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Sinha's claims and the real economy

Ruddar Datt

EVERY FINANCE Minister's Budget speech tries to prove that he has made a serious effort to change the course of the Indian economy and introduce path-breaking reforms. While presenting the 2000-01 budget, Mr. Yashwant Sinha made certain, very lofty, pron ouncements: ``I propose to put India on the sustained, equitable and job-creating growth of 7-8 per cent per year in order to banish the scourge of poverty from our land within a decade.'' Therefore, it would be appropriate to examine how serious an effo rt Mr. Sinha has made to achieve these objectives. But before doing so, it would be prudent to examine whether the Budget has succeeded in the following fiscal objectives:

Reining in non-Plan expenditure,

Garnering enough revenues to bridge the revenue deficit,

Reducing interest payments that are over Rs. 1,00,000 crores,

Saving the economy from the internal debt trap, and

Controlling fiscal deficit to a prudent level.

Against the Budget provision of Rs. 2,06,882 crores, non-Plan expenditure, according to revised estimates, works out to be Rs. 2,24,343 crores. This implies non-Plan expenditure has shot up by Rs. 17,461 crores in 1999-2000. According to the Finance Mini ster, the following factors are responsible for this: the rise in pensions as a consequence of the Pay Commission recommendations, the rise in interest payments, raised Defence expenditure due to the Kargil war, assistance to States from the National Cal amity Fund, interest and food subsidies.

Factors such as the Kargil war and the super-cyclone were exogenous and could not be predicted during the formulation of the Budget. Not so other factors. It would not be appropriate to absolve the Finance Minister for his failure in reining in non-Plan expenditure. This is also evident from the fact that even in the 2000-01 Budget, the escalation in non-Plan expenditure is 11.6 per cent. Again, the high provision for Defence (Rs. 10,083 crores), interest payments (Rs. 9,841 crores) and grants to States , recommended by the Eleventh Finance Commission, are responsible for this rather large increase. Various suggestions are being mooted.

The most important is the downsizing of the government. It was a folly to accept the report of the Fifth Pay Commission with regard to pay scales, ignoring the recommendation of a 30 per cent reduction in staff. The then Government accepted the pay scale s, but left the acceptance of the latter measure to the future ruling alliances. The country has to pay for this.

Raised pensions further add to the Government's deficit. This, in turn, leads to higher government borrowing, resulting in higher interest burdens. Thus, there is a vicious circle of rising non-Plan expenditure necessitating higher government borrowing. Since rising expenditures have become a fait accompli, the Government should expedite making a distinction between essential and non-essential expenditures, and cutting massive and mounting non-Plan expenditure.

The interim report of the Expenditure Commission could provide assistance. But in a democratic society, downsizing cannot be ruthlessly implemented for fear of erosion in political base. This implies that the option could be implemented in a limited mann er. Hence, it is necessary to think in terms of lowering non-salary expenditures.

The second issue pertains to increasing tax revenues. The Finance Minister failed to raise tax revenues, and against a target of Rs. 1,32,365 crores in the 1999-2000 Budget estimates, the revised estimates place it at Rs. 1,26,469 crores -- a shortfall o f Rs. 5,896 crores.

An explanation for this shortfall has been sought in terms of lower realisation from customs and excise duties. There was also a shortfall of Rs. 1,161 crores in corporation and income-tax realisations in 1999-2000. In fact, our policies of continuously lowering Customs duties under international pressure has shown that the elasticity expected as a result of lower customs in higher overall realisations has not borne out in practice. A re-examination of the policies is necessary.

Moreover, it has been revealed that over Rs. 5,000 crores is locked up in legal cases related to corporation tax and excise duties. Business houses in India have adopted litigation as a way to delay the payment of excise and corporation tax. The Finance Minister should have applied himself to finding ways to force business houses to pay first, and then claim a refund if the judicial verdict goes in their favour.

This tough option, aimed at powerful business lobbies, has evaded the so-called eagle eye of the Finance Minister. It appears that a soft attitude towards big business, the principal evader of taxes, continues. Larger judicial tribunals to finalise pendi ng cases must be created. Even the realisation of Rs. 10,000 crores from tax dues locked in litigation will help the country reduce fiscal deficit.

Among non-salary items, the Finance Minister has made an effort to reduce subsidies. He hopes that subsidies will be reduced to Rs. 22,800 crores in 2000-01 against Rs. 25,692 crores in 1999-2000 (RE). This indicates a reduction in subsidies of Rs. 2,892 crores. However, there has been opposition to this move. The Congress has argued that the reduction of subsidies would hurt farmers' interests and that on food subsidies the poor.

Dr. Manmohan Singh, the Leader of the Opposition in the Rajya Sabha, took a very correct view on this question. He maintained that the continuance of subsides on merit goods was justified, however, the subsidies on non-merit goods needed to be stopped. S ince fertiliser subsidies did not directly benefit the farmers, but helped industrialists reduce costs, the withdrawal of this subsidy was justified. To compensate the farmers, the State must fix rice, wheat and other crop prices such that they become re munerative. But it passes one's understanding why the Government raised PDS foodgrains prices by 68 per cent. The Government has been arguing that by raising the quota of foodgrains from 10 kg to 20 kg per month per family, the Government has taken care of the interests of those below the poverty line.

Such a view is hardly justified because PDS foodgrains should be treated as merit goods and to raise their price at one go by 68 per cent was hardly justified. The removal of the subsidy on sugar was reasonable, as it largely benefited the better-off urb an population. However, the Government has not succeeded in plugging the loopholes, with PDS shops still supplying substandard foodgrains to the poor. The Finance Minister did not yield when the entire Opposition, and even a significant section of the ND A alliance, argued for a rollback of PDS prices. The Centre argued that as the Opposition had always pressed for hard options to reduce subsidies, there was now no merit in their arguments for a reduction in PDS foodgrain prices. The Finance Minister's v iew is too naive. He is also backed by the Prime Minister.

The Centre could have reduced PDS foodgrains price hike to just 30 per cent. It would not have imposed much burden on the States. Hard options to be exercised against the poor, but not against rich industrialist lobbies, do not meet the ends of equity.

Although Mr. Sinha set a target of reducing the fiscal deficit to four per cent in 1999-2000, he ended up with a deficit of 5.6 per cent of GDP. Instead of limiting fiscal deficit to Rs. 79,955 crores, revised estimates put the deficit at Rs. 1,08,898 cr ores -- an increase by Rs. 28,943 crores, that is a jump of 36.2 per cent. In both expenditure and revenue, there is wide divergence between budget and revised estimates in 1999-2000.

This also casts a shadow on the quality of budgeting. Many proposals have gone haywire. For instance, raising Rs. 10,000 crores by the disinvestment of PSUs -- the net receipt was barely Rs. 2,600 crores. This is so when the Government unloads shares of its best-run and most profitable enterprises. The Finance Minister has again proposed disinvestment receipts to the order of Rs. 10,000 crores in the 2000-01 Budget. No lessons seem to have been learnt from experiences.

In the Central Plan outlay, the contribution of internal and extra budgetary resources (IEBR) of the PSUs was Rs. 52,649 crores, that is, 54.7 per cent of the total outlay. In 2000-01, the Finance Minister proposes to raise Rs. 66,058 crores from IEBR -- 56.3 per cent of the Central Plan outlay. The question that begs an answer is: If we continue our disinvestment policy and reduce the share of the state in PSUs year after year, how will more internal resources be raised from them to fund the Central Pl an. No lesson learnt here either.

Against the budgeted IEBR of Rs. 59,521 crores in 1999-2000, the actual realisation was only Rs. 52,649 crores. However, the Finance Minister proposes to raise it to Rs. 66,058 crores in 2000-01, that is, an increase of Rs. 13,409 crores. This despite th e fact that the Government proposes to reduce its equity in banks to 33 per cent, and in several PSUs. While we continue to weaken the PSUs, instead of consolidating them, the Centre still hopes to raise more resources from them. There cannot be a greate r contradiction in logic than this. A better course of action would be not to expand PSUs further, (already this is being done), reduce the burden of chronic loss-making PSUs, if they can not show a turnaround, and consolidate profit-making PSUs. The Gov ernment policy of unloading the shares of its most profitable undertakings is, to say the least, suicidal for the country. It complicates the problem.

Against Rs. 10,30,444 crores in terms of internal debt and other liabilities on March 31, 2000, these are likely to rise further to Rs. 11,22,595 crores by March 31, 2001, indicating an 18.6 per cent increase in 2000-01. Obviously, the economy is rapidly moving into an internal debt trap. Consequently, interest payments are likely to shoot up to Rs. 1,01,266 crores in 2000-01. It may be noted that interest payments were just Rs. 26,596 crores in 1991-92. During the nine-year period since, they have zoom ed by 281 per cent, indicating an average annual growth rate of 16.0 per cent. The increase in internal debt at the rate of 16 per cent does not speak of good health of the economy. It is true that the blame for this falls on the policies pursued in the post-reforms period. Mr. Sinha, therefore, cannot claim that the economy has been able to steer clear of the difficult economic situation.

There is no doubt that the Finance Minister has rationalised the budget. First, with effect from April 1, excise assessees have been allowed to pay excise dues in fortnightly instalments. With this, the Finance Minister has put an end to the age-old prac tice of day-to-day payments of excise dues. This is a welcome change. The time saved can be used to trace unabated evasion in excise duties.

Second, with effect from July l, all statutory records in excise will be dispensed with. The Excise Department will rely on the manufacturer's records. This step will also reduce the Excise Department's load in terms of maintaining records.

Third, the Finance Minister has abolished the collateral requirement for loans for small-scale (SSI) units up to Rs. 5 lakhs. This measure will enable more SSI units to avail of credit and, thus. improve their production and profitability.

Fourth, the Jana Shree Bima Yojana is a good initiative for poor families. By paying an insurance premium of Rs. 10 or less per month, the poor can have an insurance cover of up to Rs. 20,000. It is interesting to observe that below-the-poverty-line part icipants in this scheme will pay only half the premium, while the remainder will be contributed from LIC's existing Social Security Fund. A basic issue that needs to be considered is: The Finance Minister could persuade the LIC to contribute half the pre mium for persons below the poverty line. Would he be able to make the private sector, which is now being permitted to enter insurance also adopt the scheme? The obvious answer is: No. So how is the privatisation of the insurance sector justified when it only helps fill the coffers of Indian or foreign businesses?

Lastly, the Budget provided Rs. 1,501 crores for 12 lakh houses in the rural areas. This works out to be an assistance of Rs. 12,510 per house. Though the initiative is welcome, the assistance is too meagre to have a rural house with a pucca roof. Experi ence shows that it would be better to construct fewer houses, but provide for a pucca roof and walls, so that the houses can withstand rains. The scheme needs to be reconsidered.

To sum up, it may be stated that the Budget 2000-01 has made certain modifications, but the Finance Minister's claim that he proposed to put India on a sustained, equitable, job-creating growth rate of 7-8 per cent per year in order to erase poverty with in a decade, appears to be only a tall boast. Fresh evidence is that the trickle-down theory of growth does not function. A frontal attack on the problems of poverty, unemployment and under-employment needs to be made. The Budget should be viewed as a sm all endeavour in this regard. Since about 95 per cent of the total non-Plan expenditure is incurred on four items -- interest payments, Defence, subsides and general administration -- very little elbow room is available to the Finance Minister to tackle the massive problems of poverty and unemployment.

Recent data from the National Sample Survey reveal that the proportion of population below the poverty line has increased from 35.1 per cent in 1991-92 to 37.2 per cent in 1997. Similarly, there is a marked deceleration in generation of employment to mer ely one per cent during 1992-97, while the labour force increased by 2.45 per cent. The Finance Minister should, therefore, reconsider the policies that are being pursued by the NDA Government. Merely adopting the programmes initiated by the Congress gov ernment will not usher in an era free from the scourge of poverty and unemployment. Emphasising downsizing, both in the public and the private sector, may result in a higher growth rate. However, the objective of reducing poverty by enlarging employment and reducing under-employment will remain elusive if a concerted effort is not made to achieve it. This is the principal bane of the programmes of liberalisation, privatisation and globalisation based merely on the market mechanism. Not to speak of attai ning the larger social objectives of reducing poverty and unemployment, and establishing a just and equitable society, the Budget has not yet achieved even the limited objective of reducing fiscal deficit to a prudent or sustainable level.

(The author is a New Delhi-based freelance writer.)