The Hindu : Expenditure control remains intractable

Online edition of India's National Newspaper
Monday, Feb 16, 2004

Business

Business

Expenditure control remains intractable

The interim budget is a pointer that the economy is functioning quite well.

THE INTERIM budget should not be taken too seriously. With the polls just a couple of months away, the ruling coalition is basically using the Central budget to attract voters.

On one side no changes have been proposed relating to taxation; on the other, giveaways have been announced. In fact, even before the interim budget was presented to Parliament, major announcements had been made with regard to indirect taxes including reduction of import duties. Only when the new government takes office and presents a proper budget will a balanced picture emerge. An interim budget is the price we pay for advancing polls.

However, the interim budget has its uses. First, we get to know the state of the fisc for the current financial year, that is 2003-04. Here it must be accepted that given that 2003-04 is a pre-election year, the fiscal figures could have been much worse.

The Finance Minister has announced that the fiscal deficit will be contained at 4.8 per cent of GDP during 2003-04. Even if there is some slippage in meeting the disinvestment targets, the fiscal deficit should be contained within 5 per cent of GDP. This has been possible mainly because of buoyant tax revenues. Considering the temptation to overspend in such circumstances, the Finance Minister has to be appreciated for his comparatively conservative approach. One major long term fiscal burden for posterity is of course the estimated Rs. 4,000 crores annual outgo on account of DA merger scheme for Central employees. The fall-out on State finances will be more serious.

There is a theory floating around that the Government should not worry too much about fiscal deficits, and instead should concentrate on growth. For the kind of government system that we have, this is a dangerous theory.

The internal debt is already very high and had reached 85 per cent of India's GDP by March 2003. The present NDA Government has been especially remiss in tackling excessive government expenditure.

The main reason for the smaller fiscal deficit this year is the buoyancy in tax revenue following a high GDP growth. Net tax revenue to the Centre is expected to grow from Rs.159, 425 crores in 2002-03 to Rs.187, 359 crores, a rise of 17.6 per cent. But what are the chances of a sustained reduction of fiscal deficits in future in order to meet the commitments of the Fiscal Responsibility and Budget Management Act which has set March 2008 as the deadline for wiping out the revenue deficit?

Sizable revenue deficit

Even the revised estimates for 2003-04 shows the revenue deficit at a massive Rs. 99,860 crores, which is 75.6 per cent of the total fiscal deficit. Success in containing fiscal deficit would depend crucially on increased revenue collection backed by high GDP growth rates. The high growth during the current year is mainly because of the turnaround in the agricultural sector, from a negative 5.2 per cent last year to around 9 per cent. To repeat an 8 per cent GDP growth rate in the coming years will be difficult, but not impossible.

Tax collection as a percentage of GDP has been steadily falling over the past few years. It appears that any Government would be loath to increase direct tax rates in future. Indirect tax rates like excise duties have already been rationalised to a significant extent, but there is scope for further rationalisation. Customs duty rates cannot be increased on account of WTO commitments as also the imperative of keeping the economy competitive. Service taxes still offer some scope for increase. Value added taxes can improve the efficiency of the tax collection system. VAT is being opposed by sections of the trading and manufacturing community which seem to fear that they stand to lose from the resultant transparency.

If the Government cannot ensure tax buoyancy on a continuing basis, then public expenditure will have to be cut. This of course is anathema to any ruling party. However, the truth is that capital expenditure is already suffering as revenue expenditure, including interest payments, continues to rise.

Scope for expenditure cuts

There is also the need for a debate on a few issues relating to expenditure that the country has treated as sacrosanct. For example, do we require to increase defence expenditure substantially when we are trying to smoke the peace pipe with Pakistan? Even during 2002, India did not finally muster up the courage to attack Pakistan in spite of serious provocation, given Pakistan's nuclear capability as well as international pressure.

The silver lining is that if the Central Government is really interested, expenditure can be controlled without growth rates suffering. This has been the result of the reforms carried out since 1991. There is surplus in foodgrains production and foreign exchange reserves have crossed $100 billion. These surpluses can be judiciously used for poverty alleviation, inflation control as well as encouraging growth.

In today's context, the Government does not need to increase capital expenditure substantially in many important areas. Continuing the reforms process is much more important. For example, in the power sector, the main investments in the Central sector can be undertaken by NTPC, NHPC and Power Grid Corporation which will not entail allocations from the Central Budget. Similarly, the road projects undertaken by NHAI can be funded by imposing a fuel cess and other user charges. Telecom expansion is being undertaken by the private sector and MTNL and BSNL, which are now corporate entities. The Railways is a separate undertaking with its own budget. The ports and shipping sector can be funded by user charges and do not need government funding to any large extent. If Central Ministers could be discouraged from disbursing funds to their favourite vote banks, fiscal consolidation on the back of a decent GDP growth rate is not very difficult.

The Government of course needs to increase outlays in several sectors including food-for-work programmes for BPL (below the poverty line) families, agricultural infrastructure, education and health. Unfortunately, aberrations will continue to creep in where politicians are involved. The recent directive to IIMs in fee reduction is a case in point.

Damage from

populist schemes

Another favourite ploy is to make others pay for the announcements being made by the Ministers. In the case of medical insurance, the Government announces half-baked schemes like the Universal Health Scheme targeted at the poor, wherein the costs are expected to be met by the public sector insurance companies. Similarly, public sector banks are supposed to extend low cost farm loans, the cost of which will not be borne by the Government. This kind of interference in bank lending had led to a number of public sector banks becoming sick in the past, but no lessons appear to have been learnt. The Finance Minister has reduced the provisions towards petroleum product subsidies in the budget, but the Petroleum Minister will not allow the public sector oil companies to increase selling prices.

Overall, the interim budget is a pointer that the economy is functioning quite well. However, the tasks of poverty removal, continuing the reforms process and fiscal consolidation are major challenges, and the new Government will have its hands full.

Abhijit Roy

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