Why we should opt for a Capital Budget

Here are nine good reasons why India should switch to a Capital Budget instead of the usual one that focuses primarily on revenue-related issues:

First, every economic entity has a capital budget, be it unstated and implicit (like a household or kirana shop) or stated and explicit like in the case of a company or an R&D lab.

As the size and complexity of operations increase, it becomes all the more necessary for an economic entity to structure, implement and review a capital budget. A nation-state is the most evolved form of an economic entity, and therefore needs a capital budget. We in India certainly need one.

Second, there seems to be an obsessive interest in a 'revenue' budget. The annual tamasha surrounding the end-February presentation of the Union Budget reinforces the feeling that our economic pundits, commentators and critics are not able to step out of this frame of reference and demand a 'capital budget'.

While revenue deficit, fiscal deficit, FRBM et al are all very fine, surely as citizens, we have a right to know how much capital is being deployed in nation-building activities and how such capital is being raised.

At a ridiculous level, but just to forcefully make the point, a perfectly balanced revenue budget may have zero funds deployed for long-term investment in the country's infrastructure. Something close to this may well have happened as is pointed out below.

Third, a capital budget provides a full perspective. A lack of appreciation of the nation's capital needs may have derailed us. An obsession with the revenue books has led India up the path of minimum investment in the country's infrastructure with an abysmal figure of close to 3.5 per cent of the GDP for about three decades. Debate and discussion on a publicly declared capital budget may have averted this serious under-investment.

Four, revenue and capital budgets are obviously inter-related just as a profit and loss account and balance sheet are. Surpluses and allocations from the revenue budget go towards capital investments. Similarly, the servicing of long-term capital features in the revenue budget. In a jugalbandhi, there is no music when one half is missing, forgotten or ignored.

Five, a capital budget should be made understandable to the people. Just as the television-viewing public has over the years gained an appreciation of the nuances of the revenue budget (prices, inflation, deficits, taxes, allocations, subsidies and so on), the language of capital budgets must also be made simple to the public at large who are today tuned in far more to economic issues than ever before.

The following five questions need to be posed and then answered:

• How much capital formation does my country need?
• How much has been planned for?
• How much has actually been invested?
• How has it been financed?
• What choices have been made?

Simple? Then let's get the answers in the form of a Union Capital Budget. Or do we have to wait till these questions are posed under the Right to Information Act?

Six, the capital budget is intimately linked with infrastructure investments. If US$ 350 billion is the planned infrastructure outlay in the next five years (as endorsed by everyone from the prime minister downwards), then let us have a capital budget that shows the way; or candidly admit that we have yet to find the way.

Recognising reality through a capital budgeting process will indeed throw up some challenging issues. An ICOR (incremental capital output ratio) hovering around four would mean that for the 9 per cent growth envisaged for the 11th plan period, capital formation will have to be around 36 per cent.

If the infrastructure sector is targeting around 8 per cent Gross Capital Formation in Infrastructure, roughly one-fourth of the nation's capital formation will be in infrastructure. It is this one-fourth that is closely linked to the provision of public goods and services, economic development and global competitiveness. It is also largely under the direct influence of central and state governments.

The balance non-infrastructural elements of capital formation are largely in the private domain and not directly amendable to public accountability or the assessment of the government's performance. So, the link between a capital budget and nation-building is very strong.

Seven, the frailty of investment-related statistics is worrisome. Nobody from the Planning Commission to the finance ministry to the PMO will deny that the existing statistical superstructure for accurately capturing capital and investment related "stock" data is woefully inadequate vis-à-vis systems in place for capturing "flow" data.

While we are up to our eyeballs in statistics relating to industrial production, agricultural production, service sector output, mining, electricity production, export-import figures and so on, try asking for data relating to the capital invested in the last one year across the central government, state governments, PSUs, private sector, urban local bodies and rural infrastructure, and humming and hawing is all you would get.

The ministry of statistics and programme implementation should get cracking on this huge challenge. Surely, the newly constituted National Statistical Commission that has taken charge under the Chairmanship of Professor Suresh Tendulkar can list 'capital investments' as one of its priority tasks.

Eight, a capital budget will lead to a more informed debate. A good capital budgeting process would lead to far greater participation and consensus on key issues of nation-building. Should we be investing more in railways or a new generation of expressways? Should irrigation take precedence over rural roads? Should urban local bodies strive to invest more by quadrupling their income from property taxes and other revenue raising methods?  How is funding happening? Are we availing enough of overseas development assistance? Are short-term funds of public sector banks going towards long-term debt of infra-projects? Is there gross asset liability mismatch in the balance sheet of our nation...or is there likely to be?

Nine, finally, can we please do away with the irrelevant colonial hangover of a Railway Budget Day in Parliament. It was in 1924 that, for the first time, railway finances were separated from the general finances of the government.

Eighty-three years later, it seems more appropriate to have an Infrastructure Budget Day. The overall requirement of Indian infrastructure is five times the size of the railway's requirement. And an Infra-Budget Day is nothing more than presenting the Capital Budget of the nation.

February is a good time for capital ideas for a Capital Budget!