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Merger of Rail Budget with Union Budget and more: What it means for India

Many Indians living in rural areas keep large amounts of cash at home because of a lack of banks. Photograph: (Getty)

WION New Delhi, India Sep 22, 2016, 11.49 AM (IST) Vrinda Aggarwal

The Government of India has made several changes in its Annual Financial Statement, commonly referred to as budget. Some of these changes are:

  • Omission of plan and non-plan expenditure
  • No separate Railway budget
  • The budget in the Indian Parliament may be tabled earlier than before

What does each one of them mean?

The budget is represented under two accounts: revenue account and capital account. The revenue account means day to day running of the various government departments and services, interest payments etc.


Capital account involves long-term investments such as machinery, plants, etc.


 

Till this year’s budget, revenue expenditure and capital expenditure were further divided into plan expenditure and non-plan expenditure.

Plan expenditure: means the expenditure done under the five year plans, that is decided beforehand during the planning process.

Non-plan expenditure: means expenditure that lies outside the plan and for which no provision can be made as it is largely unforeseen, unpredictable and contingent on circumstances.  E.g. expenditure on repairs and maintenance of assets, unfinished schemes, defence, law and order, etc.

From next year, the expenditure under both the accounts will not be divided into plan and non-plan as the premier economic planning institution, Planning Commission of India, no longer exists. It has been replaced by NITI Aayog, a think tank.


From next year, the expenditure under revenue account and capital account will not be divided into plan and non-plan.

The 12th five year plan will end in 2017 and after that, there will be no five year plans, thus redefining the Indian Economy textbooks.
 
If not five year plans, then what?  

The NITI Aayog will be preparing a 15-year vision document aligned with the country’s social goals and sustainable development targets. The first 15-year vision document will start from 2017-18. Aayog will also prepare a seven-year National Development Agenda which will lay down the schemes, programmes and strategies to be reviewed after every three years.

The vision document is similar to the Directive Principles of the State Policy of the Constitution, guiding where India should be heading but not enforceable by law.  
 At the same time, one should be looking at the documents laid before Parliament under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003:

  • Medium term fiscal policy statement: It sets out three-year rolling targets for four specific fiscal indicators in relation to GDP, namely (i) revenue deficit, (ii) fiscal deficit, (iii) tax to GDP ratio and (iv) total outstanding debt at the end of the year.
  • Fiscal policy strategy statement: It outlines the strategic priorities of the government in the fiscal area for the ensuing financial year relating to taxation, expenditure, lending and investments, administered pricing, borrowings and guarantees. The statement explains how the current policies are in conformity with sound fiscal management principles and gives the rationale for any major deviation in key fiscal measures.
  • Macro-economic framework statement: It contains assessment regarding the GDP growth rate, fiscal balance of the Indian government and the external sector balance of the economy.

 Concerns with merger of railway budget with general budget

The proposal to merge the two budgets was given by the Bibek Debroy Committee at NITI Aayog. It is said that after the merger, Indian Railways will save around $1.5 billion every year by not paying the dividend it has to pay for gross budgetary support from the Indian government.

Indian economist Bibek Debroy, in an interview, has raised four concerns regarding this merger that still need to be addressed by the railway ministry and finance ministry:

  • What happens to dividends? Dividends i.e. corporate dividends is actually a repayment of debt that the Indian government extends to the railways in perpetuity and only the interest gets repaid, the principal is never extinguished. 
  • What happens to the existing debt? Does that continue or not? 
  • What happens to the gross budgetary support? In what form will it be extended now?
  • What happens to the windows that the railways has for borrowing? Right now, the railways borrows through Indian Railway Finance Corporation (IRFC).

 
Why does the budget needs to be presented earlier than usual?

At present, the budget is presented on 28th February every year. The budget session of Parliament is divided into two parts: the first is held between last week of February to middle of March and the second session is held from last week of April to middle of May.

Usually, the budget gets passed in the second part of the session. After that, the country experiences monsoon season for 3 to 4 months hampering the infrastructure spending.

Also, unlike India, most countries around the world have their fiscal year as the calendar year.

With the Goods and Services tax scheduled to be rolled out next year, it is not certain whether the Indian government would table its Annual Financial Statement on a different date. 
 

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