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`Scrap subsidies not serving social good'

Our Bureau

BANGALORE, July 11

THE former Union Finance Minister and Rajya Sabha Member, Dr Manmohan Singh, has said resorting to fiscal correction through reduction in public expenditure was no longer feasible in the country.

He was speaking at a conference on `Public finance in Indian States' here on Wednesday. The two-day conference, being organised by the Institute of Socio Economic Change and the State Tax Reforms Commission, has six States participating, which include Ta mil Nadu, Kerala, Andhra Pradesh, Maharashtra, Pondicherry and Karnataka. Other participants include the World Bank and the National Institution Public Finance and Policy.

Dr Singh said: ``The public expenditure in the country is not excessive.'' The public expenditure to gross domestic product ratio is currently about 32 per cent. Reducing this ratio would have social sector implications, he said. Instead, the States, he said, would have to begin prioritising public expenditure more carefully. This should be done by removing both implicit and explicit subsidies in the country that have not served any social purpose.

But State-level fiscal deficits could be reduced or eliminated by correcting the power and transport sectors. This was because at least three-fourths of the fiscal deficits were caused by these sectors. The States should also focus on right-sizing of Gov ernments with a view to keeping check on the revenue expenditure. In addition, the States should looking for a quick shift to value-added taxation (VAT) so as to improve the buoyancy of the tax systems and improve revenue receipts.

However, fiscal management should not be confined to just taxation alone. Efforts should also be made to improve non-tax receipts and reforms of the State public sector, Dr Singh said. Reforms of the public sector should include better management and tar iff policies.

Besides, disinvestment was needed to be done in a manner that employees' interests are not ignored. Consequently, any privatisation of public sector undertakings would have to be done in a transparent manner.

But, he added, that the process of fiscal correction should also take into account the concerns of the local bodies. Additional resource mobilisation should be through local bodies. ``Local development should essentially be funded by local resources.''

The Karnataka Chief Minister, Mr S.M. Krishna, said that the State Government's main agenda was to keep debt under control and ensure that all borrowings were used exclusively for capital expenditure, mainly infrastructure development.

Nevertheless, debt accretion was a matter of concern, especially since revenues for servicing the debt have not shown adequate increases. Besides, substantial borrowings were taking place, through off-budget means, mainly through special purpose vehicles . This, in turn, was leading to an escalation in contingent liabilities.

The State Government had also sought a review of the Gadgil formula, a formula which allows for sharing of resources from the Central tax pool between the States. For the purpose, he said, a committee of Chief Ministers would have to be formed to study t he public finances of the States and work out a mechanism for restoration of fiscal balances.

Pic.:The former Union Finance Minister and Congress leader, Dr Manmohan Singh, and the Karnataka Chief Minister, Mr S.M. Krishna, at a meet in Bangalore on Wednesday.

Picture by GRN Somashekar