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Budget 2009-2010: Beyond Fiscal Rectitude

Budget 2009-2010: Beyond Fiscal Rectitude

The Union Budget for 2009-10 travels the well-worn path of proposals and policies. Can we open our minds to new ideas and new possibilities?

COMMENTARY

Budget 2009-2010: Beyond Fiscal Rectitude d owngrading the Indian economy after the budget was presented, even though it issued warnings. Downgrading India (when the US and UK had at least the same order
Vinod Vyasulu of deficit in a situation of contraction) may not be good politics for them. India enjoys positive growth. This would put pressure

The Union Budget for 2009-10 travels the well-worn path of proposals and policies. Can we open our minds to new ideas and new possibilities?

This article is based on a presentation made at an Interactive Session on the Union Budget at the Bangalore International Centre on 17 July 2009. I am grateful to S Varadachary for not only encouraging me to write this piece, but also for valuable inputs. I am not mentioning this to share blame for errors.

Vinod Vyasulu (vinod_vyasulu@yahoo.com) is at the Centre for Budget and Policy Studies, Bangalore.

Economic & Political Weekly

EPW
august 1, 2009

‘I have tasted eggs, certainly’, said Alice, who was a very truthful child; ‘but little girls eat eggs as much as serpents do, you know’. ‘I don’t believe it’, said the Pigeon; ‘but if they do, then they are a kind of serpent; that’s all I can say’.

I
– Lewis Carroll, from Alice’s Adventures in Wonderland. n a recent erudite article in EPW, Govinda Rao (2009) has discussed the problems inherent in a continuing high fiscal deficit in India. He points out that the total national deficit is much higher than the number for the union budget. He also makes the point that the problems are structural, and need to be attended to rather urgently. The government has failed to meet the requirements of the F iscal Responsibility and Budget Management (FRBM) Act. The Union Finance M inister Pranab Mukherjee’s budget seems to have been made without reading this article.Others agree. Shankar Acharya, former Chief Economic Adviser in the F inance Ministry, in a television programme, felt that the recent budget should be seen as “risky”. While agreeing that the downturn globally has made a stimulus important, the feeling among these economists is that it must be kept within fiscally prudent norms – and we are at that limit now. There is also the fear that global r ating agencies, uneasy with this level of fiscal deficit, would “downgrade” the I ndian economy, thus scaring off investors. Returning to a fiscally prudent r egime should therefore be an important objective of the finance minister. The message seems to have gone home, for the day after the budget the finance minister announced that he will bring the deficit under control soon. The finance secretary to the government of India spoke of the plans to disinvest in two public s ector units. In his reply to the debate in the Lok Sabha, the finance minister r eiterated this point.

Yet, Standard & Poor’s – a well-known rating agency – has refrained from

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on these agencies to downgrade these powerful economies if they were to retain credibility. This shows, however, that there are also other factors to be taken into account in making an assessment of the economy. The fiscal deficit seems less important in a recession. Who in the global economy is worried about the US deficits?

The fiscal deficit is undoubtedly an important indicator of economic health. It is not the only one: economists use many others. The fiscal deficit is like the body temperature, which is an important indicator of the state of health of an individual. An increase in body temperature – like an increase in the fiscal deficit – points to a problem that must be tackled. A high t emperature adds urgency to this. It is a symptom of an underlying problem. We have to treat that problem, and the symptom will then disappear. Treating the symptom alone may not cure the patient – or the economy.

When a doctor diagnoses a patient, the temperature is only one indicator – perhaps the first but not the most important – that she relies on to decide on a course of treatment. Temperature can be reduced by a dose of paracetamol. But that would leave the underlying cause untreated. Is our fiscal deficit to be treated with paracetamol – indiscriminate expenditure compression? Or by selling shares in the public sector that has been built up over the years? When we have sold them, what do we do next year?

What does the fiscal deficit warn us about? It is an accounting concept, which warns us that expenditures are running ahead of revenues. An early formulation is “Micawber’s Equation” in Charles Dickens novel David Copperfield. There it is related to misery and happiness. In today’s discussion, the misery is invisible, and happiness is growth at any cost.

One way of trimming the fiscal deficit is to reduce the role of the state in the economy. Let it get out of all but essential governmental functions like law and

COMMENTARY

o rder and foreign affairs, etc. This is called “Good Governance”. This would mean less state spending. This has indeed been a policy prescription in what is called the Washington Consensus. If expenditures are reduced and revenues are stable, then the fiscal balance can be restored. Since many expenditures are committed – such as salaries – the degree of freedom to reduce expenditures is little. The result has often been a reduction in the soft areas – health, education and other social welfare measures!1 Let the state get out of health and education, and leave them to the private sector. A start has been made, with tax incentives for setting up private hospitals, and for e ncouraging people to take health i nsurance (Vyasulu 2008b). This while reducing the already low proportion of e xpenditure on health.

If today, in a global recession, we agree that fiscal stimuli are necessary, the focus must shift to ways in which we can increase revenues, reduce some unimportant expenditure while increasing that which has multiplier effects. Let us c onsider a few options, which can, in combination, offer an alternative to the current policy direction. Raise Revenues: We have perhaps the lowest rates of income tax in the world. About 3% of the population pays income tax. The direct tax to GDP ratio is less than 12%. Studies in the finance ministry have shown that for companies, the effective rate of tax is only around 22%. The many exemptions in the tax code make this possible. Since there are powerful groups behind each exemption, the government then brings in a Minimum Alternate Tax, and fiddles with it every once in a while. This reflects only its own ineptness.

It is a positive thing that the finance minister has done in promising to put out a new tax code in 45 days. We need a simple and clear system that is stable over time. We have an opportunity to seek a simple tax free of exemptions. Whether the government will take that route remains to be seen. The new code could be more complex!

There is no justification for selling shares in the public sector to finance c urrent consumption. In fact, the government has to put the proceeds of such sales in the National Investment Fund and use it for specified purposes, thanks to the influence of the Left in the last government. This may be the reason behind the finance minister’s silence on this subject. Maybe they want to do away with this Fund b efore divesting any shares – so that they can use it for current consumption.

There is a case for a 40% bracket for high incomes beyond some agreed limit – say Rs 15 or 20 lakh a year. Many developed countries have higher rates. We can introduce estate duties. Tax administration has improved in recent years; it can be improved further to widen the tax base, as Govinda Rao points out. It is possible to raise revenues. We have ruled out this o ption today. Even this budget doled out sops

– small ones, but still unnecessary sops.

Improve Efficiency: What do we get per rupee we spend? All our projects suffer from time and cost overruns. Sometimes the time overrun is more than 100%; the cost overrun can be 400%. The d eadweight

INDIRA GANDHI INSTITUTE OF DEVELOPMENT RESEARCH

Film City Road, Goregaon (E), Mumbai-400065

Young Scholars’ Programme 9 to 21 November 2009

Young scholars in the field of Humanities and Social Sciences interested in Human Development research and teaching are invited to participate in a Young Scholars’ Programme (YSP 6) for capacity development. This is the sixth in the YSP series conducted bi-annually at IGIDR since 2007. The Programme is supported by UNDP and Planning Commission and hopes to build capacity in the broad area of human development. Those who finish their master’s degree (M.A., M.Sc. or M.Phil.) this year or have done so in the preceding three years may apply. Recently appointed college lecturers are also encouraged to apply. We expect to select about 35-40 participants from all over India across various disciplines.

The Programme will consist of lectures by IGIDR and guest Faculty on a range of topics, discussion groups and individual research, for which library, internet and other advanced facilities will be provided. Participants will be expected to give at the conclusion of the Programme a short presentation along with a 2,000 word essay on a relevant topic of their choice.

Those selected will be given full boarding and lodging in twin-sharing AC suites at IGIDR, and Rs. 3,000 for incidentals (related to travel) and out of pocket expenses. Three-tier AC travel (including Tatkal charges where necessary) will be reimbursed. Accommodation may also be available before/after the programme in case of travel exigencies. They should arrive latest by 8 November, and not leave before 21 November (evening) at conclusion of the programme.

Selection will be on the basis of CV and a half page note on your motivation (why you wish to participate). These should be sent by email to: ysp6@igidr.ac.in latest by 30 August 2009. Selected candidates will be intimated in the week commencing 21 September and short-listed candidates offered places as vacancies arise.

august 1, 2009 vol xliv no 31

EPW
Economic & Political Weekly

COMMENTARY

loss in government spending must be reduced. Even in normal circumstances, we cannot go on like this.

There is another issue. Our research in the field has shown that there are what is called “unspent balances” in health and education – and some other social sector areas as well, in the districts at the end of each year. This is an institutional inefficiency that can be reformed. The situation at the local level is chaotic.2

The 73rd and 74th amendments – passed in the era of reforms, I might remind the reader – offer a new opportunity in our federal system. By adding local tiers of governance, by sharing powers, by redefining concurrency, these amendments institutionalise the subsidiarity principle

– that things should be decided upon and managed at the lowest level possible. In a federal structure it is possible to manage differences in the common interest. We have an excellent example of what federal relations can achieve in the work of the Empowered Group of State Finance Ministers that has made the Value Added Tax possible in India. We need much more of such cooperation.

There are many areas where central schemes must be replaced by local plans and implementation by local governments. The money now committed to c entral schemes – and to the centrallysponsored schemes – is likely to give much better results if simply transferred to the states, which can then devolve them to l ocal governments for flexible implementation. The legal regime is available; it has to be activated, and we will get better r eturns for our expenditure.

Limit Subsidies to the Poor: It is generally accepted in this country that the poor must be helped to live a decent life. In the long term this means education, health, opportunities to learn and grow. In the short term it means a life free of hunger, in tolerable housing. There are many schemes aimed at this, and a great deal of money is earmarked for this. But studies have repeatedly shown that the poor often do not receive the subsidy – or service – and that the nonpoor – what a term! – often corner these benefits. They then become a vocal lobby for their continuance. The Public Distribution System, with the Food Corporation of

Economic & Political Weekly

EPW
august 1, 2009

India at one end and fair price shops at the other, has failed to deliver. Why not try a system of coupons, which is really a transfer of income, and shut down the whole machinery? This is not the place to discuss the coupon or voucher system, but it is well known. This can be extended to other sectors as well – like education. Modern technology makes it very possible.

Sort Out the Power Sector: Electric power is an important input for development. Every part of the country has shortages that lead to all kinds of losses. It gobbles up huge subsidies. It is also known that what is politely called “non commercial losses’”are extremely high. Small managerial improvements, like metering agricultural consumption, are difficult to implement. Past efforts, which relied on “unbundling” electricity boards and privatising distribution, have led to the private sector getting a bad name – just think of the mess in Delhi. Sorting out the mess in power will have multiple positive effects on the economy, if resistance to simple things like metering use can be overcome. This kind of argument also applied, mutatis mutandis, to large irrigation projects.

Right Size Government: This is urgent. And this is not an argument to reduce the role of the State in the economy, a la the Washington Consensus. The government must focus on, and do better, its key functions of providing security, of enforcing laws, of regulating the economy. It is a recognition that, for various reasons, government has got into many spheres of activity where it is not needed – or where it contributes negatively to society. Why does the Union have departments in subjects that belong to the States? Why not work through the Inter State Council, which is a constitutional body? Why do States create departments when a new scheme is announced? Consider the introduction of the ICDS – a well-intentioned scheme – which led to the setting up of the Department of Women and Child Welfare to implement it. There are many departments which can now be shut down as the functions are transferred to local governments. The staff can be declared surplus and redeployed in more useful areas. This is not new, as many commissions have made such suggestions.

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Prioritise Expenditures: Why do we spend so much on defence? We are today the world’s largest purchaser of arms. We are strengthening police forces – to fight “naxalism”. But this naxalism is a manifestation of the inequities in our society. The need for a police force will disappear if the problems of these people – and they are genuine problems – are dealt with d irectly. Instead of spending money on i ncreasing the police and other security forces, we would do well to transfer i ncomes to these poor, who deserve all help, and are protesting against unacceptable inequity.

Link Agriculture and Health Policies:

In the current thinking, the government promises each poor family a certain amount of rice at a highly subsidised price. Why should we subsidise – and encourage – rice consumption? Most people in India – and certainly the poor – prefer other grains, like jowar, ragi, millets, etc. These are known to be nutritious. They are grown in dry lands by poor farmers. If their consumption is encouraged by food policy, it will benefit small local farmers and stimulate the local economy. Rice – and sugar, also subsidised – are unhealthy in a country experiencing an epidemic of diabetes. We could argue that the current policies subsidise diabetes, and then we need to spend money to help fight it. Can we rationalise this?

These are only a few of the possibilities, and mentioned here in what Schumpeter called “desperate brevity”. My point is only that options exist if we open our minds to them.

Notes

1 As happened in Karnataka. See Vyasulu, ed. (2008a).

2 Centre for Budget and Policy Studies reports on the Health and Education Budgets in Karnataka. These may now be dated, but there is no reason to believe that things have changed. The situation in other states is similar.

References

Rao, Govinda (2009): “The Fiscal Situation and a R eform Agenda for the New Government”, Economic & Political Weekly, June 20.

Rath, Shardhini and Madhusudhan Rao (2007): A Study of Health and Education Expenditures in Udupi and Chitradurga Districts (Bangalore: CBPS).

Vyasulu, Vinod, ed. (2008a): Karnataka: Fiscal Consolidation for Human Development? A Symposium (Bangalore: Centre for Budget and Policy Studies), May.

– (2008b): “The Case against Health Insurance”, Economic & Political Weekly, No 39, 27 September.

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