Taking Stock: Skewed priorities of the government's budget

Image credit: CNS: citizen-news.org
Dr Rahul Pandey, CNS Columnist
Skewed Priorities of the government: Write-off in customs duty on gold, diamond and jewellery is about twice the cut in total budget for health, education, women and child development, drinking water and sanitation!

The 2015-16 Budget and the Statement of Revenue Impact of Tax Incentives in 2014-15 reveal what is high and low on Modi government’s priority. The strongest priorities appear to be to promote corporate sector and physical infrastructure. The strongest disdain appears to be for the key social infrastructure sectors of health, women and child development, drinking water and sanitation, and education. Incentive for the former is not a problem in itself. It is when we evaluate it together with disincentive for the latter that the skewed priorities become manifest. If the government continues with these priorities, this has clear implications, largely dire, for economic and social pathway that India will take in the next several years.

What’s preferred?

Let us look at the preferences first. Items that strike the most are: (i) announcement to cut corporate income tax by 5% over five year period, (ii) drastic hike in 2015-16 budget allocation by 126% or INR 47,720 crore for road transport and highways, and by 54% or INR 34,416 crore for railways, as compared to 2014-15 budget (iii) INR 75,592 crore of revenue foregone in 2014-15 due to tax incentives or subsidies on customs duty for gold, diamond and jewellery, which comprises 25% of total revenue foregone on account of customs duty incentives, and (iv) INR 62,399 crore of revenue foregone in 2014-15 on account of various incentives or subsidies on corporate income tax.

The budget figure for road transport and highways includes both Central Plan outlay and States and Union Territories’ Plan outlay allocated by the Centre. There is almost no change in State and UT outlay for roads and bridges, implying that most of the increase in this sector is for national highways. There is also no increase in Pradhan Mantri Gram Sadak Yojana.

The figures of revenue foregone are on account of various tax incentives such as special tax rates, exemptions, rebates and deductions. The Statement of Revenue Impact of Tax Incentives describes these as indirect ‘subsidy’ to preferred tax payers. Since such tax subsidy results in loss of revenue to the government, this statement is also called the Statement of Revenue Foregone. In this statement the government publishes revenues foregone due to all kinds of subsidies on corporate tax, individual income tax, excise duties and customs duties for various goods. Here we have reported only the exemptions on precious stones and jewellery and corporate tax as those benefits go mainly to the rich companies and well-off individuals.

What’s not?

Let us now turn to the main sectors and programmes that have been discouraged by means of major funding cuts in the 2015-16 budget. Four important Ministries and sectors that constitute bulk of the social infrastructure – Health and Family Welfare, Women and Child Development, Drinking Water and Sanitation, and Human Resource Development (including education) – face a total cut in funds of INR 40,205 crore as compared to 2014-15 budget. This includes both Central Plan fund and Centre’s assistance to State and UT Plan fund.

The government first reduced the 2014-15 budget allocation for Ministry of Health and Family Welfare by 20% (i.e. by about INR 6,500 crore) in a revision in December 2014, and later maintained that reduced allocation in the 2015-16 budget. The budget for Ministry of Women and Child Development has been reduced by 52% or INR 10,818 crore, and that for Ministry of Drinking Water and Sanitation by 59% or INR 9,026 crore. It must be noted that the entire Swaccha Bharat Abhiyaan is included in Drinking Water and Sanitation sector. In other words, in spite of Modi’s rhetoric of Swaccha Bharat the total fund allocation in 2015-16 for all governmental programmes of cleanliness, drinking water and sanitation improvement has actually gone down by 59% from budgeted allocation of 2014-15. Finally, the budget for Ministry of Human Resource Development, that includes school education, literacy and higher education, has been cut by 20% or INR 13,853 crore. Majority of this cut is in programmes of school education including setting up model schools at Block level. There is no cut in higher education fund.

Skewed priorities

The stark policy bias of the government can be seen from the fact that the revenue foregone on account of customs duty write-offs on precious stones and jewellery alone is about twice the combined cut in Central and State Plan outlay funds of four social infrastructure sectors of health, women and child development, drinking water and sanitation, and education. It is also more than twice the annual fund of MNREGA. If only 30% of total foregone revenue of corporate tax and customs duty on jewellery was recovered, it would be sufficient to make the funds of all four social infrastructure sectors in 2015-16 at par with their 2014-15 budget allocation. It is sad that the government could not even find the fund required to keep health and education at the level of 2014-15 budget while it gave away much more by subsidizing customs duty on jewellery.

Improvement and expansion of social infrastructures such as health and education lays foundation for widespread prosperity. It plays greater role than mere physical infrastructure in making the poor and low-income populations capable to access opportunities thrown up by economic growth. Exclusive focus on physical infrastructure such as highways and railways will certainly facilitate economic growth, but socially and economically weaker sections may not be able to harness those opportunities if they are deprived of basic health care and education during various stages of upbringing. Trickle-down effect will not work. In the absence of adequate social infrastructure and the presence of various incentives for corporate sector, it will be mostly the already well-off who will continue to benefit from economic growth.

This is a bleak scenario for India, given that the state of health, education and sanitation for the majority of people is at abysmally poor level. For instance, on almost all the health indicators published by WHO such as life expectancy, maternal mortality rate, infant/neonatal/child mortality rate, % of underweight and undernourished children, hospital beds per 10,000 population, % of people without access to improved drinking water and sanitation, India currently ranks among bottommost countries in the world, far below all the other BRICS nations and the low-middle income nations that have achieved near universal health coverage. On several indicators it ranks worse than even majority of its South Asian neighbours.

All successive Indian governments have acknowledged the facts about poor health condition of India’s population and weak public health care systems. They admit that a key reason for this state of affairs is the constraint of extremely low level of public health expenditure. India’s public health expenditure is about 1.3% of its GDP, which compares dismally with other BRICS countries that spend 3-8% of their GDP on public health, and with high-income countries that spend 5-10%. Per capita public health expenditure in other BRICS countries is 5-18 times larger than in India in terms of purchasing power parity (and even more in absolute terms).

Modi government’s own National Health Policy 2015 Draft mentions, “global evidence shows that unless a country spends at least 4-5% of its GDP on public health, basic health care needs are seldom met”.  Since 4-5% implies drastic jump, the Health Policy Draft suggests a target for public health expenditure of 2.5% of GDP. If this target has to be met in the next four years, public health funding must increase annually by about 25%. In light of these facts it is shameful that in the latest budget the government has reduced health expenditure by 20% and gone back on its own commitment. The same can be said for education and sanitation.

The central government hopes that the states will make up for the funding gap through their increased share of central tax revenue. However, given the generally tight fiscal condition of the states and the diversity in priorities and willingness of different states, the combined government expenditure of both the centre and states will most certainly fall in percentage terms, and is likely to decline in absolute terms too. Therefore, unless the government makes mid-course budget correction to significantly hike the funds for social infrastructure sectors, it can be said that it is determined to push India more aggressively on the path of GDP growth at the cost of economic inequality, further marginalizing of the poor, and social conflicts.

Add to above list the government’s ongoing proposal to make it easy to acquire farm land for industrial corridors, infrastructure and PPP (public-private-partnership) projects by removing the crucial consent and social impact assessment clauses from the Land Acquisition and Rehabilitation Act of 2013, and the contradiction becomes starker.

Dr Rahul Pandey, CNS Columnist
31 March 2015
(About the author:  Rahul Pandey has interests in supply chain management, operations research, energy and environment policy, sustainable development, physics, and biological evolution. Formerly he was a faculty member at IIT Bombay and IIM Lucknow. He is currently an entrepreneur and teaches at IIM Lucknow as adjunct faculty. He can be reached at rahulanjula@gmail.com)

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