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February 16, 1999
Economists see through the politics and the business of Budget
Amberish K Diwanji in New Delhi
The forthcoming Budget will be crucial. The Bharatiya Janata Party-led 18-party coalition government finds itself in a situation akin to 1991 and certainly hard measures are called for, said economic and political observers.
The difficult question is, will the BJP be willing to take the political risks that come with such decisions? Not long ago, Finance Minister Yashwant Sinha hinted that the Budget this year would be harsh. Given the state of the economy, he really has few other options, the observers remarked.
The troubles are aplenty. A yawning fiscal deficit, a widening revenue deficit (which many economists believe can be more dangerous than the fiscal deficit), a huge debt and the risk of a debt trap, an economy in a recession or at least close to it, trouble in neighbouring regions, falling revenues, and politics.
"The fact is that in spite of every effort, the economy has simply not picked up," said a senior economist, at present with the government and who requested anonymity, "and the Budget will have to reflect this fact.
Perhaps it is in recognition of the difficult time ahead that the Centre suddenly cut down on various subsidies by hiking up prices of food grains sold through the public distribution system besides increasing the price of fertilisers and urea. Expectedly, there was a howl of protests from the BJP's allies and the government rolled back the cut, but only partially.
"The thrust should not just be on cutting subsidies but on targeting subsides better," said Suresh Tendulkar, professor at the Delhi School of Economics, "since most of the subsidies are not really reaching the poor. The PDS offtake in states where the bulk of the poor live -- Uttar Pradesh, Bihar, Orissa, Madhya Pradesh and Rajasthan -- is very low while it is high in the other states."
For instance, Uttar Pradesh and Bihar with 18 and 16 per cent of India's poor accounted for only eight and five per cent of the PDS offtake. On the other hand, Andhra Pradesh and Kerala, with five and three per cent of India's poor respectively, claimed 15 and 10 per cent respectively of the PDS subsidy.
Professor Subhashish Gangopadhyaya of the Indian Statistical Institute agreed with Professor Tendulkar. "I don't think subsidies per se are wrong. What, after all, is the job of the government? It is to look after defence, law and order, and help the poor. Subsidies do just that. But what is wrong are the wasteful subsidies that we have in the country today, subsidies to the steel industry, subsidies to churn out PhD rather than primary education," he said.
Giving an example of the government's misplaced priorities, Professor Gangopadhyay pointed out that in Delhi, if one purchased an automobile, one had to pay a road tax of Rs 1,200. Only once! "This is ridiculous. The government should collect Rs 1,200 per annum, because even then it is just Rs 100 per month. Surely, anyone who owns a car can afford that much. And that money collected should be used to build better roads. Why is the government giving subsidies to rich or middle-class car-owners?" he asked incredulously.
Today, it is an acknowledged fact that the PDS has benefited the rich and middle-class people rather than the poor for whom it was created. The government economist has an option. "Rather than target poor individuals, it would be better to target poor regions so that even if the five per cent rich in that region benefit, it will not be as bad as the present scenario. Second, distribute items that only the poor people use," he said.
Professor Gangopadhyay lamented that the ration card today had become an identity card making it necessary for all Indians to acquire one. "The ration card must be distributed only to the poor people, no one else. That will put a lot of people out of the subsidies bracket and help the country save millions of rupees," he said.
However, cutting subsidies is a political nightmare. Subsidies over the years have created vested interests and politicians will not let go without a fight. And can a BJP dependent on allies take such a risk?
Admitted Professor Tendulkar: "Cutting subsidies will hurt the people in the states where the offtake is high, and there will be a backlash. Also, any cut in urea subsidy will see the farmers' lobby protest, something that any government will fear." As if on cue, Om Parkash Chautala, whose four members in the Lok Sabha help prop up the BJP-led government, has warned the government to revoke its decision.
Expenditure on subsidies today is a whopping Rs 89.5 billion per annum, and is one of the major reasons for India's rising fiscal deficit.
It is by now history that India's economic reforms were sparked off by a looming financial crisis, leaving the then prime minister, P V Narasimha Rao, and his finance minister, Dr Manmohan Singh, with little choice. "That is the only good thing about the present crisis, that having no other alternative the present government too will undertake bold measures and spark off the second wave of reforms," said Dr Pradeep Chattopadhyay hopefully.
Dr Chattopadhyay works at the National Centre for Applied Economic Research's macro monitoring and forecasting division, and his forecasts are rather gloomy! A study released recently made the following points: floods hit rice production, but a modest recovery in agriculture is expected; industry still struggling; recessionary trend stays; and, exports still plunging, that to even remain stagnant they will have to grow by eight per cent in the last quarter of 1998-99.
"It is the revenue deficit within the fiscal deficit that is the cause for worry and which will hurt us soon, very soon," warns Dr Chattopadhyay.
Today, revenue deficit stands at 4.5 per cent of the country's GDP, last year (1997-98) it was 4.3 per cent of GDP. "Let us never forget that in 1991, when we had the financial crisis, our revenue deficit was also 4.5 per cent of GDP!" said Dr Chattopadhyay. Now for two years in a row, the deficit is over four per cent of GDP.
The remedy to reduce the deficit is actually quite simple: cut expenditure drastically. Here is where one must separate the wheat from the chaff. Cutting capital expenditure can hurt the country in the long run, hence the emphasis has to be on non-capital expenditure. That is, the money spent on salaries, administration, subsidies, etc, the experts said.
The single biggest culprit for the soaring revenue deficit lies not with the BJP but with the United Front, which unabashedly agreed to the Fifth Pay Commission's recommendations for an across-the-board hike in wages of central government employees. This in turn forced state governments, many of them on the verge of bankruptcy, to follow suit.
"More than the central government, it will be the state governments that will face serious trouble. Most of them are in a mess, and hiking salaries at this juncture will only derail their plans," said the government economist.
"A deficit by itself is not bad." said Professor Gangopadhyay. "The reconstruction of Europe after World War II was financed through massive deficits. But the money was put into social and economic infrastructure, in building roads, all of which ensured high returns. Here, by contrast, the deficit is caused by wasteful expenditure like higher salaries that has no returns."
When the Fifth Pay Commission decided to hike the wages of government employees, Professor Tendulkar, who was on the Commission, had vigorously argued for seeking improved productivity. It was a struggle in vain as the weak United Front government gave in to the trade unions, hiking salaries but not seeking higher productivity. This meant that government employees earned more for doing much of the same. Professor Tendulkar refused to speak of his role on the commission.
"Only former finance minister P Chidambaram and Professor Tendulkar opposed the move to hike the salaries. Sadly, all the political parties supported the move, including the Congress and the BJP. And today, we have to pay the price for this lack of political courage," said Professor Gangopadhyay.
The Budget debate continues: Revenue, interest and divestment
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