Budget 2009-2010: Beyond Fiscal Rectitude

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

Young Scholars’ Programme 9 to 21 November 2009

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

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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

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.