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Tag Archives | budget

Starting off on the right foot

Increase in capital outlay in the 2016—17 Karnataka budget is a good sign for the state

by Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas)

[Note: This article first appeared in the Kannada newspaper Prajavani on 19th March 2016]

The 2016—17 Karnataka state budget was much awaited for two reasons. One, in 2015—16, Karnataka and other states had little time to respond to several important changes affected by the 14th Finance Commission recommendations. These changes had resulted in a 61% increase in unconditional transfers to Karnataka on one hand, and a decrease of nearly 50% in grants for centrally sponsored schemes on the other. Since these changes happened very close to the budget date, Karnataka could only make incremental changes last year.

Secondly, 2016—17 is the only election-free year for Karnataka. The three previous years had elections at state, union and important local government bodies respectively while next year’s budget will have to factor in the 2018 state elections. An election-free year means that the government can afford to depart from marginal changes and take decisions that might not be populist, but are nonetheless necessary for long term welfare.

So, given the importance of this budget, how did the Karnataka government fare on important areas this year? This article analyses the budget in the backdrop of this unique opportunity.

How did Karnataka’s earnings change?

The Finance Minister accounted for an increase of 11 percent in Karnataka’s own tax collections, which primarily come from taxes on sale of goods (VAT), alcohol and land duties. There was also an increase of 12 percent in Karnataka’s share of taxes collected by the union, taking the unconditional transfers received from the union to a total of 26,978 crores. Note that this number had already increased by 61% last year, as a result of 14th Finance Commission recommendations.

A big change this year was that Karnataka has budgeted for a significant increase in the loans to be borrowed from markets. This was made possible, without any change in the fiscal deficit because of a change in methodology for estimating the state’s GSDP, abruptly changing it from 7.36 lakh crores in 2015-16 to 12.13 lakh crores in 2016-17. The new methodology gives higher weightage to the IT sector’s contribution, a sector that Karnataka excels in. Since the permissible borrowing limit is calculated as a fixed percentage of the GSDP, a higher GSDP allowed the government to borrow more from the open market.

But aren’t loans always bad? Not necessarily, it depends on what purpose the loaned amount is spent on. Generally, deploying borrowed money towards long-term asset creation can have a positive impact.  

How did Karnataka’s spending change?

On the spending side, there was a 21 percent increase in the capital expenditure (money spent on asset creation) at Rs. 26,341 crores and an 11 percent increase in the revenue expenditure (money spent to meet short term expenses such as salaries) amounting to Rs. 1,30,236 crores. The areas of urban development, irrigation & flood control, police, and crop husbandry saw major increases in allotments.

The continued increase on capital and revenue expenditures for irrigation and flood control shows us that agriculture continues to be the priority area for this government and that it is willing to focus on both long-term asset creation and meeting short-term expenses in this area. Second, there is an increase in expenditure outlay for water supply and sanitation but most of this increase is towards meeting running expenses with only a small jump of about 10 percent towards capital expenditure. Third, there is a doubling of capital expenditure on social security and welfare. Finally, there seems to be a new found focus on urban development with an increased capital outlay of 1886 crores compared to 365 crores last year.

It is heartening to see that significant portions of the increased borrowing  has been utilised for long-term asset creation. At the same time, it was disappointing that only marginal changes were made in allocations towards health and education — essential services for a state like Karnataka that aspires to reap the demographic dividend.

Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas) are researchers with the Takshashila Institution.

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Budget 2016-What about naval acquisitions?

Navy’s role as an instrument of Indian foreign policy gets a lukewarm treatment with the latest budget

By Guru Aiyar (@guruaiyar)

The budget presented by the Finance Minister Mr Arun Jaitley surprisingly sidestepped one of the most important components—national security. Not a word was mentioned about defence. The Budget estimate for 2016-17 is Rs 2,95,623 Crores excluding defence pensions. An amount of Rs. 82,332 Crores has been set aside for defence pensions. The total allocation is thus an increase of about 10 percent which compares to the previous year on year (YOY) increases. What is of interest is the allocation for capital acquisitions which is Rs. 90,660 crores.

Capital expenditure indicates the money that is spent on acquiring new assets to enhance combat capability. The defence ministry returned 13.5% allocated to capital expenditure in the last fiscal. This is attributable to the procurement procedures as well as delay by the arms suppliers. The ratio of individual service expenditure approximately is as below.

Service             Capital Expenditure (in %)          Revenue Expenditure (in %)

Army                           10                                                                          90

Navy                            40                                                                          60

Air Force                     35                                                                          65

The armed forces’ capital acquisition is based on a Long Term Integrated Perspective Plan (LTIPP) which envisages acquisition over a period of fifteen years from 2012-2027 (from 12th to 14th five year plans). The individual services then have their own Service Capital Acquisition Plan (SCAP) that are based on the five year plans. The yearly plan that is reflected in the budget is the Roll-on Plan (ROP).

Of the three services, navy is the one which is the most visible as an instrument of foreign policy. It derives this ability from being the most mobile and deployable in any part of the globe when national interests require it to do so. To maintain combat capability, the desirable equipment profile of the armed forces as per defence secretary’s testimony to parliamentary standing committee is 30:40:30 (30 per cent state of the art, 40 per cent current, and 30 per cent nearing obsolescence), the present profile is 15:45:40. As a result, the combat edge is consistently getting weakened.The main reasons for emasculated acquisition budget is the ballooning salaries and pension bill.

The most significantly affected on the acquisition matrix of the navy are the Project 15B destroyers, Project 17A frigates and the two indigenous aircraft carriers which are the fulcrum of the navy’s capability. Another cause for worry is the delay in Light Combat Aircraft (LCA) and the Medium Range Reconnaissance Aircraft. According to the latest Defence Procurement Procedure 2016 unveiled by the defence minister, one of the main initiatives to overcome the foreign dependence is the Indigenous Design Development and Manufacturing (IDDM). This would ensure a viable military-industrial complex with spin offs for the civilian sector. At present, is better to be circumspect than sanguine about our acquisition policy.

Guru Aiyar is a Research Scholar with the Takshashila Institution.

Featured Image: Aircraft Carrier by Steven Weng, licensed from creativecommons.org

 

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How does the Union Government earn money?

Amidst all the analysis about fiscal deficits, budget etc, the fundamental question about how the Union Government of India earns its revenues gets ignored. This post examines the revenue aspect of the budget.

All the revenue that the Union Government earns can be classified into three buckets

  • Tax Revenue
  • Non-Tax Revenue
  • Capital Receipts

picture 1e

 

Tax Revenue:  Tax revenue is the largest source of revenue for the Union. The major heads under tax revenue include

  • Corporation Tax – This is the tax levied on the income of Companies under the Income-tax Act, 1961
  • Income Tax – This is a tax on the income of individuals, firms etc. other than Companies, under the Income-tax Act. This also includes Securities transaction Tax
  • Wealth Tax – This is a tax levied on the specified assets of certain persons including individuals and companies, under the Wealth-tax Ac
  • Customs – Revenues earned through taxes imposed on imported goods
  • Union Excise Duties
  • Service Tax – Taxes on service transactions(at hotels,
  • Taxes from Union Territories – comprises of taxes collected by UT Governments without Legislature and include items of taxes normally collected by States. These taxes collected by UTs accrue to Central Government.

picture 2(r)

Non-Tax Revenue: The various forms of Non-Tax revenue includes

  • Interest receipt – This includes the interest earned by the Union from loans to states, loans to Union territories, interest payable by the Railways and several other smaller loans advanced by the Union
  • Dividends and profits – This comprises of dividends and profits from public sector enterprises and surplus of the Reserve Bank of India that is transferred to Union.
  • Fiscal Services
  • General Services – Fees and other revenues earned by the Union through various general services that it provides. Eg., Central police forces supplied by the Union to States etc.)
  • Social and Community Services – Fees and receipts earned through social and community services. Eg., entry fees collected at museums.
  • Economic Services(including Railway revenue) – Revenue earned through economic services delieverd by the government Eg., royalty on Oil and Gas produced from the Offshore fields
  • Grants-in-aid and Contribution – Grants received from external sources
  • Non-Tax revenue of Union Territories – The receipts of the Union Territories (without legislature) mainly relate to administrative services; sale of timber and forest produce mainly in Andaman and Nicobar Islands; receipts from Chandigarh Transport Undertaking and receipts from Shipping; Tourism and Power 

picture 3re

 

Capital Receipts: Capital Receipts include

  • Non Debt Capital Receipts
  • Debt Receipts

Non Debt Capital Receipts include

  • Recoveries of Loans and Advances – Loans recovered from states and union territories
  • Miscellaneous Capital receipts – receipts on account of disinvestment of part of government equity in central Public sector Enterprises

Debt receipts are those receipts that the Union receives for the current year under the explicit assumption that it is a temporary receipt which acts as a liability on the part of the government.

  • Borrowings
  • Securities against Small Savings
  • State Provident Fund
  • Other Receipts
  • External Debt

Picture 4

 

(All the information contained herein, including most of the definitions, is taken from the Union budget documents for 2015-16)

Author’s note: A big shout out to Karthik Dinne for pointing out a few errors in the graphs in the previous update

Varun Ramachandra is a policy analyst at Takshashila Institution He tweets @_quale

 

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Words in budget speech

Budget speech usually proposes multiple ideas and it is essential for analysts to followup on the actuals – Varun(@_quale)

As the current NDA government is about to finish first year in office, social media and traditional media is awash with analysis and comparisons with the previous government. The budget speech is usually a good barometer that indicates the priorities of the government and this post explores the text contained in budget speeches.

In order to undertake a rudimentary text analysis of the budget speech, the text of the first full-budget speech delivered by UPA  and NDA were used to obtain the following word clouds.

NDA year 1_17968

NDA budget speech for year 1 had 17,968 words

NDA interim budget_6595

The interim budget presented by NDA had 6,595 words

UPA year 1 budget_13148

UPA budget speech for year 1 had 13148 words

Word clouds are presented without any comment and it is left to the readers’ judgement to draw conclusions. It must however be noted that word clouds merely provide a pattern in the text and in a document like the budget speech  it is natural for the finance ministers to use terms like government, tax, per cent etc. One must also be cognisant of the fact that the budget speech is a combination of political and economic tools, with the scale tilted towards politics.

The following two images show the word clouds for all the budgets presented by UPA-I and UPA II between 2004-05 to 2013-14

UPA - I_72996

UPA I’s budget speeches had 72,996 words in total(inclusive of the interim budget in 2009-10)

UPA- II_65117

UPA II’s budget speeches had 65,117 words in total

The word “propose” features very highly in all the budgets, which signals the necessity to check the actual numbers that are published 2 years after the budget is presented.  Typically,  the budget estimates are presented for year n, along with the revised estimates for (n-1)th year and the actuals for (n-2)th year. Do read my colleague Pavan Srinath’s essay that outlines 5 broad ideas to read the budget commentary better.

Addendum:

The words “propose”, “government”, “tax”, “crore” ,”per cent”, “duty”,”lakh”, “year”, “http://indiabudget.nic”  were removed from the speech to obtain the following word clouds.

NDA budget 1 sans

NDA first full budget speech without the words “propose”, “government”, “tax”, “crore” ,”per cent”, “duty”,”lakh”, “year”, “http://indiabudget.nic”

UPA-I sans

UPA I speeches without the words “propose”, “government”, “tax”, “crore” ,”per cent”, “duty”,”lakh”, “year”, “http://indiabudget.nic”

UPA II sans

UPA II speeches without the words “propose”, “government”, “tax”, “crore” ,”per cent”, “duty”,”lakh”, “year”, “http://indiabudget.nic” .

 

Note:- The tool wordle was used to obtain word clouds. Hat-tip to @gkjohn for introducing this author to wordle.

Note 2- The complete text for UPA budgets can be found at UPA-I and UPA- II. NDA year 1 budget speech can be found here

Varun Ramachandra is a policy analyst at Takshashila Institution and tweets @_quale

 

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