An Unnoticed Reform

Budget to be presented on February 1: FinMin

There is no justification for a separate Rail Budget when allocation for other departments like defense, roads and highways are much more and yet form part of general budget

By K R Sudhaman

A silent but major economic reform has happened in the country which has largely gone unnoticed. Scrapping of Rail Budget and merging it with general budget, doing away with distinction of plan and non plan expenditure and advancing of general budget to February one are certainly not a small reforms step but have a major, positive and far-reaching benefit to the economy that has not been fully understood.

Scrapping of nearly a century old practice of having separate Railway budget is yet another step to dismantle colonial hangover. Rail Budget was started by British in 1924 as at that time rail budgets were very large and at time almost that of general budget financially. 

Rail budget will be merged into general budget from the coming financial year. Nowhere in the World there is a separate Rail Budget. Somehow in India, this archaic practice has been continued even 70 years after independence to perpetuate populism, which all political parties enjoy indulging in. 

Finance Minister Arun Jaitley is right in saying there is no justification for a separate Rail budget when allocation for certain other departments like defense, roads and highways are much more and yet form part of general budget. 

Announcements in rail budget seldom get implemented for paucity of resources. Yet Rail Budgets announce several projects year after year because of popular demand by political parties to the satisfaction of their respective constituency knowing full well such projects are not economically viable and technically feasible. Rail budgets have been exploited the most during the coalition governments. This has been bleeding the Railways and as a result it has not been able to take up several commercial viable projects to the detriment of the economy.

The rail Budget was separated from the main Budget, following recommendation of a panel headed by British railway economist William Acworth in 1920-21. The rail Budget has had a separate existence from the general Budget since 1924 when the British spun it off for a better focus on India’s most important infrastructure network. 

The Railways then accounted for 70 percent of the total budget. For the British Railways were important as it facilitated them in troop movements and establishing their control in the entire Indian Peninsula. But today it accounted for mere 15 percent of the total union budget despite India having largest rail network in the World. It has potential to implement several new projects that can push economic growth by 1-2 percent. In this context it is certainly an historic step as it will help in moving towards minimum government and maximum governance. Global and domestic business sentiments too would get a further fillip and so would help the environment for doing business in the country. It is certainly a step towards commercialization of railways. 

More projects could now be expected under public-private partnership. The commercialization of railway properties, particularly railway stations located in prime locations in various cities, could now be hastened. More commercial shopping malls and office complexes can come up with more ease.

The merger of rail budget with general budget was mooted by a committee headed by NITI Aayog member Bibek Debroy, as part of the restructuring of the Railways. This merger will certainly help in tackling structural problems faced by the railways, thereby push modernization of railways. It would also help in finding resources through commercialization of railway property. More projects could also come up in the manufacture of engines, coaches, signal equipment and so on in joint venture. Accounting practices will also improve.

 In fact, there is crying need for reforming the presentation of general budget itself.  No country has such an elaborate general budgets with several booklets, a long winding budget speech in Parliament with several populist measures included.  Some of the budget announcements do not see the light of the day during that financial year. In China budget presentation is hardly 10-15 minutes job with government presenting one or two pages of statement of accounts for the concerned year and projections of revenue, expenditure and deficits for the subsequent year. In several advanced economies budget presentation is a low key affair as tax rates are hardly tinkered with. 

Only in India tax rates are frequently changed to pursue vote bank politics and provide succor to some vested interests. India is one of the few counties where there is huge tax exemption list. The government loses as much as Rs 5.75 lakh crore annually due to tax exemptions mainly to corporate. This is almost equivalent to the fiscal deficit of the country.

The indirect taxes in particular are tinkered with so minutely to serve the vested interests as well as populism.  Of course some sanity has come to budget making in recent years with government moving towards three or four tax rates. Some stability on direct taxes has now been achieved and with the rollout of Goods and Services Tax, there would be some stability in indirect tax rates as well.   

The 92 year old tradition of separate Rail Budget is certainly a step in the right direction as it has deglamorised the railway portfolio and discourage the leveraging of the Rail Budget for handing over largesse to vote banks.  Every year discussion on Rail Budget is one of the longest in parliament as majority of members and parties want to speak on it. The debate is invariably hackneyed with every member demanding more trains, more railway lines and more stations in his or her constituency unmindful of economic viability and technical feasibility. This is one of the reasons for several crores worth of projects have not seen the light of the day for decades. In fact the Rs 1.5-2 lakh crore of rail projects are pending and foundation stones laid for these projects have remained buried for decades.

Railway Minister Suresh Prabhu is justified in saying that this is the biggest reforms done till date in the sector. The financial autonomy will remain with the railways. The existing financial arrangements will continue and all revenue expenditure, working expenses, pay and allowance and pension will continue to be met by revenue receipts of the railways. Some experts and former finance ministers and railway ministers argue that though on paper financial autonomy will not be lost, experience show that it will be as finance minister over a period of time will have more say on railway allocation than the railway minister as was the case with gross budgetary support to erstwhile planning commission. The friction is bound to occur, they argue.

But the immediate benefit is that Railways will no longer have to pay dividends hereafter. The railways pay nearly Rs 10,000 crore as dividend annually and this amount can now be put to use for capital expenditure of railways. It will also certainly reduce paperwork and do away with separate passage of appropriation bill for railways. Railways can now adopt rational approach to unviable projects. 

Along with this merger, the cabinet decided to remove the distinction between Plan and non-Plan expenditure, a commendable initiative to simplify and streamline decision-making within the government. Year after year, nearly 20 t0 30 percent of plan expenditure remain unutilized due to various reasons including some political making a mockery of this distinction. The idea of merging these two heads of expenditure in the government was first mooted by Prime Minister Economic Advisory Council Chairman C Rangarajan some years back.  It is a positive development as it would help spending money in a more useful and integrated manner. What is the point in continuing with the farce of making huge allocation for plan expenditure when they are not actually spent? Instead the money could be put to better use by spending in areas in which it ought to be.

Another important change brought about is the cabinet clearance to advance the presentation of the Union budget to February one, instead of last day of the month. This is a significant development as this would help in ensuring that the entire budget exercise, which is now a three stage passage in parliament, is completed before the end of the financial year. Usually the general budget is presented on February 28 or 29 if it is a leap year and entire budget exercise have to be completed within 75 days of budget presentation. This means the budget will be passed by May 15. As a result government is forced to go in for what is called vote-on-account along with presentation of the budget for government expenditure for two months of April and May in the new financial year. As per the constitution, the government cannot spend any money from the consolidated fund of India without getting Parliamentary approval. Since the passage of finance bill is completed only by May first week, government will have to seek temporary approval by way of vote on account for spending in April and May until the passage of the full budget. This also meant delay in implementation of the planned spending proposed in the budget. 

So by completing this budgetary exercise before March 31, government will now be able to implement its budgetary plans from day one of the new financial year that starts on April one. This will ensure that government does not lose two months of precious time in implementing its planned projects in the New Year. The first stage of budget passage in Parliament is the approval to vote on account. The second stage is passage of demands for grants by various ministries and departments and third and final stage is the passage of finance bill, which provides for various new tax measures in the budget. Now the first stage clearance of vote on account would no longer be required as the whole budget itself will be passed before the new financial year.

At the turn of the century, the then NDA government led by Atal Bihari Vajpayee did away with budget presentation at 5 PM on the last day of February. The then finance minister Yashwant Sinha advanced budget presentation to 11 AM ending yet another colonial practice to suit the British masters. Presenting budget at 5 PM meant it was around noon in London, a convenient time for the British, but not for Indians in India.

By subsuming the Rail Budget in the general budget, the railways would be in a better position to raise funds, from elsewhere including foreign on the strength of the sovereign to invest in projects having long gestation period. The government will have to ensure is that the operational autonomy of Railways is not compromised as feared in some quarters.

Also this move should not become a precursor to privatization of Railways, which may be disastrous in a country like India where the Railways are the life line, particularly for the poor. Along with this merger of rail budget, the government decision to advance the general budget presentation and doing away with the distinction of plan and non-plan expenditure should lead to better planning and spending outcomes in the entire financial year by various ministries and departments. One also hopes these reforms lead to further reforms of general budget presentation in the coming years. It is high time that the country had stable tax rates, which are not tinkered with and tax exemptions done with barring a few exemptions so as to do away with rigmarole budget presentation.