Catalyst | Reading between the Budget lines

Five broad ideas to read the budget commentary better.

The first full budget of the NDA union government was presented in the parliament yesterday by Arun Jaitley, and today’s newspapers and news sites are replete with analysis of the budget and various sections therein. You will be reading more of them in the coming days and weeks, with praises and brickbats thrown at the numbers, with surprise, outrage and resignation at their implications.

Here is a quick guide to reading the expenditure budget with five broad ideas, and questions to ask yourselves as you continue to read the commentary.

The first idea is to think beyond budget estimates. The budget estimates for the new fiscal year tell you a lot about the government outlays and priorities for the coming year, but a lot can be learnt by looking back as well. Each budget document provides the budget estimate for the coming year (2015-16 here), the revised estimate for the previous year (2014-15) and the actual expenditures for the year before last (2013-14). Understanding where the government shaved off or reduced expenses between the budget estimate and the revised estimate (and the actuals) can reveal many government priorities that remain hidden in the budget announcement. Attributing the cause for these changes can be tricky – from changing priorities, to lack of capacity, to overestimated revenues, to many other reasons. However, understanding the pattern is a necessary first step. For example, I had found in 2013 that the Indian army finances show a consistent shift from capital to revenue expenses between budget announcements and actual expenses. The more close that the budget estimates tally with the revised estimates and actuals, the healthier and more reliable the budget process is.

The second idea is to compare like with like. An article in Economic Times on science and tech funding is illustrative of a lot of misleading figures (HT: Anand Ranganathan.) To begin with, the headline claims that the entire budget allocation of 7,288 crores is a “boost” to the sector, never mind that quite a bit is allocated each year. Then it goes on to claim that there is an increase of Rs 1,793 crore over the 2014-15 budget. Turns out that this is misleading as well. The 2015-16 budget estimate is 1,793 crores larger than the 2014-15 revised estimate, an apparent increase of 32.6 percent (!) and whereas the increase over the previous budget estimate is a more modest 8.4 percent.

The third idea is to think beyond nominal increases in allocations and include inflation. Even when you compare carefully and find that there is a 10% increase in some allocation, know that most of that gets eaten up by inflation. Till this year, one had to discount about 8 to 12 percent of increases towards inflation, and it’s great that this discount has become smaller with reducing inflation rates. However, inflation is not constant across sectors and activities, and both wage inflation and inflation in the prices of certain goods & services can be far higher than the overall figure. In healthcare and education, for example, often see wage inflation at consistently higher rates because productivity increase is usually slower than the rest of the economy.

Thus an 8.4 percent increase in the science & tech research budget might barely be able to stay the same in real terms, and it is certain that the budget of ISRO will actually decline after accounting for inflation.

The fourth idea is to think beyond outlays. It isn’t just the size of the budget available for a certain activity, but how that money is deployed. As Jessica Seddon explains, the budget is where the union government can reshape the State and its role in the economy, society and polity. Also – outputs and outcomes are never tracked in the budget, which showcases outlays. Thus union ministries had started publishing ‘outcome budgets‘ since a few years ago, but unfortunately the exercise remains largely farcical.

Budgets can and do actually shape policymaking beyond the hard size of numbers, and this year’s budget is a great example of it. Accepting the 14th Finance Commission’s recommendation, the union government has agreed to devolve 42 percent of union taxes instead of 32 per cent, as an untied, unconditional award to states. Note that this is largely in lieu of “tied” grants from the union government in the form of centrally sponsored schemes. So it isn’t that the state governments have suddenly gotten a lot richer, but that they have far greater control over the deployment of resources.

This change in devolution of funds to states has made budget analysis a lot more complicated this year. There is outrage brewing that union allocations on ‘social sectors’ has reduced significantly, including how the education allocation has gone down by about 17 percent. However, sectors like health and education come under state or concurrent lists, where the implementation has always been done by states and local governments. With the greater tax devolution, state governments will be expected to allocate funds towards health and education, and modify schemes and policies according to their likes. This is a welcome change, even if it makes the lives of analysts a little harder.

The fifth and final idea is to ignore the artificial divide between plan and non-plan expenditures. With the dissolution of the planning commission, expectations were high that the differentiation in expenditures (and a false, implied priority for ‘plan’ expenses) would come to an end. While the 2015-16 budget fails to do this, it is no reason for people to continue paying attention to the difference. Add the numbers up and count them as one.

The more relevant distinction is between capital and revenue expenses, where the former is towards productive assets that will provide value beyond the fiscal year, and the latter towards salaries and expenses that are consumed within the year.

These five broad ideas should make for a better analysis of all expenditure budgets.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.