All eyes on the budget

All eyes on the budget
ekantipur, 7-Jul-08
BY PROF SRI RAM POUDYAL

The upcoming budget is going to be the first to be presented by the Maoist-led government. Rightists are watching how it will embrace socialist vision and programs in the context of a liberalized economy, while leftists are pondering how the budget will combine the ideals of socialism with those of capitalism.
Whatever they may be speculating, the budget has to be designed to maintain the growth momentum, fulfill the mandate of the people's movement and adhere to fiscal discipline. The Maoists have to deliver what they promised in their CA election manifesto. Besides, there are mounting claims and aspirations of all classes and interest groups. The finance minister has the difficult task of balancing these expectations when allocating and generating the required resources. He also has to make a tradeoff between short- and long-term objectives.

The most important thing the budget should mention, even if in general terms, is the direction in which the government is steering the economy.

The finance minister inherits a legacy of fiscal profligacy characterized by a persistent budgetary deficit. In 1974, the gross fiscal deficit (excluding grants) was Rs 505.4 million. It surged to Rs 12,819.9 million in 1991 and is estimated to have ballooned to Rs 65,328.3 million today.

As a proportion of the GDP, the deficit has remained at the 6 percent level in recent years. The growing deficit has tended not only to cause a sharp increase in the debt-GDP ratio, but also exerted pressure on domestic prices and adversely affected savings and investments, and consequently, growth. Foreign grants and loans covered 57 percent of the gross deficit in 2006 and 2007. The estimate for the current fiscal year is 68.6 percent.

The question is how long and to what extent we should depend on foreign help to meet our budgetary expenditure when we are all aware of the consequences of excessive dependence on foreign aid. Keynesian intellectuals are losing ground as Nepal's tradition of unbalanced budgets has not yielded any tangible results.

So the first task is reducing the deficit. This can be done by increasing expenditure marginally if it is not possible to reduce it and if there is no rise in revenue. This brings up three important questions. First, what should be the size of the government budget? Second, how should the allocations be made? And, third, how can revenue be increased?

Nepal Rastra Bank's data for the first 10 months of the current fiscal year shows that actual expenditure is 60 percent of the estimated amount (Rs 168,995.6 million), while revenue mobilization is 76 percent of the target (Rs 103,667.3 million). It seems very likely that both the expenditure and revenue collection targets will be met. The estimated expenditure for next year will have to be certainly higher, say around Rs 200 billion, representing an increase of 18.3 percent over this year's estimate.

As inflation is estimated to be around 8 percent, the real increase will be 10 percent. The government should contain current expenditure at the present level allowing for inflation and increase the share of capital expenditure. In the last five years, capital expenditure amounted to 26 to 27 percent of total expenditure. This is just the reverse of what prevailed during the years 1975 to 1994 when the share of capital expenditure ranged between 63 to 71 percent.

The high share of current expenditure in total expenditure witnessed during the last one and a half decades has been largely due to the unnecessary expansion of the state machinery by successive governments to serve the political interests of the party in power. One can see how the staff are only partially employed at almost all the government offices. Therefore, there is a need to restructure administration to make it more effective and accountable. Unjustifiable current expenses also need to be eliminated. This will result in significant savings that could be used to meet obligations warranted by circumstances.

The allocation of capital expenditure should be done in such a way so as to maintain the growth momentum witnessed in the current year. In the course of maintaining the growth momentum, the focus should be on inclusive growth, which means concentrating on agriculture. Farming, the mainstay of 85 percent of the country's population, has been lagging behind with a nominal growth rate of 0.7 percent in 2007 and 1.1 percent in the preceding year.

The agricultural sector needs to be transformed by steering it towards greater commercialization and gradual substitution of integrated farming by enterprises specialized in crops, vegetables, horticulture, livestock and poultry. This requires development of fodder markets, effective delivery of agricultural and veterinary services to the farms and sustained investments in rural markets, transportation and communication. Moreover, crop and livestock insurance has to be provided, and floor prices and minimum wages have to be fixed.

Commercialized farming and specialized enterprises can be best achieved through producers' cooperatives. Although such organizations have proliferated, there is no vision and perspective of cooperative development. Therefore, specific policies are required to develop a new generation of cooperatives to have an impact on the agricultural sector. Such cooperatives should be able to face market competition with vertical integration and coordination as is prevalent in India, the US and Canada. Other sectors that should receive due attention in the budget are the social sector and the needs of underprivileged communities and victims of the people's movement.

With respect to industry, the strategy should be to promote public-private partnership by developing viable mechanisms and easing infrastructural and policy bottlenecks. There is a need to bring a new industrial policy to encourage the growth of export industries and discourage the rampant tendency of holding licenses - particularly for micro-hydro, mining, forestry and trading - instead of executing the projects within the stipulated time.

On the revenue front, there is plenty scope for mobilizing additional resources by enhancing tax compliance, expanding the tax base (i.e., urban property tax) and enforcing VAT. A modern computerized information system and simplified procedures will help improve tax compliance considerably. Local authorities need to be motivated to explore and tap potential revenue sources within their jurisdiction. And, of course, malpractices and corruption by tax collectors should be stopped. They siphon off a significant amount of money that would otherwise go into the state treasury.