms bullet. Successive Governments either rejected or overlooked many expenditure management-related recommendations of various panels.

Indira Gandhi Government, for instance, had set up The Economic Administration Reforms Commission (EARC) in early eighties. Similarly, Narasimha Rao Government had constituted Joint Parliamentary Committee (JPC) on fertilizer pricing, whose recommendations in August 1992 contributed to the present subsidy mess. United Front Government also set up a Working Group of Expenditure Policy that submitted its report in September 1996.

And NDA Government, in its first avatar, was not found wanting in this arena. It had constituted Expenditure Reforms Commission (ERC), which submitted 10 reports during July 2000-September 2001.

Mr. Jaitley should refresh his memory about ERC's recommendations on subsidies especially fertilizer subsidy reform, which have been botched time and again since mid-1991.

In its report captioned ‘Rationalizing Fertiliser Subsidies' submitted in September 2000, ERC had recommended a moderate increase in urea price every year of 7% in real terms every year from April 2001 onwards to achieve decontrol on 1 st April 2006.

In his 2001-02 Budget speech, Mr. Yashwant Sinha had said: "Government has now decided to implement the recommendations of the Expenditure Reforms Commission for phased programme of complete decontrol of urea by April 1, 2006."

Mr. Sinha's proposal was sidelined by the Government by setting up a Group of Ministers (GOM) on long-term fertiliser policy (LTFP) on 31 st May 2001. LTFP has not been unveiled so far.

The statutory retail price for urea was last hiked by 10% on 1 April 2010 after gap of nine years. The politicians have ensured that urea price is kept as one of the lowest in the world. This fertilizer thus retails at a price, which is not even half the price of branded table salt.

A few expert committees have pitched for immediate hike in urea price to promote balanced application of fertilizers and thus improve the crop's response to optimum availability of nutrients through higher yields.

The UPA dragged its feet on raising urea price while acknowledging the urgency for price hike for last two years. And Mr. Jaitley has toed this line verbatim.

Take first the Medium-term fiscal policy statement (MTFPS) that Finance Minister P. Chidambaram presented as part of the 2013-14 Budget on 28 th February 2013.

MTFPS says: "On fertilizers, Nutrient Based Subsidy regime has been working well in the P&K sector. What is now urgently required are certain pricing reforms in the urea sector with an immediate price correction for urea. This is not only essential from viewpoint of the size of the subsidy bill but also from the viewpoint of balanced use of N, P&K nutrients."

Consider now MTFPS that Mr. Chidambaram presented as part of The Interim Union Budget for 2014-15 on 17th February 2014. He opted for reiteration of the same quoted paragraph in MTFPS.

And Mr. Jaitley has done precisely that in MTFPS that he presented as part of budget documents on 10 th July 2014. Mr. Jaitley's MTFPS says: "On fertilizers, Nutrient based subsidy regime has been working well in the P&K sector. What is now urgently required are certain pricing reforms in the urea sector with an immediate price correction for urea, new Nutrient based Urea Policy. This is not only essential from viewpoint of the size of the subsidy bill but also from the viewpoint of balanced use of N, P & K nutrients."

A day before the presentation of the budget, analysts got a wrong impression that Mr. Jaitley had a steely resolve to launch ticklish reforms when he released the Economic Survey, which virtually trashed fertilizer subsidy.

The Survey noted that average cost of urea is subsidized by more than 54%. Urea's nitrogen (N) content is thus relatively cheaper than the price of two other major nutrients, phosphorous (P) and potash (K), resulting in overuse of urea by farmers. This, in turn, has distorted the country's average NPK ratio from the ideal 4:2:1 to 8.2:3.2:1.

It stated: "For each unit of K, instead of 4 units of N which are required, 8.2 units of N are being put into the soil. The incremental output of the excessive 4.2 units of N is zero or somewhat negative. This purchase of urea, beyond what is required, works out to roughly 50 lakh metric tonnes (MTs). Farmers and the government are wastefully spending Rs 2680 and Rs 5860 crore respectively for this. These costs are ultimately paid by the consumers as higher food prices and higher taxes, in return for a zero or negative impact upon agricultural output."

The Survey's punch line reads as: "The fertilizer subsidy hurts everyone: farmers, f irms, taxpayers, and consumers."

Instead of raising the urea price, Mr. Jaitley opted for hike in urea subsidy by Rs 5000 crore to Rs 36,000 crore from Rs 31,000 crore allocated in the Interim Budget.

Having admitted dirt-cheap urea is inflicting Rs 5860-crore loss on exchequer, apart from making farmers poorer, how would Mr. Jaitley justify further delay in hiking urea price? Does the word "urgently"has different meaning in the dictionary of reputed lawyers like Mr. Jaitley and Mr. Chidambaram?

The urea subsidy imbroglio is a perfect example of policy paralysis virus which the NDA has merrily inherited from the UPA. It also demonstrates the credibility deficit that NDA has started exhibiting.

The fact that policy paralysis has hit the NDA gets confirmed by the fact that it has not yet notified the amendments to the New Urea Investment Policy-2012 that were approved by UPA's Cabinet Committee on Economic Affairs on 28 th February 2014.

The gap between intent and the action is also emerging in the new Government, if its stance on retrospective governance is any indication. In his Budget speech, Mr. jaitley stated: " The sovereign right of the Government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This Government will not ordinarily bring about any change retrospectively which creates a fresh liability."

The word 'retrospective' or 'retrospectively', however, figures 16 times in the memorandum explaining the provisions of Finance (No.2) Bill, 2014 that forms part of the Budget document. It is not known whether any proposed retrospective change would create any liability on the tax-payer.

Liability or benefit, retrospective governance is not good governance and reflects lack of public consultation and transparency in fiscal arena. NDA Government should thus be on guard against any action that erodes its credibility.

UPA Government suffered enormous credibility crisis due to its wont to procrastinate or backtrack. It had set up one committee after another to resolve the Gordian knot of pricing and subsidization of politically sensitive petroleum products. It even failed to implement the Cabinet decisions on milestones in reforms in this area.

The previous Government had also set up Administrative Reforms Commission (ARC) that submitted 15 reports during 2005-08. It, however, gave several politically sensitive recommendations including the one relating to expenditure reforms.

In its 14th report titled ‘Strengthening Financial Management Systems', Administrative Reforms Commission (ARC) recommended that "the practice of announcing projects and schemes on an ad-hoc basis in budgets and on important National Days, and during the visits of dignitaries/ functionaries to States needs to be stopped. Projects/schemes which are considered absolutely essential may be considered in the annual plans or at the time of mid-term appraisal."

In its action taken report submitted in 2009, UPA Government rejected this recommendation. And this has obviously helped Mr. Jaitley embark on schemes-announcing spree in his maiden budget speech, overlooking the fact certain schemes are already under implementation for several years.

A case in point of completely redundant announcement in the Budget speech was about soil health cards. Mr. Jaitley stated: "Government will initiate a scheme to provide to every farmer a soil health card in a Mission mode. I propose to set aside a sum of Rs 100 crore for this purpose and an additional Rs 56 crores to set up 100 Mobile Soil Testing Laboratories across the country. There have also been growing concerns about the imbalance in the utilization of different types of fertilizers resulting in deterioration of the soil."

The decision to set up 100 new Soil Testing Laboratories (STLs) and Mobile Soil Testing Laboratories (MSTLs) under the Soil Health Management (SHM) component of National Mission for Sustainable Agriculture (NMSA) was announced as part of NMSA guidelines in January 2014.

A centrally sponsored scheme named National Project on Management of Soil Health and Fertility (NPMSHF) under which soil health cards are issued to farmers is being implemented since 2008-09. Millions of farmers have already been issue soil health cards.

According to Compendium on Soil Health issued by Agriculture Ministry in January 2012, "0.74 crore soil health cards were issued to farmers during 2010-11 compared to about 0.57 crore during 2009-10."

Yet another avoidable addition to the clutter of irrigation and watershed schemes is Mr. Jaitley's announcement to launch Pradhan Mantri Krishi Sinchayee Yojana with an outlay of Rs 1000 crore.

Similarly, there was no need to announce the Shyama Prasad Mukherji Rurban Mission as it would duplicate the Mission for Provision of Urban Amenities in Rural Areas (PURA) that was launched by the then President Dr. A.P.J. Abdul Kalam in 2003 during the NDA regime. Mr. Jaitely could have perhaps renamed PURA, if political compulsions necessitated bringing in the name of BJP founder in Budget or national mainstream.

The lack of concern for simplification, rationalization and consolidation of expenditure brings us to the need for revamp of Fiscal Responsibility and Budget Management Act (FRBMA), 2003 .

As put by the Survey, "India needs a sharp fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, and improved budgetary management."

Prior to this, the 13th Finance Commission and International Monetary Fund in 2009 had given suggestions to strengthen FRBM Act through appropriate amendments. The UPA Government did not implement these suggestions.

Apart from reconsidering IMF and FC proposals, Modi Government should study similar fiscal discipline laws of other countries to select good provisions from them to enact a new fiscal law.

The two laws worth considering are the Australia's Charter of Budget Honesty Act 1998 and Canada's Spending Control Act 1992.

The new Indian fiscal law might perhaps be titled as Indian Fiscal Discipline and Accountability Act, which should be backed up comprehensive budgetary reforms.

And if the Modi Government has an iota of concern for expenditure control, then it must set up an independent National Fiscal Council to monitor the implementation of proposed fiscal discipline law. Its reports should be placed in Parliament and should be debated professionally.

More than 30 countries have already constituted fiscal councils to ensure that their respective Governments comply with fiscal law and regulations.

As put by a paper issued by International Monetary Fund in July 2013, "all else equal, fiscal councils can promote stronger fiscal discipline as long as they are well-designed."

The paper captioned 'The Functions and Impact of Fiscal Councils' concludes: "The analysis points to a number of key features of effective fiscal councils: a strict operational independence from politics, the provision or public assessment of budgetary forecasts, a strong presence in the public debate (notably through an effective communication strategy), and an explicit role in monitoring fiscal policy rules."