Separate Railway Budget scrapped: How will it impact fiscal management and what is the political fallout?

The Union Cabinet on Wednesday approved three significant proposals related to the country’s fiscal management by merging the separate Railway Budget with the General Union Budget, ending distinction between Plan and Non-Plan funds and also to complete all budgetary processes by March 31, by advancing Budget session of Parliament.

Even though there was consensus on completing budgetary processes early, to allow all tax proposals to get effective by April 1, it was decided to fix the date of Budget session for 2017, as per the schedule of assembly elections. “In principle the proposal was approved, but for 2017, we will have to take the calendar of assembly elections into consideration,” said Finance Minister Arun Jaitley, soon after the meeting. The meeting was chaired by Prime Minister Narendra Modi, who had been insisting on ending past conventions to streamline the processes of budget making.

The Cabinet's decision to end the 92-year-old practice of presenting a separate Railway Budget will impact fiscal management. Now the Finance Minister will present it as part of the General Budget. FM Arun Jaitley said the practice of a separate Railway Budget was started in 1924, since the Railway expenditures used to be more than the General Budget. But now, many other ministries like the Defence, parts of the Union Budget have more expenditure than the Railways. Also, if the expenditure entailed on projects coming under the public-private partnership (PPP) model is added to the Ministry of Road Transport and Highways, its Budget also adds up to more than that of the Railways.

The political fallout of the new arrangement will be that the Railway Minister’s political stature will diminish and the hot race to occupy Rail Bhawan will end up. In 2004, when the UPA-I took over, two of its stalwarts Ram Vilas Paswan and RJD leader Lalu Prasad Yadav fell apart, as both were vying for the Railways portfolio. The portfolio ultimately went to heavy weight Yadav. It has been observed that instead of priorities, the funds and resources were being allocated for political reasons. Officials here believe this practice will end with the merger of the budgets. Immediately after the decision, chief minister of Bihar and former Railway Minister Nitish Kumar said the move will affect the Railway’s autonomy. "Merging rail budget and general budget won't do any good, it will lose its autonomy."

According to the government, the move will come as a relief to the Railways, which, until now, has been reeling under an additional burden of Rs 40,000 crore from higher salaries, following implementation of the 7th Pay Commission. It also has to bear close to Rs 35,000 crore of subsidy burden. The Railways will get rid of the annual dividend of Rs 10,000 crore it has to pay for gross budgetary support from the government. The government used to hand over Rs 2.27 lakh crore to the Railways every year, which now ceases to be a liability.

Both, Railway Minister Suresh Prabhu and Finance Minster Arun Jaitley were at pains to explain that the step has been taken only for presenting a common budget and will in no way affect the financial autonomy of the Railways.

Earlier, Niti Ayog in a 20-page note sent to the Prime Minister’s Office (PMO) had also argued in favour of doing away with the Railway budget. The note, titled 'Dispensing with the Rail Budget' and jointly authored by Aayog member and economist Bibek Debroy and Kishore Desai, Officer on Special Duty, argues that the exercise had failed to be of use to the sector and had become a “mechanism to announce popular measures”.

“The Railway Budget became a mechanism to announce popular measures, new trains, new routes, new rolling-stock manufacturing factories etc., with no concomitant focus on addressing Railways’ structural requirements, implementation of the ‘grand’ announcements, or funding needs,” states the note.

The Cabinet also approved a proposal to remove the existing Plan and non-Plan expenditure classifications from future Budgets. “We will be switching to a more globally relevant system of classifying spending as revenue expenditure and capital expenditure,” said an official. All the administrative spending will come under revenue expenditure while capital spending and grants for creation of capital assets will be classified under the same broad category.

“In the backdrop of the abolition of the Planning Commission and setting up of the NITI Aayog, the classification of expenditure as Plan and non-Plan had lost  its relevance. If the accounting of expenditure is classified broadly under revenue and capital, I think this is where the expenditure is focused,” an official said. In 2011, an experts’ committee headed by C Rangarajan had proposed that the distinction between Plan and non-Plan expenditure be abolished for both the Centre and the states.

In another proposal, a cabinet note had proposed  to hold the budget session of Parliament early from January 27 (Friday) and present the union budget on February 1 instead of the past practice of it coming only on the last day of February. Jaitley said the proposal was approved in principle, but for 2017 will be linked to the schedule of assembly elections for want of availability of MPs who will be busy in campaigning. This will help budget proposals and fund flow to states start right from April 1. Since the full budget gets approved by May, some proposals are rolled out by September.

A tentative calendar has been drawn up to have the recess from February 17 to March 20 to enable the department-wise standing committees of MPs deliberate on the budget proposals. Both the Houses will sit up to February 17, a Friday, and then assemble on March 20. The government contemplates to get the budget passed in March itself to put an end to the practice of the vote-on-account for four months for the financial business in the new financial year that begins on April 1.