Business-as-usual budgetWhat the country needs is a quantum leap in the economy, not incremental change
Finance Minister Yubaraj Khatiwada’s Rs1.31 trillion federal budget for fiscal 2018/19 aims to create jobs, develop infrastructure and boost production to achieve eight percent growth and double farm output in five years. One question that arises is whether the budget has addressed the problems flagged in the white paper or not, namely with regard to agriculture, industry, underemployment, inadequate investment, swollen public sector, weak private investment and dependency on remittance.
The traditional path
The budget has allocated Rs40.14 billion, or 3.05 percent of the total spending to the farm sector which is too little to achieve the miracles promised—increasing grain production by 20 percent annually and doubling it in five years. Agriculture and industry are the potential real sectors that can generate sufficient employment for a growing population, but they are hindered by woeful physical infrastructure. The growth rates achieved so far can largely be attributed to the services sector that has limited scope for job opportunities to absorb a swelling labour force. The budget envisages a 12 percent growth in industrial production, but without a substantial surge in infrastructural investment, this is unattainable.
When the government is making a case for public investment, the misapplication of scarce resources on public consumption should be stopped by reviewing the public positions and downsizing them. Public sector investment lays the groundwork for economic growth. To attain a higher GDP, the public and private sectors need to limit consumption spending and increase day-to-day savings. The budget statement contains no plans to limit government consumption to an affordable level. The revenue collection target of Rs831 billion is insufficient to cover the recurrent expenditure of Rs845 billion, thus the government has to depend on loans and grants for capital expenditure. The federal budget remains reluctant to rein in administrative costs. The size of the federal budget is limited as a large chunk goes directly to the provincial and local governments which they can spend at their discretion.
Despite Khatiwada’s criticism of the past practice of scattering small amounts of scarce resources on a plethora of dubious projects, he also capitulated to pressure from lawmakers and hesitantly allocated Rs40 million for each electoral constituency. As mentioned in the white paper, there is a growing tendency to create positions to meet individual opportunities without any admissible requirement and affordability— whether in the civil service, defence, security or diplomatic service—thus creating a long lasting liability on the public coffers. The budget was expected to bear the risk of taking structural changes to reduce the burden so as to streamline recurrent expenditure, but it remained silent over the issue and followed the traditional incremental path of resource allocation.
Need for quantum leap
The government can take comfort on the revenue front because inflation is on an upward trajectory and nominal income has to rise accordingly. At the same time, much of the budget earmarked for the provincial and local levels circuitously pushes up demand for consumer goods. This also adds income to the government coffers by way of VAT and customs duty, allowing a higher revenue collection projection. Though the projection of a 33 percent growth in revenue collection is a little bit ambitious, given the scenario, it is an achievable target. The budget is bogged down in the quagmire of a remittance-centred resource base that is spent completely on consumption goods and services largely imported from abroad, only providing an opportunity for the government to boast of an increase in revenue collection.
The current deceleration of inflation is mainly due to a slump in oil prices in the world market and the strong price control measures taken by the Indian government. It is simply not true that the fall in the inflation rate is a result of domestic monetary policy or supply chain improvement in the country. With oil prices on an upward trend, inflationary pressures are once again building up. If inflation cannot be contained at 6.5 percent as projected in the budget, private sector investments are likely to be seriously affected by a rise in oil prices and increased interest rate. Learning from the rising powers, as they have always used the state to kick-start growth, this should be compensated by means of public investment to boost job opportunities. But the budget is totally silent on this front.
For years, Nepal has been an example of opportunities squandered and potential unfulfilled. An incremental change cannot lead the country anywhere. What is needed is a quantum leap to bring an economic revolution. If the people feel that the budget is not geared towards the right direction, there will be dissatisfaction towards the Nepal Communist Party. And if the dissatisfaction is high, social unrest could result.
Poudel is a retired senior officer of the Finance Ministry