ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Demonstrating a 'New Political Budget Cycle'

The budgetary allocations for primary education and agriculture - the two apparent beneficiaries from budget 2008-09 - are examined in some detail in this article. In the case of primary education the funds have been directed at programmes that show a track record of underutilisation. In agriculture too, the details reveal that allocations are not on directly productive activities. These covertly disguised allocations on "desirable" components of the budget suggest that there has been "learning" on the part of politicians and we need to watch out for a New Political Budget Cycle.

BUDGET 2008 09

Demonstrating a ‘New Political Budget Cycle’

Mala Lalvani

and not all capital expenditures is “good”, a falling share of capital expenditures and a rising share of revenue expenditures seems to indicate that the “fiscal consolidation” is of the wrong variety. Table 1 traces the shares of revenue and capital expenditures over the entire term of the

The budgetary allocations for primary education and agriculture – the two apparent beneficiaries from budget 2008-09 – are examined in some detail in this article. In the case of primary education the funds have been directed at programmes that show a track record of underutilisation. In agriculture too, the details reveal that allocations are not on directly productive activities. These covertly disguised allocations on “desirable” components of the budget suggest that there has been “learning” on the part of politicians and we need to watch out for a New Political Budget Cycle.

Thanks to Abhay Pethe and Ajit Karnik for their comments and suggestions. The usual disclaimer applies.

Mala Lalvani (mala.lalvani@gmail.com) is with the department of economics, University of Mumbai.

Economic & Political Weekly

EPW
april 12, 2008

E
lection time manipulation of budgetary variables in democracies to lure the voter, a phenomenon popularly known as the “Political Budget Cycle” is well established in public choice theory. There is ample evidence in literature pointing to the existence of such cycles in democracies and India is no exception [Karnik 1990; Sen and Vaidya 1996; Lalvani 1999; Khemani 2004 for evidence on India]. With elections around the corner and with buoyant tax revenues, the finance minister’s task of coping with the political compulsions in budget 2008-09 was made easier to that extent. Hence, the entire speech of P Chidambaram emphasising the achievements of the government and the generous gifts announced to various sections of the society came as no surprise at all.

The focus of this article is on the allocations to two specific thrust areas of the budget, viz, social services (education in particular) and agriculture. Section 1 looks at the broad picture presented in terms of expenditures; Section 2 focuses on social services and economic services in general and primary education in particular (specifically the Sarva Shiksha Abhiyan (SSA) and mid-day meal (MDM) schemes which have attracted much attention); Section 3 concludes.

1 Budget Numbers at a Glance

The macro picture presented by the budget of meeting and in fact surpassing the targets of the Fiscal Responsibility and Budget Management (FRBM) Act target suggests a move in the direction of “fiscal consolidation”. Indeed, the gross fiscal deficit (GFD) has reached 2.5 per cent of GDP and revenue deficit (RD) too is not way off target at 1 per cent of GDP, but one finds that the share of revenue expenditure in total expenditures has increased and that of capital expenditure has declined. While one is well aware that not all revenue expenditure is “bad”

UPA government (2004-05 onwards).

Table 1: Composition of Expenditures (in %)

2004-05 2005-06 2006-07 2007-08 2008-09
(RE) (BE)
Revenue exp/
Total exp 77.14 86.88 88.21 82.97 87.65

Capital exp/Total exp 22.86 13.12 11.79 17.03 12.35 Source: Computed from Expenditure Budget, GoI various issues.

The story that Table 1 tells is that the structure of expenditure has worsened during the two years, 2005-06 and 2006-07

– with a rising share of revenue expenditure and a falling share of capital expenditure. Prima facie this pattern of expenditures goes against the conventional prescription of the political budget cycle (PBC) hypothesis. Traditionally the way that PBC pans itself is an improvement and some hard decisions in the early years of the electoral term of any government (when elections are behind it) and as elections approach populist gifts are doled out (resulting in an increasing share of revenue expenditures). The pattern observed in Table 1 where the share of revenue expenditures has increased from the second year of the electoral term itself is a pointer to the compulsions of coalition politics. In 2007-08 revised estimate (RE) some improvement is observed with a rising share of capital expenditure and falling share of revenue expenditure (we expect this picture to change when accounts figures for 2007-08 become available). The budget estimate for 2008-09 (which is a pre-election year) clearly shows a deteriorating structure of expenditure. Thus, with the macro caps, as stipulated under the FRBM, being complied with but a deterioration in the structure of expenditure, it would appear that the fiscal consolidation is headed in the wrong direction.

An alternative pointer to the “wrong variety” of fiscal consolidation is provided by the following aggregate numbers in Table 2 (p 26).

The FRBM requirement of RD/GDP being 0 per cent and GFD/GDP being 3 per cent of

25

BUDGET 2008-09

GDP implies that capital expenditures must be of the magnitude of 3 per cent of GDP. Table 2 shows the RD/GDP is more or less constant at 1.5 per cent in 2007-08(BE) and the 2007-08(RE), so that capital expenditure was approximately 1.5 per cent of GDP. For 2008-09(BE), if the GFD/GDP had been kept at 3 per cent, with RD/GDP at 1 per cent, capital expenditure could have been boosted to 2 per cent and this would have been a move towards our FRBM target. However, currently we have RD/GDP as 1 per cent with 0.5 per cent as “head room” in the words of the finance minister for the pay commission hike. Subsequently it was announced that Rs 25,000 crore (from the Rs 26,657 crore, i e, 0.5 per cent of GDP, that had been kept as “head room” for the sixth pay commission) is being used to fund the loan waiver. This takes our de facto RD/GDP to 1.5 per cent of GDP and assuming that GFD/GDP will stay at 2.5 per cent of GDP, our capital expenditure will now be curtailed to 1 per cent of GDP. The further implication of this “head room” being lost to the loan waiver is that there is now absolutely no provision in the budget to take the hit of the sixth pay commission hikes.

If the pay commission hikes siphon off

0.5 per cent of GDP as was initially budgeted and if we assume that GFD/GDP target of 2.5 per cent will be maintained, then this would result in our capital expenditure being further compressed to 0.5 per cent of GDP! These numbers further prove our point that fiscal consolidation appears to be “wrong headed”.

2 ‘Devil’ in the Details

We discuss here details of some of the important expenditure items.

(a) Administration, Subsidies and Interest Payments: The trio of administrative services, subsidies and interest payments, which are by and large contractual in nature, continue to siphon off almost half the revenue receipts of the government.

At the beginning of its term in 2004-05, the UPA government inherited a scenario where 61 per cent of its revenue receipts were captured by these three categories of expenditure. Helped by higher growth and a low interest rate regime in 2007-08(RE) this figure stood at 47 per cent. However, in 2007-08(RE) the share of subsidies is higher than 2007-08(BE) by 2 percentage points, thus the government slipped on its own promise of the budget estimate.

An added factor that needs to be borne in mind here is that the explicit subsidies that appear in the budget are a gross underestimation as oil bonds, contingent liabilities and revenue foregone due to tax exemptions are all “hidden” off budget.

While on the matter of these “off budget” liabilities, we would like to say that the single most important achievement of Budget 2008-09, for which the finance minister deserves high praise, is that of making some part of these off budget liabilities a part of the budget document. These off budget liabilities in the form of securities issued by the GoI currently stand at Rs 11,257 crore for the oil marketing companies and Rs 7,500 crore for fertiliser companies. While there is no doubt in one’s mind that there are many other subsidies which continue to be hidden from public scrutiny, but to have introduced a budget item of these liabilities will go a long way in improving accountability and transparency in the budgetary process. The fact that these off budget liabilities are being increasingly resorted to so as to not upset the macro targets (as set under the FRBM) signals that subsidies are being pushed “under the carpet” and away from public scrutiny. This is also indicative of the fact that the conventional practice of tracing the time spread of explicit budgetary subsidies during electoral terms to look for political budget cycles is no longer a valid practice. This realisation provides us with a first indication of the fact that we may need to look out for a political budget cycle of a new variety.

(b) Social Services: The share of expenditure on social services and education in particular, in total expenditure has been tabulated in Table 4. We do not look at the break-up of social services into revenue and capital account as both components may be thought of as equally important in the context of social services.

We find that the share of social services (revenue and capita account) in total expenditure has indeed risen from 6 per cent in 2004-05 to 7.26 per cent in 2007-08(RE) and this share is expected to further climb to 8.6 per cent in 2008-09(BE). However, we find that the government failed to keep to its budget estimate of 7.8 per cent in 2007-08. A similar pattern is noticeable for education in particular. Its share has risen from 2.55 per cent in 2004-05 to 3.37 per cent in 2007-08(RE) but the revised estimates of 2007-08 falls short of the budgeted estimates in 2007-08.

Within education, it is primary education that can be classified as a “merit good”. And it is right that the SSA and MDM schemes have been accorded a prime position in all the budget speeches of P Chidambaram. Hence we felt that a closer look at the details of the financial performance of the SSA and the MDM would be a good pointer to the performance of this government on what we can term as “core activities” of the government.

Sarva Shiksha Abhiyan: The department of school education and literacy has received Rs 27,850 crore in budget 2007-08. This is a hike of 20 per cent over the previous year’s budget estimate. Three considerations are important when considering the allocations to any scheme (1) desirability, (2) utilisation, and (3) outcome. There can be no quarrel about the need to “universalise education” and therefore about the desirability of the SSA. As regards “outcomes”, there is undoubtedly an improvement in the school indicators and the SSA has been one of the important contributors to this improvement. However,

Table 2: Major Deficit Indicators (in Rs crore)
2007-08(BE) 2007-08(RE) 2008-09(BE)
Revenue deficit (RD) 7,148 (1.5) 63,488 (1.4) 55,184(1.0)
Gross fiscal deficit (GFD) 1,50,948 (3.3) 1,43,653 (3.1) 1,33,287 (2.5)

Figures in parenthesis are as % of GDP. Source: Budget at a Glance 2008-09, GoI.

Table 3: Contractual Outgo from Revenue Receipts (in %)

2004-05 2007-08(BE) 2007-08(RE) 2008-09(BE)

Admin services / revenue receipts 4.83 3.85 3.68 3.51

Subsidies/ revenue receipts 15.02 11.17 13.28 11.85

Interest payments/ revenue receitps 41.48 32.69 32.75 31.65

Total 61.34 47.71 49.71 47.01

Source: Computed from Annual Financial Statistics (AFS), GoI, various issues.

Table 4: Share of Social Services and Education in Total Expenditure (in %)

As % of Total Expenditure 2004-05 2007-08 2007-08 2008-09 (BE) (RE) (BE)

Social services/ total expenditure 6.09 7.80 7.26 8.61

Education/total expenditure 2.55 3.67 3.37 4.28 Source: Computed from AFS, GoI, various issues.

april 12, 2008

EPW
Economic & Political Weekly

BUDGET 2008-09

conventional route of subsidies targeted to powerful vested interest groups have been pushed under the carpet as off budget liabilities. It is indicative of “learning” on the part of the policymaker.

MDM Scheme: Unlike the SSA there is no information on financial utilisation of funds under the MDM on the web site of the department of school education, hence our observations are confined to budgetary allocations alone. Like the SSA, the MDM scheme too was emphasised by the finance minister in his budget speech and there can be no quarrel with greater expenditure on this front too. Here too the allocations are under the same major heads as SSA. The allocations to this programme have been tabulated in Table 6.

Three observations that one can make from the allocations to the MDM scheme are:

– Total allocations to the MDM scheme from the Fund for General Education have

Table 5: Allocations to Sarva Shiksha Abhiyan (SSA)

(in Rs crore)

Major Head 2007-08 2007-08 2008-09 (BE) (RE) (BE)

General education

  • (i) SSA allocation 2,202 2,767.24 3,704.64 4,249.98
  • (ii) Grants to states 3,601 0.01 0.01 0.01
  • (iii) Grants to union territories 3,602 0.01 0.01 0.01

    (iv) Provision for projects/ schemes of NE areas 2,552 910.74 1,150.74 1,160

    declined from Rs 3,865 crore in 2007-08(RE) to Rs 2,873 crore in 2008-09(BE).

  • The allocation from the PSK has increased from Rs 2,812 crore to Rs 5,127 crore. The composition of the allocation from PSK shows that the grant component has risen but the other than grant allocation to the scheme has been completely reduced to zero.
  • The utilisation of funds based on a comparison of 2007-08(RE) with 2007-08(BE) shows underutilisation to the extent of 9 per cent of the allocation.
  • The grant component to the MDM scheme has increased by Rs 2,300 crore in 2008-09(BE) over 2007-08 (RE). If the finance minister genuinely felt that this scheme deserved to be given a major thrust he could have kept the allocations to this scheme from the budget untouched at the level of 2007-08(RE) and allowed this hike in grants to give the scheme a “big push”. This would have resulted in an allocation of almost Rs 9,000 crore in 2008-09(BE). Currently there has been some reallocation and the provision to the scheme stands at Rs 8,000 crore, i e, a shortfall of Rs 1,000 crore. Thus with the grant component decided upon in some senses “exogenously”, the finance minister has in fact in some senses “cut” the budgthe success of any programme per se and the wisdom of pumping more money into it can be gauged from utilisation of previous funds. However, unlike many other programmes the utilisation of funds under SSA cannot be gauged simply from a comparison of the BE and RE as this would not provide us with a complete picture since the SSA funds are seen to spill over. (The SSA financial accounts show both opening and closing balance.) The statment of expenditure under SSA for the year 200607 (as on June 2007 http://ssa.nic.in/finmanagement/Expenditure-%2006-07.pdf) shows an aggregate underutilisation of funds as on June 2007 to the tune of 14 per cent with this proportion constituting as much as 94 per cent for Lakshadweep. Surprisingly, the maximum underutilisation is noticed in union territories and in northeastern states which in fact have separate allocations (Assam 43 per cent, Nagaland 93 per cent, Sikkim 34 per cent, Daman and Diu 23 per cent, Pondicherry 37 per cent).

    As far as the budget is concerned, allocation for SSA appears in two parts in the Demand for Grants (Vol II of the Expenditure Budget). The first part is the general allocation and the second part comes out of the Prarambhik Shiksha Kosh (PSK). The allocation for both these

    parts is classified under three major heads: 2,202: general education, 3,601: grants to states (both plan and non-plan unless we know the minor head which is not provided in the budget document), and 3,602: grants to union territories

    Total from general education funds 3,678 4,855.4 5,410

    Financed from Prarambhik Shiksha Kosh (PSK)

  • (i) SSA allocation 2,202 6,993 8,315 7,690
  • (ii) Grants to states 3,601 0 0 0
  • (iii) Grants to union territories 3,602 0 0 0

    Total from PSK 6,993 8,315 7,690

    etary allocations to this scheme.

    On the other hand, if underutilisation of the funds in the previous year was a concern, then there is no justification to hike the allocation for 2008-09(BE) by almost Rs 700 crore.

    (both plan and non-plan). Total allocation to SSA 10,671 13,170.4 13,100 Based on observations regarding two

    Source: Expenditure Budget 2008-09, Vol II.

    Table 5 shows that the RE of 2007-08 is popular and “merit good” schemes of the higher than the BE of 2007-08 to the extent Table 6: Allocations to MDM Scheme (in Rs crore) government, we would like to emphasise

    of almost Rs 2,500 crore.

    Undoubtedly the programme is aimed at a “merit good” but higher allocation to the programme in 2008-09(BE) to the extent of 20 per cent over the budget estimate of the previous year in the face of underutilisation of previously allocated funds, is puzzling. Given the underutilisation of funds in this scheme, one cannot help but

    Major Head 2007-08 2007-08 2008-09 (BE) (RE) (BE)

    General education

  • (i) MDM allocation 2,202 579.3 579.14 1424
  • (ii) Secretariat-social services 2,251 10.5 10.5 0
  • (ii) Grants to states 3,601 2,556.3 2,579.27 574
  • (iii) Grants to union territories 3,602 45.5 22.69 75

    (iv) Provision for projects/ schemes of NE areas 2,552 732.4 674 800

    Total from general education funds 3,924 3,865.6 2,873

    that it goes against economic wisdom to pump more funds into them – no matter how meritorious the scheme may be. Higher expenditure on social services in general and education in particular are important public goods that governments have to necessarily concern themselves with, but there is a need to provide incentives and tie the higher allocation to utili

    feel that the announcement of a further hike in allocation is an electoral tactic – characterising a new political budget cycle (NPBC) – where the emphasis has shifted to making announcements for “meritorious” components of the budget (even when funds are underutilised) and the

    Economic & Political Weekly

    EPW
    april 12, 2008

    Financed from Prarambhik Shiksha Kosh (PSK)

  • (i) MDM allocation 2,202 1,307.3 730.32 0
  • (ii) Grants to states 3601 2,092.7 2,082.08 5,127
  • (iii) Grants to union territories 3,602 0 0 0

    Total from PSK 3,400 2,812.4 5,127

    Total allocation to MDM in schools 7,324 6,678 8,000

    Source: Expenditure Budget 2008-09, Vol II .

    sation – even before we start to tie higher allocation to outcomes. In other words, when it comes to pure public goods and merit goods, the state has to play the role of not only a “provider” (as is conventionally emphasised) but also provide incentives for utilisation for funds allocated.

    BUDGET 2008-09

    The fact that the alloc ations to the MDM control where an underutilisation occurred
    programme which too“merit good” of providing and incentive to education, continues to be hiked despite a track record of underutilisation, lends further credence to our NPBC phenomenon that we discussed in the context of the SSA. is ai med at the by 0.01 percentage points, the share allocated has been hiked by 0.03 percentage points. The important message that comes across from our previous discussion on SSA and MDM is that budgetary allocations seem be made oblivious of the utilisation
    Having looked at the fine print for some programmes under social services we now turn our attention to the other thrust area of agriculture that has captured the limelight in this budget. (c) Agriculture and Rural Development: The loan waiver to farmers has occupied the centre stage in budget discussions on agriculture. Our assessment of the fiscal disarray that has occurred due to this loan waiver added to the problem of sending out the wrong signal and that of targeting is something that we touched upon when presenting the macro scenario. However, not even the most ardent supporter of of previous funds. Even if we allow for the fact that the RE is a mid-year estimate, then the previous year’s accounts figures must be used to provide the basis to justify any hikes in specific programmes. In fact, we would like to go a step further to say that such a justification of hiked allocations to specific programmes and utilisation of previously allocated funds must form a part of the budget documents. In fact, this is the spirit in which the requirement for transparency as mandated by the FRBM Act must be interpreted. In its present form, there is a clear disconnect between utilisation of previously allocated funds and new announcements.
    the loan waiver would disagree that such one time measures cannot provide longterm solutions. What, according us, is of greater relevance for agriculture are the monies being set aside for investments in agriculture which will boost its productivity. The share of total expenditure set aside for agriculture is tabulated in Table 7. A quick look at thexpenditure allocated to agriculture and allied activities and rural development tells us the revised estimates have exceeded the budgeted amount in 2007-08. In fact the shares kept aside in 2008-09(BE) are lower than the 2007-08(RE) for agriculture and only marginally higher by 0.02 percentage points in the case of rural development. In case of irrigation and flood Table 7: Share of Agriculture, Rural Development and Irrigation in Total Expenditure (in %) e shar e of total Having obtained the broad picture we turn to some details under this category. As mentioned in the preceding para Table 7 showed that in 2008-09(BE) the share of allocation for agriculture (aggregate and on revenue account) in total expenditure is higher than 2007-08(BE) but lower than 2007-08(RE). However, the share of expenditure on agriculture on capital account was seen to be higher than not only 2007-08(BE) but also 2007-08(RE). Prima facie this signalled a positive move as investments in agriculture are what will sustain and improve agricultural production and the condition of farmers in the long run (and not loan waivers which can at best be a one-time measure). This motivated us to start looking for greater detail as to which specific budget head had received the boost from the
    2007-08 (BE) 2007-08 2008-09 (RE) (BE) finance minister.
    Allocation on revenue and capital account Agri and Allied Activities/ Total expenditure Rural devt/Total expenditure Irrig and flood/Total expenditure Allocation on revenue account agri and allied/Total expenditure Rural devt/Total expenditure Irrig and flood/Total expenditure 7.10 2.44 0.06 7.09 2.44 0.06 9.39 9.17 2.45 2.47 0.05 0.08 9.34 9.08 2.45 2.47 0.05 0.07 Much to our disappointment we discovered a newly created budget head under this category (major head 4,416) meant for “Investment in Agricultural Financial Institutions”. We find that in 2008-09(BE), of the Rs 335 crore increase in agriculture and allied activities on capital account, Rs 292 crore is the increase due to these
    Allocation on capital account investments. While there is no doubt in our
    agri and allied/Total expenditure Rural devt/Total expenditure Irrig and flood/Total expenditure Source: Based on AFS 2008-09. 0.014 0.000 0.001 0.0528 0.0945 0.0028 0.0001 0.0005 0.0034 mind that these institutions may genuinely require investments from the central government and would indirectly help the farmer
    28

    by providing easier access to credit, the directly productive capital investments in agriculture (which are higher in budget 2008-09 by merely Rs 43 crore) is the one where we would expect direct greater state intervention and “hand holding” of the farmer. Thus the apparently “good” allocation of a budgetary hike on expenditure in agriculture on capital account is somewhat deceptive. This further vindicates our argument of “learning” on the part of the policymakers who are increasingly resorting to covertly disguised budgetary announcements – the NPBC hypothesis.

    3 Conclusions

    A somewhat detailed scrutiny of some specific allocations, as has been attempted in this article, seems to suggest the emergence of a political budget cycle of a new variety. Spending hikes are not on the usual suspects – subsidies – but on “desirable” and “meritorious” components of the budget, viz, primary education and agriculture. In case of the SSA and the MDM schemes we find that generous allocations have been made despite a track record of underutilisation – a clear violation of economic wisdom. Similarly, a hike in the share of capital expenditure on agriculture is “apparently” good, but detailed inspection revealed that it was “Investments in Agricultural Financial Institutions” and not directly productive capital investments in agriculture that constituted the bulk of the increase. Such covertly disguised budgetary allocations and discretely removing the conventional subsidies directed to vested interest groups from public scrutiny by making them off budget is clear proof of the fact that there has been a “learning” on the part of the politicians – we need to now watch out for a New Political Budget Cycle!

    References

    Karnik, A V (1990): ‘Elections and Government Expenditure: The Indian Experience’, Journal of Quantitative Economics, Vol 6, pp 203-12.

    Khemani, S (2004): ‘Political Cycles in a Developing Economy: Effect of Elections in the Indian States’, Journal of Development Economics, 73: 125-54.

    Lalvani, M (1999): ‘Elections and Macropolicy Signals: An Examination of the Political Budget Cycle Hypothesis’, Economic & Political Weekly, September 11.

    Sen, K and R Vaidya (1996): ‘Political Budget Cycles in India’, Economic & Political Weekly, July 27, pp 2023-27.

    april 12, 2008

    EPW
    Economic & Political Weekly

    To read the full text Login

    Get instant access

    New 3 Month Subscription
    to Digital Archives at

    ₹826for India

    $50for overseas users

    Comments

    (-) Hide

    EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

    Back to Top