This is the second of a two-part series of articles on the Indian budget and comparisons with Pakistani budgets. Part-one focused on revenue generation while part-II will focus on expenditure allocations.
The Indian budget's allocations are significantly different from our budgets, explicable given the state of the two economies; however, there are some marked differences in expenditure priorities that need to be highlighted.
The most closely watched expenditure item in Indian budgets by Pakistan is the allocation for defence. Last year the Indian budget allocated, as a ratio of projected GDP, 1.74 percent for defense while Pakistan allocated more than double at 3.5 percent. The reason for the divergence: India's much larger economy (almost eight times the size of Pakistan's) and with consistently higher growth rates relative to ours. In 2015-16, the Indian economy grew at 7.6 percent in contrast to ours of less than 4 percent though the government is widely expected to overstate it. Dar is on record as repeatedly stating that the Sharif administration would not compromise on security expenditure, a line that he reckons would silence his critics. However, while outlay for defence has been rising each year yet the unbudgeted rise in current expenditure at the end of the year is mainly attributable not to defense but to higher debt servicing due to this government's heavy reliance on borrowing. In addition, Dar appears to remain focused on reducing the budget deficit under the 6.64 billion dollar Extended Fund Facility which accounts for slashing development expenditure as well as mini-budgets - items that impact on the common man.
The Modi government allocated 10 percent to defence in 2016-17, one percentage point less than in 2014-15. While Pakistan's nuclear option is realistically the major deterrent with respect to India yet our army's funding requirements have risen dramatically due to the ongoing operation Zarb-e-Azb. Total allocation for defence in 2014-15 budget was 781 billion rupees (7.5 billion dollars), which is 15 percent only of India's 50 billion dollars in 2016-17. However, our budget outlay on defence was a whopping 19 percent of our total expenditure (current and development) as opposed to India's 10 percent.
India also allocates 10 percent on subsidies or the same amount as on defence. Pakistan government again under the International Monetary Fund programme has been reducing subsidies and in the current year's budget subsidies amounted to 3.3 percent of total expenditure. The Indian budget envisages a decline in petroleum subsidy from 2013-14's total of 85,378 crore rupees to 26,947 crore rupees - a decline no doubt due to the massive decline in the international price of oil. Be that as it may, the Indian farmer is at a distinct advantage compared to his Pakistani counterpart because of the heavy subsidy on fertilizers estimated at 72,437 crore rupees and budgeted at 70,000 crore rupees in the forthcoming fiscal year. The Indian domestic fertiliser output does not meet domestic demand and hence imports are required to meet the shortfall. In this context the decline in the international commodity prices including fertiliser accounted for significant savings by the government in the year just past.
Pakistan government did not allocate any subsidy to the fertiliser sector in the current year and the last year when subsidy was extended for fertiliser was in 2013-14 and that was specific to Fauji Fertilizer Bin Qasim. What is baffling today is that domestic fertiliser is more expensive than imported fertiliser and the government has not taken any action in this regard in spite of the decline in the use of fertilizers by our farmers with a resultant negative outcome on yield per hectare.
India also controls the support price of about 25 items (in contrast to Pakistan's two) to ensure adequate compensation to farmers with the objective of achieving food self-sufficiency. Indian budgets have recorded substantial increase in subsidy for food - from 117,671 crore rupees in 2014-15 to 139,419 crore rupees in 2015-16 and has budgeted 134,834 crore rupees for next year. In addition, funds have been allocated for Mahatma Gandhi national rural employment guarantee scheme which guarantees 100-day wages in a year to every rural household whose adult members volunteer to undertake unskilled manual labour.
The PML-N's manifesto has invariably focused on industrial growth and in its current tenure its budgets have by and large ignored the farm sector with devastating results. To argue that agriculture has been devolved and therefore does not require federal support is flawed as taxes as well as availability of utilities is within the federal domain. Pakistani governments including the incumbent continue to focus on sugar and wheat subsidy only and while wheat is certainly a staple in this country heavy subsidization of sugar does periodically make the government of the day susceptible to allegations of nepotism given that sugar mill owners constitute a who's who of our political elite. In addition food subsidy is now limited to Ramazan package and typically is around 2 to 3 billion rupees maximum while sugar subsidy alone is around 4 billion rupees since 2013-14 during the tenure of the PML-N government. However, the government would no doubt point out that the Benazir Income Support Programme budgeted at 102 billion rupees in the current year is the enabler to the vulnerable to procure essentials. Be that as it may, developing countries normally prefer food stamps instead of cash payment to ensure that the vulnerable within a family unit are assured access to food.
The farm package announced by Prime Minister Nawaz Sharif prior to the local bodies' elections remains unimplemented sadly reflecting the inability of the prime minister to ensure enforcement of incentive packages that he himself announces amidst much fanfare.
The Indian budget also envisages subsidising LPG and kerosene in the forthcoming fiscal year with diesel and petrol going from subsidized to net taxed fuels. According to available data the Indian government since June 2014 raised specific excise duty on diesel from 3.56 to 17.33 per litre and on petrol from 9.48 to 21.48 rupee per litre and the resultant bonanza to the exchequer has been 150,000 crore rupees. Pakistan does not extend any subsidy to petroleum and products and instead is increasingly relying on taxing this sector to generate resources. Recently the government imposed a general sales tax at a fixed rupee rate rather than as a percentage per litre which had made the Sharif administration susceptible to criticism every time it raised taxes to ensure that its revenue remained unchanged with a decline in international oil prices. At present the following flat rates are applicable: petrol 14.48 per litre, HOBC 18.57 per litre, kerosene 10.40 per litre, light speed diesel 9.63 rupee per litre and high speed diesel art 29.57 per litre. In addition the government charges petroleum development levy and other taxes including excise and withholding taxes.
Interest payments in the Indian budget were estimated at 19 percent of total expenditure. Pakistan's comparable figure is more than 31 percent of total expenditure in the current year and 28.6 percent in the revised estimates of 2012-13 (the last year of the PPP led coalition government) however two factors need to be highlighted: (i) 2013 was an election year and with the budgetary support for Pakistan from external sources frozen since 2010 due to failure to meet the Fund conditions domestic borrowing rose visibly; and (ii) around 480 billion rupees was borrowed from the banking system by Dar on the second last day of the 2012-13 that was dishonestly placed at the doorstep of the PPP coalition government and the caretakers.
India's Finance Minister Jaitley did not significantly raise capital expenditure or raise salaries as per seventh pay commission award, which would have fuelled demand. However, critics of the Indian budget claim that the growth rate envisaged in the budget would not be achievable given the (i) postponement of a significant portion of the 7th Pay Commission-related payments to next year; and (ii) budgeting only a 4 percent increase in capital expenditure. According to Sanjeev Prasad of Kotak Institutional Equities, Jaitley chose "consolidation over growth" and Jay Shankar, chief India economist of Religare, maintained that "with government spending slowing down and private investment unlikely to kick-start meaningfully given the slack in the economy, there are downside risks to growth in FY17."
In contrast, Dar has been unable to withstand criticism in his attempt the first year to limit the rise in government sector pays and subsequently capitulated; he has also not only been compelling provinces to generate massive surpluses (around 300 billion rupees in the current year) with obvious negative implications on capital expenditure but has also agreed to slash federal development plans by 25 percent to meet its deficit targets agreed with the Fund in the current year.
To conclude, while the Indian budget was announced from a position of strength unlike Pakistan's budgets yet the inordinate reliance on borrowing and on external borrowing to shore up foreign exchange reserves as well ignoring the farm sector given the fact that our industry is agro based appear to be policies that require an urgent revisit.