Back to basics: boosting public expenditure
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Enhanced demand for goods and services can combat economic slowdown
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There should be rigorous monitoring of implementation to get the full value from all the expenditure on jumpstart schemes and achievement of objectives.
World-wide financial crisis and recession have focussed attention on remedial measures. Among the many options, fiscal stimulus is one. During the early 1930s, eminent economist John Maynard Keynes advocated public expenditure as a means of stimulating the British economy from the Great Depression. His thesis was that the State should use the budget funds to tackle sagging demand for goods and services. Any type of government expenditure, even unproductive activities such
as digging holes and filling them up or building pyramids, was preferable to non-action on the part of the government. (It is ironic that in Britain and the U.S. public expenditure on wars, totally unproductive, provided some relief from economic slump). What was needed was swift immediate action without worrying too much about long term effects as “in the long run we are dead.” In the present context Keynesian economics has been revived as an answer to the problem. Many countries are using government budgetary funds to tackle the current financial imbroglio such as the bale out by the U.S. and Britain. The Indian government is also using the fiscal device along with other measures to meet the present situation. It is prudent to use all available tools to meet short-term crisis.
In adopting the fiscal route one has to recognise the difference between the Depression-era government in Keynesian times and the nature of government at present in India, that is, between a Laissez Fare state with minimal functions and the welfare state involved in all sorts of activities. Due to this government’s resources are already under strain by a large number of projects, schemes and activities. While using the budget as short-term stimulus is legitimate in the circumstances to jumpstart the economy, the country should not take up and cannot afford any unproductive schemes or projects. In a developing economy such as India medium and long term considerations cannot be ignored.
Increased spending
Increased spending to boost the demand for goods and services is the aim of any short-term strategy to combat economic slowdown. Fiscal stimulus works through taxation and public expenditure. Reduction or abolition of direct taxes is to put more income with the taxpayers for spending. This may not always work as the extra money may be saved for future rather than being spent. There may be public resistance to restore the tax rates when such an action is warranted after the economic recovery. The easier route is adjustment of indirect taxes such as reduction of excise duties to be passed on by the producers to the consumers.
The excise duties concessions already extended are reported to reduce Indian government revenue in 2008-09 by Rs. 30,000 crore.
The other major fiscal tool is boosting public expenditure. Resort to this has to take into account some important factors:
There has to be a judicious balance between short and long-term interests. Infrastructure development is vital and requires massive investment. These are long gestation projects but will help to increase output and productivity. On the other hand, there are schemes such as rural employment generation resulting in immediate injection of purchasing power and locally useful productive assets. Large expenditure due to the Pay Commission recommendations has no direct productive link. Unproductive schemes have to be avoided especially populist ones on the eve of coming elections. Selection of schemes should be on the basis of their potential contribution to increase in GDP. As an example, incentives to small and micro businesses may be worth consideration, example, self-help groups. The details of the projects and schemes have to be worked out in sufficient detail before launching. Lack of adequate home work has plagued the speedy implementation of the recent $700 billion bale out plan of the Federal Government in the U.S. The latest fiscal stimulus package of Government of India allows Rs. 30,000 crore as additional borrowing, that is, additional fiscal deficit by State governments with no details.
Rigorous monitoring
There should be rigorous monitoring of implementation to get the full value from all the expenditure on jumpstart schemes and achievement of objectives. Proper output and outcome budgeting is most crucial. There should be an effective follow-up and remedial action to rectify shortfalls revealed by the follow-up. It is not clear what specific lessons have been learnt in working with such output and outcome budgeting introduced recently for Plan schemes.
At the Economic Editors Conference on November 24, 2008 the Finance Minister quoted Paul Krugman’s comment: “This is not the year to worry about fiscal deficit.” This needs some qualification. It is true that fiscal stimulus by public expenditure on worthwhile schemes to get out of short term economic slump need not be constrained by deficit considerations. But medium term and long term thinking and planning are essential for sustainable budget deficit and public debt. Attempts to meet the statutory deficit targets under the Fiscal Responsibility and Budget Management Act, 2003, have focussed on mechanical compliance with numerical targets rather than tackling the basic long standing fiscal problems on the revenue and expenditure side involving policy and fiscal management issues. Off budget items such as bonds for petroleum and fertilizer subsidies and buoyancy in revenue contributed to the neglect of basic factors to be set right for tackling the budget deficits. The RBI Mid Term Review wants government to address the issue of providing subsidy to oil marketing and fertilizer companies directly in cash instead of the current practice of oil and petroleum bonds. It is interesting to note that the President-elect in the U.S. Barack Obama has promised to review all federal budget items to eliminate all unnecessary expenditure to minimise the impact of the $700 billion bale out on their budget which is already on unsustainable deficit.
The latest Mid Term Review for 2008-09 of the RBI (October 24) highlights the signs of deterioration in India’s fiscal situation.
Additional deficit is no doubt a price for short-term contra cyclical stimulus. But its impact can and should be reduced by review and elimination of non-priority, unproductive and inefficient expenditure and increasing efficiency in revenue collection and management. Specific issues of expenditure policy and budget implementation needing immediate action have been indicated in these columns earlier, example, on September 15, 2008.
A. RANGACHARI
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