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Daily Current Affairs 28.01.2022 (Central Asia meet forms Afghan group,Air India back in Tata Group hangar Govt. transfers shares to Tata Sons unit Talace,India’s economy and the challenge of informality,Understanding the Budget formulation)

Daily Current Affairs 28.01.2022 (Central Asia meet forms Afghan group,Air India back in Tata Group hangar Govt. transfers shares to Tata Sons unit Talace,India’s economy and the challenge of informality,Understanding the Budget formulation)

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1. Central Asia meet forms Afghan group

PM says countries ‘concerned about the developments in Afghanistan’; leaders discuss connectivity

Overcoming the lack of land connectivity between India and Central Asia’s landlocked countries was one of the “main issues of discussion” during the first India-Central Asia Summit hosted by Prime Minister Narendra Modi with the Presidents of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, officials said on Thursday.

The leaders also spoke at length about concerns over Afghanistan, sharing the “same concerns and same objectives” in broader terms and agreed to setting up a Joint Working Group (JWG) of senior officials, said Reenat Sandhu, Secretary (West) in the Ministry of External Affairs, listing those concerns as the need for immediate humanitarian assistance, ensuring the formation of a truly representative and inclusive government, combating terrorism and drug trafficking, and preserving the rights of women, children and minorities.

Mr. Modi tweeted that all countries at the summit were “concerned about the developments in Afghanistan”. “In this context, our mutual cooperation has become even more important for regional security and stability,” he said.

More meetings proposed

Mr. Modi also proposed a number of high-level exchanges between the two sides, including biannual summits and annual meetings of the Foreign, Trade and Cultural Ministers and Secretaries of Security (National Security Advisers) to “strengthen cooperation in the areas of political and development, partnership, trade and connectivity, culture and tourism and security”, the officials said, adding that these proposals were accepted, along with a plan to build a “Central Asia Centre” in New Delhi. They also announced two “Joint Working Groups” on Afghanistan and the Chabahar port project.

“Further development of mutual connectivity is essential for enhanced trade and commerce between India and Central Asian countries in the context of their landlocked nature and lack of overland connectivity with India,” said the “Delhi Declaration” joint statement issued at the end of the 90-minute summit.

2. Air India back in Tata Group hangar Govt. transfers shares to Tata Sons unit Talace

The Union government on Thursday transferred its shares in Air India, along with control and management, to the Tata Sons subsidiary Talace, ending a disinvestment process that started five years ago and saw a failed attempt. The airline has been a public sector undertaking from 1953.

The transaction covers Air India, Air India Express and the government’s entire 50% stake in a ground handling company AI SATS.

“We are excited to have Air India back in the Tata Group and are committed to making this a world-class airline. I warmly welcome all the employees of Air India to our Group and look forward to working together,” N. Chandrasekaran, chairman, Tata Sons, said. He met Prime Minister Narendra Modi.

Disinvestment

  • Disinvestment can also be defined as the action of an organization (or government) selling or liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’
  • In most contexts, disinvestment typically refers to the sale from the government, partly or fully, of a government-owned enterprise.
  • A company or a government organization will typically disinvest an asset either as a strategic move for the company or for raising resources to meet general/specific needs.

Objectives of Disinvestment

  • To reduce the financial burden on the government
  • To improve public finances
  • To introduce, competition and market discipline
  • To depoliticize non-essential services
  • To encourage a wider share of ownership
  • For fund growth

Benefit of Disinvestment

  • Improves corporate governance: It would result in introduction of corporate governance in the privatized companies by freeing the PSEs from the Government control and give more scope to innovation. Enhanced corporate and with the introduction of independent Directors.
  • Develops and deepens the capital market through spread of equity culture. The disinvestment would benefit the small investors and employees as it would lead to a wider distribution of wealth in the form of public offerings of privatized companies.

Disinvestment funds can be utilised for long-terms goals such as:

  • Financing large-scale infrastructure development.
    • Investing in the economy to encourage spending
    • Expansion and Diversification of the firm
    • Repayment of Government Debts: Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
    • Investing in social programs like health and education
  • This also creates fiscal space for relocation of resources locked with CPSEs. Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realize a high value.
  • Resources locked in sectors developed enough to raise money from the market are channelized into areas of economy that are less likely to access resources for the market because of their stage of economic development. Letting go of these assets is best in the long term interest of the tax payers as the current yield on these investments in abysmally low.
  • Unlocking of shareholder value: It is done with the help of issuing IPO. IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. Offering an IPO is a money-making exercise. Every company needs money for expansion, to improve their business, to better the infrastructure, to repay loans, etc.
  • Employees: Employees of a firm are benefitted by disinvestment through:
    • Pay rises, which has been done in past disinvestments.
    • Greater opportunities and avenues for career growth and further employment generation through capacity expansion.

Disinvestment Types

Minority disinvestment

  • A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.
    • Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule & co. Ltd., CMC Ltd etc. Examples of minority sales via offer for sale include recent issues of power Grid Corp. Of India Ltd., Rural Electrification corp. Ltd., NTPC Ltd., NHPC Ltd. Etc.
    • The present government has made a policy statement for FY 2018-19 that all disinvestments would only be minority disinvestments through public offerings.

Majority disinvestment

  • A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake.
    • Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, and KRL to BPCL.
    • Alternatively, these strategic partners can be private entities, like the sale of Modern Foods to Hindustan Lever Ltd., CMC to Tata Consultancy Services Ltd. (TCS).
    • Also, same as in the case of minority disinvestment, in majority disinvestment cases the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

Complete privatization

  • Complete privatization is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCL.
    • Disinvestment and privatization are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in privatization.
    • When the government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatized’, because, with 26%, it can still stall vital decisions for which generally a a special resolution (three-fourths majority) is required.

Privatization and disinvestment

  • Privatization implies a change in ownership, resulting in a change in management. The privatization of public sector enterprises will occur only when govt. sells more than 51% of its ownership to private entrepreneurs.
  • Disinvestment, on the other hand, has a much wider connotation as it could either involve dilution of govt. stake to a level that results in a transfer of management or could also be limited to such a level as would permit govt. to retain control over the organization.
  • Disinvestment beyond 50% involves the transfer of management, whereas disinvestment below 50% would result in the govt. continuing to have a major say in the undertaking.

Criteria for disinvestment

  • Whether the objectives of the company are achieved.
  • Whether there is decrease in number of beneficiaries.
  • Whether serving the national interest will be affected because of disinvestment
  • Whether private sector can efficiently operate and manage the undertaking.
  • Whether the original rate of return targeted could be possible to achieve or not

Modalities of disinvestment

In order to achieve the various objectives and goals of disinvestment many methods have been formulated and implemented. These includes:

  • Public offerOffering shares of public sector enterprises at a fixed price through the general prospectus, the offer is made to the general public through the medium of recognized market intermediaries.
  • Cross holding: In the case of cross-holding, the govt. would simply sell part of its share of one PSU to one or more PSUs.
  • Golden share: In this model, the govt. retains a 26% share in the PSU. This 26% share will continue to give the govt. The status of the majority shareholder.
  • Warehousing: Under this model, the govt. owned financial institutions were expected to buy the govt‘s share in select PSUs and holding them until a third buyer emerged.
  • Strategic sale: Under this model, govt. sells a major portion (51% and above) of its stake to the strategic buyer and also gives over the management control.
  • Follow on Public Offering: It refers to issuing of shares to investors by a public company that is already listed on an exchange. Retail participation is mostly high in FPOs.
  • Offer for Sale: The features of OFS is given below:
    • The size of the offer shall be at least 1% of the paid-up capital of the company, subject to a minimum of Rs 25 crores.
    • Seller(s) may declare a floor price in the announcement/notice.
    • The duration of the Offer for Sale shall not exceed one trading day.
    • A separate window for the purpose of Offer for Sale of shares shall be created by stock exchanges.
    • The stock exchange shall collect 100% of the order value in cash, at the order level for every buy order/bid.
  • Institutional placement program
    • An institutional placement program refers to the issuance of fresh shares and offers for the sale of shares in a listed issuer for the purpose of achieving minimum public shareholding.
    • The minimum number of allottees for each offer of eligible securities made under the institutional placement program shall not be less than ten.
    • No partly paid-up securities shall be offered.
    • The issue shall be kept open for a minimum of one day or a maximum of two days.
    • Institutional placement programs must not result in an increase in public shareholding by more than ten percent.
    • Allottee cannot sell the allocation/allotment before the period of one year.

Merits of disinvestment

  • Reduce the burden on the government: Disinvestment of loss Making PSU’s, would help the government to invest in profit-making PSU’s which will minimize the burden on the government
  • In the private sector, the decision-making process is quick and decisions are linked with the competitive market changes.
  • The disinvestment process would bring in better corporate governance, exposure to competitive corporate responsibility, improvement in the work environment, etc.
  • The market participation in the capital of PSUs through stock exchanges would enable the market to discover the latent worth of PSUs.
  • The loss-making PSUs can be successfully revived by asking the strategic partner to infuse fresh capital and exercising excellent management control over sick PSUs.

Demerits of disinvestment

  • Selling of profit-making and dividend-paying PSU would result in loss of a regular source of income to the government.
  • There would be chances of ‘asset stripping’ by the strategic partner. Most of the PSUs have valuable assets in the shape of plants and machinery, land and buildings, etc.
  • The government’s policy or disinvestment includes the disposal of both profit-making, as well potentially viable PSUs.
  • Strategic and National Security Concerns: Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security since Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals.
  • Raising funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. It is said that it is the equivalent of selling ‘family silver to meet short-term monetary requirements.

National investment fund

  • On 27 January 2005, the government had decided to constitute a ‘national investment fund’ (NIF) into which the realization from sale of minority shareholding of the government in profitable CPSEs would be channelized.
  • Until 2008-09, 75 percent of the funds under NIF were spent on selected central social welfare schemes (on health, education, employment etc.) and 25 percent of the funds were to be used to meet the capital requirements of profitable PSUs.
  • Due to the economic difficulties created by the global economic recession, the government decided to utilize 100 percent of NIF funds for social welfare schemes until 2013.
  • At present, the funds under NIF exist as a ‘Public Account’ which is outside the Consolidated Fund of India. The funds under NIF are permanent in nature and remain until they are withdrawn or invested for approved purposes
  • Salient features of NIF
    • The proceeds from the disinvestment of CPSEs will be channelized into the national investment fund which is to be maintained outside the consolidated fund of India.
    • The corpus of the national investment fund will be of a permanent nature.
    • The fund will be managed professionally, without depleting the corpus.
    • 75% of the annual income of the fund will be used to finance selected social sector schemes, which promote education, health, and employment. The residual 25% of the annual income of the fund will be used to meet the capital investment requirements.
  • Fund managers of NIF
    • UTI asset management co.LTD.
    • SBI funds management co. PVT.LTD.
    • LIC mutual fund asset management co. LTD.

Policy on disinvestment

  • Citizens have every right to own part of the shares of central public sector enterprises. This is done through IPOs and FPOs.
  • Central public sector enterprises are the wealth of the nation and this wealth should rest in the hands of the people.
  • While pursuing disinvestment, the majority shareholding of a least 51% and management control of the central public sector enterprises to be retained by the government.

Arguments against disinvestment

  • Government’s stakes in CPSEs would squeeze this important source of revenue for the government. Thus, essentially implying that the real beneficiaries would not be the ordinary retail investor but institutional investors.
  • In the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes.
  • Employees of PSUs would lose jobs or benefits offered by the government.

Use of disinvestment proceeds

  • 75% to finance selected social sector schemes, which promote education, health and employment.
  • 25% to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.
  • Accordingly, from April 2009, the disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programs of the government, namely:
    • Mahatma Gandhi National Rural Employment Guarantee Scheme
    • Indira Awas Yojana
    • Rajiv Gandhi Gramin Vidyutikaran Yojana
    • Jawaharlal Nehru National Urban Renewal Mission
    • Accelerated irrigation benefits program
    • Accelerated power development reform program

Factors responsible for low disinvestment in India

  • Unfavourable market conditions
  • Offers made by the government were not attractive for private sector investors
  • Lot of opposition on the valuation process
  • No clear-cut policy on disinvestment
  • Strong opposition from employee and trade unions
  • Lack of transparency in the process
  • Lack of political will
  • Generally, profit making companies will not be privatized.
  • As per the National Common Minimum Programme (NCMP) the government retain existing ‘Navratna’ companies in the public sector.
  • Loss making companies either sold off or closed, after all workers get their legitimate dues and compensation.
  • The government has approved the constitution of a National Investment Fund (NIF) comprising of proceeds from disinvestment of public sector units
  • The govt. has also given in principal approved for listing of currently unlisted profitable PSEs each with a net worth in excess of Rs.200 crore, through an initial public offer (IPO).

Disinvestment programs in PSE’s

  • The disinvestment process, which began in 1991-92 with the sale of a minority stake in some public sector undertakings
  • The new policy in this regard is that the government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning
  • The govt. is committed to devolving full managerial and commercial autonomy to successful, profit-making companies operating in a competitive environment.
  • Some of the PSUs in which disinvestment is done are: BHEL, BPCL, CONCOR, GAIL, HCL, SAIL, NTPC, NMDC, VSNL, MTNL.

3. India’s economy and the challenge of informality

Policy efforts to formalise the economy will have limited results as the bulk of informal units are petty producers

Since 2016, the Government has made several efforts to formalise the economy. Currency demonetisation, introduction of the Goods and Services Tax (GST), digitalisation of financial transactions and enrolment of informal sector workers on numerous government Internet portals are all meant to encourage the formalisation of the economy. But why the impetus for formalisation? The formal sector is more productive than the informal sector, and formal workers have access to social security benefits.

The above-mentioned efforts are based on the “fiscal perspective” of formalisation. This perspective appears to draw from a strand of thought advanced by some international financial institutions such as the International Monetary Fund, which foregrounds the persistence of the informal sector to excessive state regulation of enterprises and labour which drives genuine economic activity outside the regulatory ambit. It underplays informality as an outcome of structural and historical factors of economic backwardness. Arguably, excessive regulation and taxation ensure the endurance of informal activities. Hence, it is believed that simplifying registration processes, easing rules for business conduct, and lowering the standards of protection of formal sector workers will bring informal enterprises and their workers into the fold of formality.

The fiscal perspective has a long lineage in India going back to tax reforms initiated in the mid-1980s. Early on, in an attempt to promote employment, India protected small enterprises engaged in labour intensive manufacturing by providing them with fiscal concessions and regulating large-scale industry by licensing. Questions of efficiency aside, such measures led to many labour-intensive industries getting diffused into the informal/unorganised sectors.

Further, they led to the formation of dense output and labour market inter-linkages between the informal and formal sectors via sub-contracting and outsourcing arrangements (quite like in labour abundant Asian economies). In the textile industry, the rise of the power looms at the expense of composite mills in the organised sector and handlooms in the unorganised sector best illustrates the policy outcome. While such policy initiatives may have encouraged employment, bringing the enterprises which benefited from the policy into the tax net has been a challenge. The challenge is only partly administrative. Political and economic reasons operating at the regional/local level in a competitive electoral democracy are responsible for this phenomenon, too.

Sign of underdevelopment

Undoubtedly, widening the tax net and reducing tax evasion are necessary. However, global evidence suggests that the view that legal and regulatory hurdles alone are mainly responsible for holding back formalisation does not hold much water. A well-regarded study, ‘Informality and Development’ (https://bit.ly/3KOBEVx), argues that the persistence of informality is, in fact, a sign of underdevelopment. Across countries, the paper finds a negative association between informality (as measured by the share of self-employed in total workers) and per capita income. The finding suggests that informality decreases with economic growth, albeit slowly. A similar association is also evident across major States in India, based on official PLFS data. Hence, the persistence of a high share of informal employment in total employment seems nothing but a lack of adequate growth or continuation of underdevelopment.

Transformation in Asia

The defining characteristic of economic development is a movement of low-productivity informal (traditional) sector workers to the formal or modern (or organised) sector — known as structural transformation. East Asia witnessed rapid structural change in the second half of the 20th century as poor agrarian economies rapidly industrialised, drawing labour from traditional agriculture. However, in many parts of the developing world, including India, informality has reduced at a very sluggish pace, manifesting itself most visibly in urban squalor, poverty and (open and disguised) unemployment.

Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of GDP. Combining the International Labour Organization’s widely agreed upon template of definitions with India’s official definition (of formal jobs as those providing at least one social security benefit — such as EPF), the share of formal workers in India stood at 9.7% (47.5 million). Official PLFS data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers. Significantly, the prevalence of informal employment is also widespread in the non-agriculture sector. About half of informal workers are engaged in non-agriculture sectors which spread across urban and rural areas.

It has many layers

It needs to be appreciated that informality is now differentiated and multi-layered. Industries thriving without paying taxes are only the tip of the informal sector’s iceberg. What remains hidden are the large swathes of low productivity informal establishments working as household and self-employment units which represent “petty production”. To conflate the two distinct segments of the informal sector would be a serious conceptual error. Survival is perhaps the biggest challenge for most informal workers (and their enterprises), and precarity defines their existence.

Despite (well-intentioned) efforts at formalisation, the challenge of informality looms large for India. The novel coronavirus pandemic has only exacerbated this challenge. Research by the State Bank of India recently reported the economy formalised rapidly during the pandemic year of 2020-21, with the informal sector’s GDP share shrinking to less than 20%, from about 50% a few years ago — close to the figure for developed countries. As we have argued elsewhere (https://bit.ly/3G6JtST), these findings of a sharp contraction of the informal sector during the pandemic year (2020-21) do not represent a sustained structural transformation of the low productive informal sector into a more productive formal sector. They are a temporary (and unfortunate) outcome of the pandemic and severe lockdowns imposed in 2020 and 2021. The informal sector will perforce spring back to life soon, for sheer survival, to produce whatever it can, using its abundant labour and meagre resources.

The necessary elements

Policy efforts directed at bringing in the tip of the informal sector’s iceberg into the fold of formality by alleviating legal and regulatory hurdles are laudable. However, these initiatives fail to appreciate that the bulk of the informal units and their workers are essentially petty producers (self-employed and casual workers) eking their subsistence out of minimal resources. Therefore, these attempts will yield limited results. The continued dominance of informality defines under-development. Policy-induced restrictions are minor irritants, at best. The economy will get formalised when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers. A mere registration under numerous official portals will not ensure access to social security, considering the poor record of implementation of labour laws.

4. Understanding the Budget formulation

How does the Budget affect economy and growth? In a pandemic year, is fiscal policy tuned to addressing contemporary challenges of unemployment and low output growth rate? 

There are three major components of the Budget —expenditure, receipts and deficit indicators. Depending on the manner in which they are defined, there can be many classifications and indicators of expenditure, receipts and deficits. Total expenditure can be further be divided into capital and revenue expenditure. Similarly, the receipts of the Government also have three components —revenue receipts, non-debt capital receipts and debt-creating capital receipts while fiscal deficit means the difference between total expenditure and the sum of revenue receipts and non-debt receipts.

Since different components of expenditure and revenue can have different effects on income of different classes and social groups, the Budget has implications for income distribution as well.

In India the fiscal rule is guided by the recommendations of the N.K. Singh Committee Report. Allowing for some deviations under exceptional times, it has three policy targets —maintaining a specific level of debt-GDP ratio (stock target), fiscal deficit-GDP ratio (flow target) and revenue deficit-GDP ratio (composition target).

The story so far: With the economy still hurting from the pandemic, the Budget on February 1 is likely to address concerns around growth, inflation and spending. The Budget, which will be tabled in Parliament by Finance Minister Nirmala Sitharaman, is the Government’s blueprint on expenditure, taxes it plans to levy, and other transactions which affect the economy and the lives of citizens. 

What are the major components of the Budget? 

There are three major components — expenditure, receipts and deficit indicators. Depending on the manner in which they are defined, there can be many classifications and indicators of expenditure, receipts and deficits. 

Based on their impact on assets and liabilities, total expenditure can be divided into capital and revenue expenditure. Capital expenditure is incurred with the purpose of increasing assets of a durable nature or of reducing recurring liabilities. Consider the expenditure incurred for constructing new schools or new hospitals. All these are classified as capital expenditure as they lead to creation of new assets. Revenue expenditure involves any expenditure that does not add to assets or reduce liabilities. Expenditure on the payment of wages and salaries, subsidies or interest payments would be typically classified as revenue expenditure. 

Depending on the manner in which it affects different sectors, expenditure is also classified into (i) general services (ii) economic services, (iii) social services and (iv) grants-in-aid and contribution. The sum of expenditure on economic and social services together form the development expenditure. Economic services include expenditure on transport, communication, rural development, agricultural and allied sectors. Expenditure on the social sector including education or health is categorised as social services. Again, depending on its effect on asset creation or liability reduction, development expenditure can be further classified as revenue and capital expenditure. 

The receipts of the Government have three components — revenue receipts, non-debt capital receipts and debt-creating capital receipts. Revenue receipts involve receipts that are not associated with increase in liabilities and comprise revenue from taxes and non-tax sources. Non-debt receipts are part of capital receipts that do not generate additional liabilities. Recovery of loans and proceeds from disinvestments would be regarded as non-debt receipts since generating revenue from these sources does not directly increase liabilities, or future payment commitments. Debt-creating capital receipts are ones that involve higher liabilities and future payment commitments of the Government. 

Fiscal deficit by definition is the difference between total expenditure and the sum of revenue receipts and non-debt receipts. It indicates how much the Government is spending in net terms. Since positive fiscal deficits indicate the amount of expenditure over and above revenue and non-debt receipts, it needs to be financed by a debt-creating capital receipt. Primary deficit is the difference between fiscal deficit and interest payments. Revenue deficit is derived by deducting capital expenditure from fiscal deficits. 

What are the implications of the Budget on the economy? 

The Budget has an implication for aggregate demand of an economy. All Government expenditure generates aggregate demand in the economy since it involves purchase of private goods and services by the Government sector. All tax and non-tax revenue reduces net income of the private sector and thereby leads to reduction in private and aggregate demand. But except for exceptional circumstances, the GDP, revenue receipt and expenditure typically show a tendency to rise over time. Thus, the trend in absolute value of expenditure and receipts in themselves has little use for meaningful analysis of the Budget. The trend in expenditures and revenue is analysed either by the GDP or as growth rates after accounting for the inflation rate. 

Reduction in expenditure GDP ratio or increase in revenue receipt-GDP ratio indicates the Government’s policy to reduce aggregate demand and vice-versa. For similar reasons, reduction in fiscal deficit-GDP ratio and primary deficit-GDP ratios indicate Government policy of reducing demand and vice versa. 

Since different components of expenditure and revenue can have different effects on income of different classes and social groups, the Budget also has implications for income distribution. For example, revenue expenditure such as employment guarantee schemes or food subsidies can directly boost the income of the poor. Concession in corporate tax may directly and positively affect corporate incomes. Though both a rise in expenditure for employment guarantee schemes or reduction in the corporate tax would widen the fiscal deficit, its implications for income distribution would be different. 

What are fiscal rules and how do they affect policy?

Fiscal rules provide specific policy targets on the basis of which fiscal policy is formed. Policy targets can be met by using different policy instruments. There exists no unique fiscal rule that is applied to all countries. Rather, policy targets are sensitive to the nature of economic theory and depend on the specificity of an economy. 

In India’s case, its present fiscal rule is guided by the recommendations of the N.K. Singh Committee Report. Allowing for some deviations under exceptional times, it has three policy targets — maintaining a specific level of debt-GDP ratio (stock target), fiscal deficit-GDP ratio (flow target) and revenue deficit-GDP ratio (composition target). 

Though both expenditure and revenue receipts can potentially act as policy instruments to meet a specific set of fiscal rules, tax rates within the existing policy framework happen to be determined independent of the expenditure requirement of the economy. Accordingly, in the present institutional framework in India, it is primarily the expenditure which is adjusted to meet the fiscal rules at given tax-ratios. Such an adjustment mechanism has at least two related, but analytically distinct, implications for fiscal policy. First, independent of the extent of expenditure needed to stimulate the economy or boost labour income, existing fiscal rules provide a cap on expenditure by imposing the three policy targets. Second, under any situation when the debt-ratio or deficit ratio is greater than the targeted level, expenditure is adjusted in order to meet the policy targets. By implication, independent of the state of the economy and the need for expansionary fiscal policy, existing policy targets may lead the Government to reduce expenditure. In the midst of the inadequacies of fiscal policy to address the contemporary challenges of unemployment and low output growth rate, the nature and objective of fiscal rules in India would have to be re-examined. 

Budget in the Indian Constitution

The term ‘Budget’ is not mentioned in the Indian Constitution; the corresponding term used is ‘Annual Financial Statement’ (article 112).

What are the constitutional requirements which make Budget necessary?

Article 265: provides that ‘no tax shall be levied or collected except by authority of law’. [ie. Taxation needs the approval of Parliament.]

Article 266: provides that ‘no expenditure can be incurred except with the authorisation of the Legislature’ [ie. Expenditure needs the approval of Parliament.]

Article 112: President shall, in respect of every financial year, cause to be laid before Parliament, Annual Financial Statement.

FRBM Act

The Fiscal Responsibility and Budget Management (FRBM) Act was passed by the Indian Parliament in 2003 for better budget management.

The FRBM act also provided for certain documents to be tabled in the Parliament of India, along with Budget, annually with regards to the country’s fiscal policy.

Budget Documents

The Budget documents presented to Parliament comprise, besides the Finance Minister’s Budget Speech, the following:

  • Annual Financial Statement (AFS) – Article 112
  • Demands for Grants (DG) – Article 113
  • Appropriation Bill – Artice 114(3)
  • Finance Bill – Article 110 (a)
  • Memorandum Explaining the Provisions in the Finance Bill.
  • Macro-economic framework for the relevant financial year – FRBM Act
  • Fiscal Policy Strategy Statement for the financial year – FRBM Act
  • Medium Term Fiscal Policy Statement – FRBM Act
  • Medium Term Expenditure Framework Statement – FRBM Act
  • Expenditure Budget Volume-1
  • Expenditure Budget Volume-2
  • Receipts Budget
  • Budget at a glance

Highlights of Budget

Status of Implementation of Announcements made in Finance Minister’s Budget Speech of the previous financial year.

There are also other related documents like Detailed Demands for Grants, Outcome Budget, Annual Reports and Economic Survey presented along with the budget documents in Parliament.

Government Budgeting: Railway Budget Presentation

Until 2016 (for 92 years), the budget of the Indian Railways was presented separately to Parliament and dealt with separately. Even then the receipts and expenditure of the Railways formed part of the Consolidated Fund of India and the figures relating to them are included in the ‘Annual Financial Statement’.

The last Railway Budget was presented on 25 February 2016 by Mr. Suresh Prabhu.

Since 2017, Railway Budget is merged with the Union Budget.

Government Budgeting: Union Budget Presentation

In India, the Budget is presented to Parliament on such date as is fixed by the President.

Between 1999 to 2016, the General Budget was presented at 11 A.M. on the last working day of February.

However, since 2017, the Indian Budget is presented on 1 February. As a convention, Economic Survey is also tabled in the Parliament – one day prior to budget submission, ie on January 31.

Note: In an election year, Budget may be presented twice — first to secure Vote on Account for a few months and later in full.

Vote on Account

The discussion on the Budget begins a few days after its presentation.

If the Parliament is not able to vote the entire budget before the commencement of the new financial year (ie. within 1 month or so), the necessity to keep enough finance at the disposal of Government in order to allow it to run the administration of the country remains. A special provision is, therefore, made for “Vote on Account” by which Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year.

Normally, the Vote on Account is taken for two months only. But during the election year or when it is anticipated that the main Demands and Appropriation Bill will take a longer time than two months, the Vote on Account may be for a period exceeding two months.

So what exactly is Vote on Account?

Vote on Account is a special provision by which the Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year, usually two months.

Vote on Account was widely used along with every budget before 2016 when the date of the budget presentation was the last day of February. Now vote on account is used only in special years like the election years (used along with interim budget).

Vote on Account deals only with the expenditure part. But the interim budget, as well as full budget, has both receipt and expenditure side.

So presentation and passing of vote on account is the first stage in the budget passing process. Vote on Account is necessary for the working of the government until the period the full budget is passed.

Budget Speech

The Budget Speech of the Finance Minister is usually in two parts. Part A deals with the general economic survey of the country while Part B relates to taxation proposals.

He makes a speech introducing the Budget and it is only in the concluding part of his speech that the proposals for fresh taxation or for variations in the existing taxes are disclosed by him.

The ‘Annual Financial Statement’ is laid on the Table of Rajya Sabha at the conclusion of the speech of the Finance Minister in Lok Sabha.

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