Union Budget: challenges of public provisioning in India

Will the first budget of the 12th Five-Year Plan make a serious effort to plug loopholes in revenue collection and increase spending on social welfare?

By Subrat Das
Published: Saturday 03 March 2012

Subrat DasThe Union Budget for 2012-13 would be presented in Parliament on March 16. The Budget accounts for roughly half the total budgetary spending in the country every year, and the experience of the past decade suggests the nature and direction of public spending in the country is getting influenced strongly by the policies adopted by the Union government. The forthcoming Budget becomes even more relevant since 2012-13 would be the first year of the new Five-Year Plan.

The 12th Five-Year Plan, which would be implemented across the country during 2012-13 to 2016-17, offers a significant opportunity to our government for radically improving the approach towards public provisioning for socio-economic development. However, in order to make any drastic improvement, the government needs to recognise a number of critical issues pertaining to planning and budgeting in the country and make a concerted effort to address these in the 12th Plan. 

In this context, it would be worthwhile to highlight some of the critical challenges in the sphere of public provisioning for socio-economic development in the country that demand urgent attention by the Union government and need to be addressed in the Budget.

Low tax-GDP ratio

The overall magnitude of public resources available to the government in India for making investments towards socio-economic development remains inadequate in comparison to several other countries, mainly owing to the low  tax revenue collections. The total tax revenue collected by the Centre and states (combined) has fallen from the already low level of 17.4 per cent of GDP in 2007-08 to 14.7 per cent of GDP in 2010-11. Hence, it is critical to emphasize the need for and the feasibility of increasing the country’s tax-GDP ratio, which would enable our government to provide more resources for development spending in crucial sectors. In this context, the Union Budget for 2012-13 should focus on, among other things, reducing significantly the amount of tax revenue forgone due to a plethora of exemptions in the Central government tax system, improving the collection of tax revenue in detected cases of tax evasion and plugging the loopholes in India’s Double Taxation Avoidance Agreements and Tax Information Exchange Agreements with other countries, particularly tax havens like Mauritius, Singapore and Cayman Islands, so as to collect higher amounts of taxes from the private corporate sector, especially multinational corporations that exploit such loopholes to minimise their tax liability in India.

Inadequate spending on social sectors

While a number of progressive legislations pertaining to basic education, food security and health have been enacted or drafted by the Union government over the past few years, the acute need for a significant increase in public spending on these essential sectors has been ignored in the three Union Budgets of the present government—2009-10, 2010-11 and 2011-12. In fact, the direction of these three Budgets has been towards a conservative fiscal policy that strongly advocates compression of public expenditure. 

We must note here that India’s total public spending every year on social sectors—combined budgetary spending by the Centre and states on sectors like education, health, water, sanitation and nutrition—continues to be less than 7 per cent of GDP, while most developed countries have been investing much greater proportion of public resources on such sectors for decades now. The average level of budgetary spending on social sectors in the OECD countries in 2006, excluding their social security payments, was 14 per cent of GDP, nearly double the level of budgetary spending on social sectors in India. Out of India’s total public spending on social sectors, the direct contribution by the Union government has been only around 30 per cent or roughly 2 per cent of GDP, hence small increases in social sector spending from the Union Budget witnessed over the past eight years (since 2004-05) have not translated into visible increase in overall public spending on these sectors in the country. Hence, the Union Budget for 2012-13 needs to steer the country towards a significant increase in its public investments on social sectors.

Systemic weaknesses need to be addressed

The Union government needs to pay adequate attention to systemic weaknesses in the government apparatus at the state, district and sub-district levels, which have constrained the quality of implementation of most of the development schemes over the past decade. Non-plan expenditure—almost two-third of total public expenditure in the country, which is outside the purview of the Planning Commission—to a significant extent shapes the strength of the state government apparatus, in terms of availability of regular cadres of qualified staff and adequacy of government infrastructure, for implementing Plan schemes. However, over the past decade, non-plan expenditure in social sectors has been checked by many states due to the emphasis of the prevailing fiscal policy on reduction of deficits through curtailment of public expenditure. In this regard, Union Budget 2012-13 needs to reflect government’s recognition of this problem of acute shortage of staff in most of the sectors (particularly the social sectors) and its intent to address the same.

Lack of responsiveness to disadvantaged sections
The Planning Commission and the Union government have recognized since long the need for making a distinction between incidental benefits for any of the disadvantaged sections of our population and direct policy-driven benefits for them from public expenditure. This recognition has led to the adoption of Plan strategies like, the Scheduled Caste Sub Plan (SCSP), the Tribal Sub Plan (TSP), and budgetary strategies like gender responsive budgeting. However, the deep rooted problems in implementation of these strategies have persisted even in the 11th Five-Year Plan. In this context, the 12th Five-Year Plan and the Union Budget for 2012-13 need to have strong measures for making public provisioning in the country more responsive to the disadvantaged sections of our population. 

It remains to be seen to what extent the Union government recognises these deep-rooted challenges in the sphere of public provisioning for socio-economic development in the country and makes a serious effort to address at least some of them in the Union Budget 2012-13.

Subrat Das is executive director of Centre for Budget and Governance Accountability


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