Business

Austerity in government, yet another routine exercise

In the wake of the latest concern of the Reserve Bank of India Governor over the fiscal situation and inflation, the Prime Minister has called for cuts in expenditure by different ministries. This is a welcome development.

Fiscal correctives to fight inflation have so far been confined to tax reductions. It is now recognised that cutting down unproductive expenditure to tackle the budget deficit is also a necessary anti-inflationary fiscal measure.

As reported in the media, ministers have been requested to go slow on foreign trips. Ministries have been told to enforce a ten per cent cut in non-plan expenditure other than travelling allowance and overtime. Any attempt to curb unnecessary foreign travel is commendable. All the more so as the budget provision for tour expenses of the Council of Ministers was doubled in the latest budget from Rs. 75.50 crore in the revised estimate for 2007-08. But a mere cut in travelling allowance and overtime and a general ad hoc target of ten percentage reduction in non-plan outlay without any reference to specific activities and schemes do not address the basic problem of pruning the massive non-plan budget of Rs. 5 lakh crore.

Some major items of expenditure in the 2008-09 budget in need of urgent action but not specifically dealt with in the latest austerity drive deserve highlighting. Central subsidies total Rs. 72,388 crore made up of major subsidies (Rs. 66,537 crore), interest subsidies (Rs. 2,829 crore), postal deficit (Rs. 958 crore) and other subsidies (Rs. 2,064 crore). Besides, there are hidden subsidies such as user charges or fees for services provided by the government not commensurate with their full and updated cost.

The burden of public sector undertakings on the budget totals Rs. 27,120 crore consisting of Rs. 684 crore as non-plan grants and loans and Rs. 16,436 crore as budgetary support. Besides direct funding from the government, PSUs impact adversely on the budget due to non-payment of interest of Rs. 37,198 crore on loans from the government. In addition, there are market borrowing by these for Rs. 41,181 crore which add to money supply.

Tax exemptions are revenue forgone and to that extent can be treated as an item of government expenditure. This was a huge budgetary burden of Rs. 2,78,644 crore in 2007-08 (No figures are given in the current year’s budget). Any plan to reduce expenditure will be incomplete if this item is not addressed.

Inadequate preparation and poor implementation of projects and schemes is a nagging problem. This leads to time and cost overruns casting a burden on the budget. According to the status report dated September 30, 2007 of the Ministry of Programme Implementation, out of 897 projects, 276 suffered cost overruns with an anticipated cost of Rs. 1,42,227 crore against the original estimate of Rs. 95,913 crore, a 48 per cent increase. Time overruns occurred in 308 projects. There is no quick fix solution to this problem through exhortation to ministries.

Proliferation of activities and schemes poses problems of prioritisation. The Finance Minister had stated in the budget speech that “We shall ensure that programmes and schemes are not allowed to continue indefinitely from one Plan period to the next without an independent and in depth evaluation.” In fact such de novo review of all existing activities, schemes and projects is required every year when ministries formulate their annual budgets so that non-priority and non-productive expenditure can be eliminated.

In the context of the current austerity it will be useful to know the specific results of such reviews and the actual budgetary savings effected. It should be clearly understood as to what the government should do and pay for, what it should pay for but not do and what it should neither do nor pay for.

Issuing austerity circulars will not automatically lead to meaningful expenditure reviews targeting specific non-priority, unproductive and inefficient items. This exercise cannot be left to the ministries. The Finance Ministry may also not be able to initiate and follow up such a systematic review; over the years, delegation of powers and the system of integrated financial advisers in spending ministries may also have eroded its special expertise in expenditure management. The PMO may be entrusted with this work. Periodic progress reports may help the public to follow the outcome of this effort. In many cases, reports of commissions and task forces are already available identifying the problems and offering solutions.

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