Borrowings by PSUs have the same effect as government deficits
Fiscal reform requires in-depth analysis and remedial measures in medium and long-term perspective. It was too much to expect this in the latest budget with its immediate concern of exit from fiscal stimulus. Even admitting this constraint, there are nagging worries on the approach envisaged for sustainable future reform.
The Finance Minister is ‘happy' to present a fiscal deficit of 5.5 per cent of GDP for 2010-11 (4.8 per cent in 2011-12 and 4.1 per cent in 2012-13) in discharge of his commitment given in the medium-term projection in the last budget. What is causing apprehension is this preoccupation with showing compliance with quantitative targets without any action to reform underlying fundamental problems of fiscal policy and management in expenditure and revenue areas.
This is the continuing flaw in implementing the Fiscal Responsibility and Budget Management Act, 2003, (FRBM Act). Revenue buoyancy was and continues to be the main reason for achieving the deficit targets as conceded by the Finance Minister himself in the earlier budget. This buoyancy is more pronounced now with large cash inflows from disinvestment and 3G spectrum auctions. The other reason was understatement of expenditure through off budget devices like oil bonds.
Though off budget bonds are reported to be given up, it is not clear whether all the commitments are brought into the budget estimates of oil subsidies next year, especially when no basic reform has been done in oil subsidy.
Another grey area in deficit targets as a percentage of GDP is the difficulty in predicting GDP and the time taken to compute actual final figures. Overestimation will show lower deficit/GDP target.
Issues to be addressed
The only relevant observation concerning fiscal consolidation in the latest budget speech is that a road map for curtailing the overall public debt and reduction in domestic public debt/GDP ratio will be brought out within six months. If such a road map is to be of any use it should address the following issues.
Define all the areas of revenue and expenditure needing reform.
Identify the specific problems in each area.
Devise the steps to be taken and fix a time period for completion.
Prepare Medium Term Budget embodying the expected reform results.
Put in place a MIS (Management Information System) and an independent agency to monitor implementation
Put out half yearly progress reports.
Fiscal stimulus was largely expenditure driven. Even otherwise increasing volume and diversity of government expenditure was a matter of some concern. A few examples of expenditure items needing reform are highlighted below.
Large expenditure on subsidies: The policy areas include procurement prices in food subsidies, dismantlement of administrative prices in petroleum products and target groups for LPG and kerosene subsidies. Implementation concerns are efficiency and reducing the cost of operation, example, in Food Corporation of India for food supply and distribution. True costing of goods and services provided by government may not be done in all cases as there is no accrual accounting in government.
The cross subsidy of passenger fares by higher freight charges in Railways (may be more than Rs.4,000 crore) does not make any economic sense, especially now when the government is trying to contain inflation. This is another policy matter on which the Prime Minister should take the initiative with the Railway Minister.
Fundamental review of the entire expenditure budget from first principles.
The guiding principles can be what the government should do and pay for, should pay for but should not do (outsourcing) and what it should not do at all.
Review of staff requirements based on review of functions.
A large number of overlapping schemes continue without review of their current relevance as noted by the earlier budget speech of the Finance Minister. These have to be dropped. Expenditure has to be reoriented for priority. Enough provision for operation and maintenance of existing assets and completed Plan schemes does not get priority as it is classified under non-Plan.
Reducing the financial dependence of public sector undertakings (PSUs) on government budget, liquidating their overdues to government, increasing the dividend to government. Disinvestment of PSUs, while providing easy money for fiscal deficit reduction, does not solve the basic problems. For example, 57 out of 362 PSUs incurred even cash loss of Rs.4,949 crore (2007-08). Many figure as sick units in the list of 40 PSUs referred to the BIFR. Examples are: Scooters India, Hindustan Photo Films Manufacturing Company, Instrumentation, Hindustan Antibiotics and Indian Drugs and Pharmaceuticals. The rationale of government being in these areas and their closure calls for examination. Many may have outstanding liabilities guaranteed by the government.
Borrowings by PSUs have the same effect as government deficits in crowding out funds for the private sector. While considering fiscal deficit targets of government this also has to be taken into account.
Time and cost overrun in projects is a serious expenditure issue. A large number of such projects involve a huge amount in cost overrun, some under execution for even ten years. Efficiency in project formulation and implementation is a vital area. Inclusion in the budget projects without proper approval and adequate funding has to be stopped. One example is a large number of populist schemes in the latest Railway budget.
A revenue item is mentioned here as it is in the nature of expenditure though classified as revenue. Tax exemptions under direct and indirect taxes total more than Rs. 5 lakh crore as estimate for 2009-10, 79.5 per cent of aggregate tax collections. This does not even figure as a distinct item in the budget estimates under revenue as budget is on a cash basis and net revenue after exemptions is shown. This can come under scrutiny if it is shown as tax expenditure. In the road map this large amount needs examination.
Fiscal consolidation and government debt sustainability is crucial for working in tandem with monetary policy for economic growth. It is also vital for ensuring foreign direct investment funds inflow as a poor rating of fiscal health by rating agencies will adversely affect such funds. Hence the importance of drawing up a comprehensive road map for this purpose.