A prescription for fiscal health

The Government’s recent reform initiatives in foreign direct investment in retail, insurance and pension, along with rationalisation of diesel prices, has evoked euphoria over reforms and leading to expectation of rate cuts by the Reserve Bank of India (RBI).

But the RBI has left its policy rates unchanged because there is little in the Government’s initiatives pointing to fiscal reforms or a prescription for fiscal health. The issues of fiscal sustainability need to properly be dealt with.

Reviewing expenditure

The broader objective of fiscal sustainability is to eliminate non-essential, non- developmental expenditures, while increasing spending on priority and growth oriented schemes. At the same time, there is need for achieving effectiveness and efficiency of expenditures and mobilising additional resources.

For this, a fundamental review of expenditures is needed first. Non plan expenditures that are non-developmental in nature have to be eliminated. Maintenance of assets and facilities may be a Non-plan expenditure item, but also very crucial to derive full benefit from the assets originally created from Plan spending. These include running of schools, hospitals or irrigation projects.

Likewise, all Plan expenditure cannot be considered top priority either. A critical review of all ongoing schemes and projects will highlight those which have to be slowed down or have to be given up in the current fiscal situation. The Finance Minister himself had in one of his earlier budget speeches had referred to thousands of schemes and the need to eliminate overlaps between them.

Here, non developmental and non asset-creating schemes need special review. One example is MGNREGS, which is both wanting in rural assets creation and adversely effecting labour availability for agricultural operations.

Subsidies for fuel, food and fertilisers are another major non-developmental expenditure item. While raising prices is the easiest method to reduce the subsidy, the basic underlying issues also need to be dealt with.

Take the increase in diesel prices. The issues that get ignored here are the Administered Price Mechanism in fuels, in-depth study of the cost structure of state-owned oil marketing and producing companies, the subsidy borne by oil marketing companies and not reflected in government budget, removal of excise and sales taxes on petroleum products, and targeting deserving beneficiaries of subsidy.

The Government also needs to define the realistic estimate of the total subsidy burden, especially with the impending Food Security Bill and cross subsidy of railway fares by freight charges.

Another issue for action concerns reduction in the dependence of public sector undertakings on government budget, improving their project implementation and reducing time and cost overruns, and ensuring overall effectiveness of expenditure by using output and outcome budgeting as management tool. Effectiveness of Public Private Partnership for infrastructure projects has to be ensured. The Railways’ finances particularly need drastic improvement and internal resources for infrastructure projects stepped up to reduce dependence on borrowings and government budget.

Fiscal sustainability, moreover, goes beyond rationalisation and effectiveness of expenditures. It requires additional revenue mobilisation without impeding growth or stoking inflationary pressures. Review of tax exemptions and doing aay with those that are no longer relevant is important. Such exemptions now total Rs 4.6 lakh crores and they should be treated as tax expenditure for Parliamentary approval.

Collection of loan repayments and interest due to the Government is also another additional resource mobilisation area, just as black money retrieval and tax reform laws need speedier action.

This is unlike disinvestment, which represents sale of assets that are a one-time fund raiser. It is a palliative and not a cure for fiscal health and should be a last resort. Last year, it was a total fiasco and the Life Insurance Corporation had to be forced to buy ONGC shares, as there was limited bid interest in the auctions.

Growth without inflation

Finally, fiscal sustainability is not confined to annual budgets. It should be made part of a medium-term fiscal plan of three years, including the budget year, as required in the Fiscal Responsibility and Budget Management Act 2003.

To generate credibility, the projections should show disaggregated figures of revenue and expenditure, based on the specific reforms on which these are estimated.

Only if all this is done, the RBI can discharge its role in bank rate adjustments to facilitate growth without inflation.