These examples of gross insensitivity to the fiscal
condition of the States come on top of the revelation
in the Budget documents that the devolution of Central
taxes to States was actually Rs. 5100 crore less last
year than promised in Budget 2002-03 and that grants
and loans from the Centre to the States were also
lower by Rs 4150 crore. For 2003-04 too, the
budget-to-budget increase in these flows from the
Centre to the States has been kept at only 3.6 per
cent, much less than the likely rate of inflation.
This is not just an indication of lack of concern from
a Finance Minister whose party rules in only three
States, it is evidence of unconcern also for
agriculture, health, education and effective social
security for the poor. Whatever the budget rhetoric,
these simply cannot be addressed without augmenting
the States' currently parlous fiscal situation.
The only explicit measure directed towards the poor,
of increasing the allocation for the Antyodaya scheme,
only amounts to an additional Rs. 500 crore. This
scheme offers poor households 35 kilos of foodgrain
per household per month at half the prevailing PDS
price. There are 530 lakh BPL families in rural India.
Of these, currently, BPL cards have reportedly been
issued to just 50 lakh families. Even if the Finance
Minister keeps to his promise of extending the scheme
to cover another 50 lakh families, the total coverage
would be only around 100 lakh families, or less than
one-fifth of India's really poor. Further, it is now
widely accepted that nutritional deprivation is much
more widespread than official poverty, and that more
than half of our population has inadequate calorie
intake.
According to the government, The Budget is supposed to
be "growth-oriented". The Finance Minister announced a
grandiose "infrastructure thrust" in road, rail,
shipping and air transport, involving investments of
Rs. 60,000 crore. But a closer look reveals that this
amount is to be spent over time, with large
contributions expected from the private sector. In
fact, the actual allocation for this new "thrust" in
2003-04 is a meagre Rs. 2000 crore. Even that sum of
money is obtained by cutting crucial investments in
agriculture, rural development and employment
generation, all of which have been experiencing a
decline in allocation.
Meanwhile, total capital expenditure is projected to
increase by only Rs. 9,900 crore, even as defence
outlays have increased by Rs. 9,300 crore. In the
circumstances, higher growth is unlikely to be an
outcome of this budget.
From the government's own point of view, what may be
of more concern is the fact that its own neo-liberal
reforms have not been able to make any dent in the
deteroriating fisc. Rather, the reforms have
contributed in various ways to reduced revenues of the
government, even as it has been constrained in terms
of making the necessary productive expenditure for
growth and development. In what follows, we consider
some aspects of this fiscal mess.
Medium-term fiscal trends
The first point relates to the effort to curtail the
fiscal deficit. With interest payments, subsidies and
defence expenditures preempting a large share of the
government's revenues, the effort to curtail
expenditure in order to reduce the fiscal deficit has
focused on holding back social sector and capital
expenditures. This has not helped to curtail the
deficit because reform policies have eroded the
revenues of the government. The adverse impact of
reform on revenue generation has occurred through two
routes: reform has on average meant a reduction of a
range of tax rates, excepting those that impact on
mass consumption goods; and reform, by curtailing
capital and social sector expenditures, has had a
deflationary impact that slows growth and therefore
indirectly depresses revenue generation as well.
The direct effect of neo-liberal reform through tax
rate reductions has been quite visible. Periodic and
sharp cuts in customs tariffs adopted as part of the
trade liberalisation effort have substantially reduced
revenues from customs duties. Direct tax concessions
provided to the rich and the corporate sector as part
of an effort to spur private savings and investment
have eroded direct tax revenues, despite the increase
in the number of direct tax payers ensured by efforts
to widen the tax base. And more often than not, the
rationalisation of excise duties undertaken in the
name of reform has involved significant reductions in
duties on durables and luxury goods.
These direct effects of the reform have been
aggravated by the deflationary effects of fiscal
reform, so that the tax-to-GDP ratio in India has been
witnessing a long term decline from a level that is
already low by international standards. This is shown
in Chart 2. The ratio of the Centre's Gross Tax
Revenues to GDP declined from 10.6 per cent in 1989-90
to 9 per cent in 2000-01, and further to 8.1 per cent
in 2001-02. The ratio of its Net Tax Revenues to GDP
fell from 7.9 to 6.4 and 5.8 per cent in those years.
The effects are visible in 2002-03 also when, despite
a recovery in revenue generation because of a pick up
in imports and the imposition of a surcharge on direct
personal and corporate income taxes, actual revenue
generation fell short of what was budgeted by close to
Rs. 15000 crore.
Chart 2 >>
The belief that these effects of reform can be
temporarily tided over by garnering large receipts
from disinvestment has also proved a mirage. Despite
the acceleration of the privatisation effort in
2002-03, receipts from disinvestment amounted to just
Rs. 3,360 crore as compared with the budgeted Rs.
12,000 crore.
The rock-bottom prices at which a small chunk of
government equity is sold to private players being
handed over control over successful public sector
units has meant that privatisation has not helped
substantially to shore up the receipts side of the
budget. Meanwhile, it is worth noting that the same
public sector that is seen as such a drain in the
economy, has been a major contributor to budgetary
resources. In 2002-03, dividends and profits from
public enterprises amounted to Rs. 20,194 crore, more
than was budgeted for, and accounting for 8.5 per cent
of all revenue receipts.
For a few years now it has been clear that the reform
objective of reducing food subsidies has not been
realised. This is not because of lack of policies of
neo-liberal reform in this sector. In fact, those
policies sought to curtail food subsidies by targeting
them at the population below the poverty line and by
periodically raising the issue prices of food sold
through the public distribution system. Yet subsidies
have been rising rapidly, as Chart 5 shows. In 2002-03
too, while food subsidies were budgeted at Rs. 21200
crore the revised figures point to an increase in such
subsidies to Rs. 24200 crore., which is well above the
Rs. 17499 crore figure for 2001-02.
Chart 5 >>
The reasons for failure on this front are now well
known. While food procurement has remained high, the
increase in issue prices has reduced off-take from the
public distribution system. This has resulted in
massive stock accumulation with the FCI, the carrying
cost of which has to be covered by the government. As
a result, the "subsidy" paid out has in substantial
part gone to meet the stocking costs of the FCI rather
than reaching the targeted BPL population, a huge
proportion of which has yet to be issued the cards to
avail of even the benefits they are entitled to.
Neither targeting nor the hikes in issue prices have
achieved their objective, revealing the flawed nature
of this aspect of reform. Yet, any sensible
recommendation to use the stocks to launch
food-for-work programmes that can provide employment,
build rural infrastructure and alleviate poverty is
dismissed as being incompatible with the objectives of
reform.
In the net, the fiscal deficit in 2002-03 remained
close to 5.9 per cent of GDP. So the irrational goal
of the reformists to reduce the fiscal deficit in a
period when unutilised capacity, large food stocks and
huge foreign exchange reserves call for an
expansionary effort, has also not been realised. What
is more, since this deficit is merely the excess of
all expenditures over revenue receipts and revenue
generation has been sluggish, the expenditure
associated with any given level of the deficit is that
much smaller. If the tax-GDP ratio is lower than
potential, a given fiscal deficit to GDP ratio implies
a lower expenditure to GDP ratio. A "high" deficit
does not therefore imply a large fiscal stimulus.
This becomes evident when we examine trends in public
expenditure (Chart 3).
Few would deny that an increase in investment is the
key to growth in the economy. However, the hope that
liberalisation per se would result in a surge in
private investment that would more than neutralize the
expected post-reform decline in government investment
has been belied. Even the industry associations now
accept that sluggish demand growth is constraining
investment and that capital expenditures by the
government are needed to directly and indirectly shore
up domestic demand.
Chart 3 >>
However, capital spending has been in long-term
decline, as indicated in Chart 3. Total capital
expenditure has been falling as a share of GDP,
consistently throughout the period since the early
1990s. Capital expenditure in fiscal year 2002-03, at
Rs. 62365 crore, is estimated to be lower than even
the nominal value of such expenditures in 1998-99. If
we allow for inflation, it is clear that real
budgetary capital expenditures of the state have
fallen quite sharply over the last five years.
Budget 2003-04 makes the promise of hiking this figure
to Rs. 72,568 crore. But we only need to note that
even Budget 2002-03 had projected capital expenditures
at Rs. 69, 827 crore, though the actual realisation
was, at Rs. 62,635 crore, less by more than 10 per
cent. Capital spending by the government is an obvious
casualty of reform, resulting in the sluggishness of
growth in both agriculture and industry.
Indeed, shortfalls in needed productive expenditure
have been a major feature of this Government's
economic performance. As Chart 4 shows, Central Plan
Outlay in 2002-03 was well below what had been
targeted. The projected increase in this amount in
2003-04 is only 8 per cent more than the actual amount
of the previous year, which implies that it would be
stagnant in real terms, even on assumptions about
extra-budgetary resources which past experience shows
will not fructify.
Chart 4 >>
