India dispels colonial legacy; merges union and rail budgets

Cabinet Approves Early Union Budget, Merger of Rail Budget

Cabinet Approves Early Union Budget, Merger of Rail Budget

In what can be seen as doing away with a practice that has been in vogue since the colonial era (92 years to be precise), Indian Government has opted to merge union and railway budgets. This also means that from now on there is no need to have different Votes on Account, and Appropriation Bills and this will save plenty of time as well. Incidentally, this is one reform that a lot of experts had been calling for in the last few years.

R Jagannathan, a columnist for Firstpost and Editorial Director of Swarajya, had written in 2014 that the railway budget was just another component like civil aviation and defence budgets, and hence it did not really merit a separate day. According to Jagannathan, it was all about presenting some accounts to the government and there was no need to hype a public undertaking budget that involved accounting, annual reporting, and budgeting like any other privately-owned enterprise.

In fact, several committees had also asked for this for a long time now, stating how instead of serving any purpose it just politicized the entire process. No fare was ever increased and it only served to operate as a patronizing body. A committee led by Bibek Debroy, a member of Niti Aayog, had termed it to be a ritual that was becoming less important compared to the union budget. He had, however, asked for a gradual phasing out in his report on restructuring of railways. British had introduced this policy in 1924 because of the sheer size of railways vis-à-vis Indian economy at that time.

What does this mean for the railways?

A report by PTI states that in spite of this union, railways will always have its distinct identity as a commercial undertaking that is regarded as a government department. It will continue to yield its authority and be functionally independent as it used to be. This will financially benefit the railways as well, considering they wouldn’t need to pay the yearly dividend of INR 10,000 crore. Its capital at charge – amounting to INR 2.27 lakh crore – would be done away with as well.

This money is the amount provided by the national government to the railways each year. It is expected that this amount would now be diverted to various funds of the railways such as reserve funds, pension funds, and development funds. Railways will also need to fulfill its various social duties and, perhaps, the added money could free up the path for some more reforms.

Incidentally, Suresh Prabhu has already promised several reforms. The government, though, is yet to take a decision on the social costs of railways – estimated at INR 30,000 crore – that stem from providing subsidized freight and cheap fares in general.

Overhauling the budget system

However, this is only part of the major overhaul being made to the system as such. It is also expected that the union government will bring forward by a month the date to present the budget, and it is also expected to spend more in the infrastructure sector, which will come as a significant boost for the rather beleaguered sector. Even though no concrete date has been provided, it is expected that it could be done on 1st February from 2017 onwards. The central administration has stated that a final decision would be taken after taking a look at the poll calendar in five states for that year.

All these proposals had been in the pipeline for some time now. According to Economic Affairs Secretary, Shaktikanta Das, the department has discussed extensively with financial advisers from different departments and ministries and a new calendar has been created so that all the participants can be ready to adapt to the same.

Other important decisions

The government has decided to remove the various categorizations – it is expected that this will make the whole process a much simpler one. All these proposals have recently received clearance at a union cabinet meeting headed by Narendra Modi. At present, a committee led by Shankar Acharya is looking at the possibility of a new financial year and once its report is submitted, there is chance that there could be further changes to the system. This report is supposed to be submitted by 31st December.

In India, the financial year starts from April while in most countries of the world this starts from January.

Legislative implications of the decisions

It is expected that as a result of this overhaul it would now be possible to get approval from legislature for the various yearly expenses before the financial year starts on 1st April. This also means that from now on the budget will have to be prepared during early October. As a result, the budget session of parliament would also be convened before 25th January, a month earlier than usual. This will also bring forward the Economic Survey done before the budget.

GDP estimates brought forward

It is expected that advance GDP estimates will have to be completed on 7th January rather than on 7th February. The mid-year review of expenses made by different ministries is expected to be completed by 15th November. However, as stated in a report in The Business Standard, published on 21st September, the Ministry of Statistics and Programme Implementation has stated that it will not be able to provide all the data that early. Das, though, feels that this data would still be helpful for purposes of planning.

Effect on planning

With all these processes being brought forward to 31st March, it is but evident that there would be advancement in the budget cycle as well. It is expected that this would also help the different ministries plan much better and carry out various programmes from the start of the financial year itself.

Under the previous system, the budget was presented on the final day of February and it was only in mid-May that the parliament approved it. After this the monsoons started during June and this meant that most state and union territories’ governments could only start work during October. This meant that they had only about six months to complete all the different programmes. The new system is expected to improve implementation with all cylinders firing from 1st April itself.

Involvement of industry and other stakeholders

Under the new system, the government will have to finish discussions before budget with various industries and other stakeholders prior to Christmas. This will also enable them to present details of their grant demands earlier to the parliament.

Removal of categorization of expenses

With its decision to remove distinction between various expenses – namely plan and non-plan – the government has made it easier to provide equal focus and emphasis on both forms. The system of presenting planned expenses separately was done for the first time in the 1959-60 financial year. Previously, planned expenses were regarded to be more important than non-plan expenses. The emphasis would now be on spending in such a way so as to create value for the common people.

Will all these be beneficial?

DK Srivastava, the Chief Policy Advisor of Ernst and Young, says that all these decisions could lead to palpable benefits. He feels the capability to release capital expenses to monsoons could be a critical development. Srivastava also says that infrastructure expenses would be specially benefited considering how normally it gets delayed because of the monsoons.

It could actually get advanced by 4-5 months – the funds can start to flow from early April and this means that, before the rains start at least 2-3 months’ work can be completed. When one comes to think of it, this is a major advantage to have and can benefit the economy in the long run. He also feels that this would make revised estimates of budgets qualitatively better.

This can also be beneficial for the Indian Government – much ridiculed for its perceived administrative apathy and failure – the chance to work without public glare and put into action the huge reforms that have to be made to improve things in the country.

Yashwant Sinha, erstwhile Finance Minister, has welcomed the reforms but feels that more expenditure-oriented reforms would have been better. He has also advised that railways be allowed to exist and operate just as present. Else, it could create difficulties for them. He welcomes the proposal to remove the dividend, but also says that ultimately perhaps Indian Government is going to make railways a corporate entity, something he feels could have been achieved without the present reforms. He has also advised the government to desist from micromanaging the body.

The ex-Secretary, Expenditure and Budget, Dhirendra Swarup, has welcomed the proposal to do away with categories of expenses, but calls for making railways a commercial body that can generate its own resources on the basis of its financial strength and credibility. He points out that with the present decision, railways will be able to pass on the buck to the union budget in case there’s a deficit.

Vinayak Chattejee, Chairman of Feedback Infra, supports the decision since he feels it will emancipate railways from populist politics, but he wants a similar level of accountability and transparency in terms of performance and accounts. Arun Jaitley has already said that each year there would be separate discussions on railways expenses, so that it can be scrutinized by the parliament and thus, remain accountable.

According to Jaijit Bhattacharya, Partner, Infrastructure of KPMG, this decision could make railways a corporate body. The Union Rail Minister, though, has stated that railways will keep working the same way it is used to and would also receive budgetary support for its expenses. A portion of this capital expenditure would come from the union budget. This will help the railways spend more than the INR 1.21 lakh crore that they are supposed to spend this year. The other part will come from revenues. When Seventh Pay Commission comes into effect, though, railways could be poorer by INR 40,000 crore.

The changes are being made at a time when Indian economy is in a transitional phase to becoming more of a federal system. It is expected that in the days ahead the budget could become easier to predict and there could be more emphasis on expenses than revenue.

Following the suggestions of the Fourteenth Finance Commission the states now have greater share in Indian Government’s net tax revenues, and this could give them more freedom to spend. The things are expected to get better when goods and services tax (GST) is implemented. However, no one knows whether or not GST is part of the new budget.

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