India’s Budget Process (in Theory)

(This was a front-page signed editorial article in The Statesman on Budget Day 2008; it had been preceded by How to Budget: Thrift,Not Theft, Needs to Guide Our Public Finances, and by Growth & Government Delusion a few days earlier. Other related articles published over the last year in The Statesman include India’s Macroeconomics, Fiscal Instability, Fallacious Finance, Against Quackery, etc.)

Budget process, in theory

by Subroto Roy

First published in The Statesman, February 29, 2008, Front Page

India follows the British system of public finance ~ except it is very far from having followed or even being aware of numerous deep improvements the UK made in its system in recent decades.

Government accounts are divided between the “Consolidated Fund of India”, “Contingency Fund” and “Public Account”. The first is most important and credits all revenues received and all loans raised by issue of government debt, and all moneys received in repayment of loans. The second is for unforeseen expenditure pending subsequent authorisation by Parliament. The last includes “trust funds” and is where all transactions relating to debt, deposits, advances, remittances are made.

The annual financial statement of the Union government presented to Parliament is popularly known as “the Budget”. Parliament’s “Vote on Account” is to enable estimates to be considered more carefully.

There is a “Revenue” Budget referring to expenditures and receipts of an annually recurrent nature; for example, staff-salaries of a school is revenue expenditure. There is a “Capital Budget” referring to investment expenditure “incurred with the object either of increasing concrete assets of a material and permanent character or of reducing recurring liabilities”. Spending today on a new school-building or setting aside a sinking fund to reduce the stock of extant public debt is supposed to be what capital expenditure includes. Capital expenditure should be met “generally… from receipts of a capital, debt, deposit or banking character as distinguished from ordinary taxes, duties….” but the government is also allowed to meet it from ordinary current revenues when these are “sufficient”.

In addition there has been in the Indian case large outright direct annual lending undertaken by the government to chosen recipients, bypassing normal capital markets. All three types of expenditure, “Current”, “Investment” and “Loan”, are of spending decisions made at the same time about the same or a similar set of activities. Yet nowhere in the Government of India’s accounts today is to be found clear actionable data that public expenditures on e.g. the power sector in a given year happens to include “Loans for Power Projects” under Account Head 6801, current expenditure on “Power” under Account Head 2801 and capital expenditure on “Power Projects” under Account 4801. It is only when these are added can a picture emerge about total expenditure on the power sector. Government accounts remain on a cash and not accrual basis, unlike the best practices adopted internationally in recent decades.

The process includes preparation of the Budget by the Executive; its consideration and adoption by the Legislature; its implementation by the administration and government agencies; and post-evaluation of achievement and performance by the Public Accounts Committee, Estimates Committee, Committee of Public Undertakings etc of Parliament.

In addition, there is Audit. Where private sector audit systems show how much profit may be properly “put into the pockets of the proprietors”, government audit is supposed to find the least cost to taxpayers in providing necessary public goods and services “to enable Government to determine how little money it need take out of the pockets of the tax-payers in order to maintain its necessary activities at the proper standard of efficiency”. That maxim of India’s Auditor-General in 1930 captures part of the normative intent of public finance in any country at any time. The office of “Comptroller & Auditor General” is charged with independently assessing and evaluating the effectiveness of outcomes generated by the fiscal process, the “high independent statutory authority… who sees on behalf of the Legislature that… money expended was legally available for and applied to the purpose or purposes to which it has been applied….. Audit… is the main instrument to secure accountability of the Executive to the Legislature…. The fundamental object of audit is to secure real value for the taxpayer’s money”. That is the theory at least.

Similar processes on smaller scales are supposed to get carried out in our more than two dozen States, though there the role of the (extra-constitutional) “Planning Commission” has been prevailing while that of the (constitutional) Finance Commission has been diminished.

The crucial variable to look out for in Mr P Chidambaram’s speech will be how much interest expenditure the Government of India has to make on its debt already incurred. That may be nearing Rs 2 trillion (or Rs 2 lakhs of crores) – and could be more than 100% of the Gross Fiscal Deficit! It is an amount “charged” directly to the Consolidated Fund of India and not submitted to the vote of Parliament though Parliament has a right to discuss it. If you want to know who in Parliament is awake and aware of our nation’s economic and financial good, look for anyone who discusses or wants to discuss the size of that amount! It may be best to ignore all attempts at joking and poetry as distractions because the situation is grim ~ although of course there is such a thing as “gallows humour”.


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