For an Effective Budget, Fin Min Should Have Rejigged Priorities

Budget 2018 was all about schemes without money and enhanced allocation to unproductive areas.

Image of Finance Minister Arun Jaitley used for representational purposes.

(Photo: The Quint)

The Union Budget has a few redeeming features: the outlay on infrastructure creation is up to almost Rs 6 lakh crore, implying that its share in total budgeted expenditure is around 25 percent, significantly higher than what was allocated last year.

This includes a record capital outlay for the Indian Railway (Rs 1.46 lakh crore), a promised five-fold expansion of airport capacity to around 1 billion trips a year, and a 50 percent increase in provision under the smart cities programme.

Among the possible benefits is the generation of some direct and indirect employment, propelled by a boost to economic activities, especially those critically dependent on connectivity such as manufacturing, domestic and international trade, and the underachieving labour intensive sector of international tourism.

These potential benefits can, however, be neutralised by the investment dampening effects of the 10 percent tax on those making large long term capital gains.

The Issue of Agricultural Credit

Sadly, the allocation of the rest (75 percent) of the budgetary expenditure has more to do with political grandstanding than economic vision. Eye catching welfare schemes have been announced: Rs 11 lakh crore of agricultural credit, which will entail substantial direct and indirect cost to the exchequer, health insurance for 10 crore poor families, and a project which will create 1.5 lakh wellness centres.

These schemes need to be examined for desirability and feasibility.

Let us examine the issue of agricultural credit. The 10 percent increase from the already undeservedly large target in the 2017-18 Budget merits examination for three reasons.

First, meticulous research (by CS Rao) shows that about 80 percent of small and marginal farmers (plots smaller than 2 hectares), accounting for 85 percent of the total number of farmers, are bypassed by the formal (and document bound) system of formal credit which provides large chunks of credit to wealthy large farmers.

Second, engagement in munificent and politically motivated loan waivers (Rs 77,000 crore last year) wreaks havoc on exchequers and encourages a culture of defaulting on loans.

Third, bank managers, compelled to meet stiff targets for loan disbursal as well as ceilings for rates of default, resort to significant evergreening (facilitating the use of a new loan to repay an old loan), as revealed by micro evidence collected by Xavier Gine and Martin Kanz of the World Bank.

Reviving an ‘Obese’ Agricultural Credit System

No wonder that ever increasing formal agricultural credit facilitated by the Union Budget (from Rs 7 lakh crore in 2013-14 to the current level of 11 lakh crore) has not done much to shore up growth in agricultural GDP: growth in the last three years, starting 2015-16, has been 1.2 percent, 4.9 percent, and around 2.5 percent.

The obese and unsustainable system of formal agricultural credit is in the ICU; its health has to be revived by downsizing (and revamping), which will in turn release crucial budgetary resources for much-neglected health and education.

The second and third mentioned schemes, for provision of health insurance and creation of a dense wellness network, are good ideas which have been starved of allocations: Rs 2,000 crore and Rs 1,200 crore respectively.

At the usual insurance premium of Rs 4,000 per family, a contribution of Rs 24,000 crore would have to be made by the Union government for providing insurance cover to 10 crore poor families (even if state governments foot the desired 40 percent of the bill), which is 12 times the allocated amount.

The other pledge of Rs 1,200 crore for 1.5 lakh wellness centres is the equivalent of Rs 80,000 per centre.

A rough back of the envelope calculation reveals that establishment and operation of such a centre (with doctor, nurse, basic equipment and a stock of medicine) needs Rs 20 lakh. A total allocation of Rs 30,000 crore – 25 times the sanctioned amount – is needed.

Hopes for a Visionary Budget

What alterations are, therefore, needed to make the present Budget more visionary? To start with, the target on agricultural credit can be reduced to Rs 8.3 lakh crore, the real equivalent of the level in 2013-14.

The resulting saving of Rs 2.7 lakh crore worth of credit can be meaningfully employed in the following manner: an additional allocation for the healthcare sector which will help fully implement both promised schemes; an additional Rs 16,000 crore for the provision of early child nutrition through Aanganwadis (this doubles the original allocation, a crucial step given the widespread incidence of child malnutrition in India); an additional outlay on education (again a doubling); and allocation for subsidising essential agricultural inputs such as seeds and agricultural implements and constructing a dense network of minor irrigation works, which will be accessible to all cash-strapped small and marginal farmers.

These changes are necessary for many reasons. In the last two decades, the Indian economy has undergone unprecedented growth. Yet about 60 percent of the Indian population survives on less than Rs 80,000 per household per annum. This population’s condition and capacity to earn, can be improved only if the government increases expenditure on health and child nutrition as well as education, as proposed.

Key to Undiminished Long-Term Growth

At present, government expenditure on health and education in India is 1.2 percent and 3.7 percent of the GDP. The governments of almost all of the 20 richest countries, with per capita incomes, in terms of purchasing power, seven to 14 times that of India, spend 7 to 9 percent and 5 to 7 percent (United Nations data) of GDP on these sectors.

This implies per capita health and education expenditures which are at least 42 and eight times the corresponding Indian levels. The Indian government, forever trying to catch up with China, should realise that the latter, with a per capita income which is 2.25 times the Indian level, spends per capita amounts on health and education which are five and at least 2.5 times the Indian levels.

Government assistance, which addresses the whole lot of impoverished farmers, rather than a select and (relatively) privileged few, and greatly enhanced disbursal on health and education holds the key to undiminished long term economic growth and the eradication of poverty. To implement the proposed changes, however, grandstanding and populism have to give way to benevolent pragmatism and political will.

(The author is a Professor of Economics, Jadavpur University, Kolkata. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)