MacroScan (Printable Version) - Budget 2003-04: Retarding Development

By now the country should be used to Finance Ministers who excel in the art of double speak, since that has been our fate for several years now. We can even recognise the possibility of double think, as Finance Ministers seem to believe in what they declare to be their goals, even as they institute actions which are likely to have the opposite effect. But this may be the first time that the Finance Minister's budget speech has been so full of "confusions and supple contradictions", that his own intent is simply not clear.

Despite the apparent confusion, of course, the actual impact that the budget is likely to have on the economy is clear enough, just as it is quite clear what fiscal strategy the economy really required in the current circumstances.

This has been a drought year, one of the worst in the past decade and more. Cultivators and agricultural labourers in many parts of the country are still reeling under the effects of that drought. The worst effects, in terms of loss of income and less employment, are going to be felt from now until the next kharif crop. Meanwhile, farmers continue to face volatile and falling prices because of trade liberalisation, even as their costs are going up.

The greatest need in the economy today is that for productive employment. The mismatch between available jobs and people who need work has never been so great. In such a situation, the task before the Finance Minister should have been clear. The most urgent requirements in the economy relate to the crisis in agriculture and the need to generate more employment, and the Budget should have addressed itself primarily to these issues.

Budget 2003-04 was therefore expected to be different from its immediate predecessors, and focus on rural India and the poor. This was also expected because the government is faced with elections in a number of states as a run up to the general elections next year. With large food stocks in the government's godowns and huge foreign exchange available with the RBI, the Finance Minister was expected to use the opportunity, by increasing spending on food-for-work programs aimed at creating rural infrastructure, which could have had positive employment and poverty-reduction implications However, Mr. Jaswant Singh has not met any of these expectations. Instead, the Finance Minister has chosen to go along the well-trodden path of furthering the interests of domestic and international large capital, while sacrificing cultivators and ordinary workers.

There are a large number of tax sops and fiscal concessions made to the middle classes and to large capital, especially that involved in producing consumer goods. There are also major gains for financiers, with the elimination of long-term capital gains tax in an effort to boost the sluggish stock market.

These measures have been instituted despite the trend decline in the tax-GDP ratio, which is discussed in more detail below, and the large shortfalls in tax collection in the current year, as shown in Chart 1. There have been significant shortfalls in most tax revenues, amounting to nearly Rs. 14,000 crore in the aggregate. Personal income tax collection has been 12.2 per cent less than anticipated, and corporation taxes and excise duties around 5 per cent less.



These could have been blamed on the domestic recession, but for the fact that the only taxes to exceed the budgeted amount were customs duties, indicating that at least import demand remained buoyant. Inadequate enforcement in the context of lower tax rates, remains the single most important factor behind low tax collection.

The Finance Minister spoke for a long time about the importance of reviving agriculture in his Budget speech. But despite all the fine words, the Budget has almost nothing positive to offer rural India. Total central plan outlay for agriculture and allied activities along with rural development, will be reduced by more than Rs. 4,000 crore, from Rs. 16,053 crore to Rs. 12.047 crore. The argument here is that there was additional expenditure over the past year because of drought relief work – but in fact the most crucial need for drought relief may be now, in the next few months, as the lean agricultural season stretches the survival strategies of those already affected by the poor monsoon.

Instead of alleviating the problems of agriculture, the Budget actually makes conditions worse for most cultivators. Far from offering a package to aid the recovery from drought and help farmers cope with import competition, the Budget will contribute to increased costs of agricultural production.

The price of fertilizers will go up, (by Rs. 12 for a 50-kg bag of urea and Rs. 10 for DAP and MOP) at a time when already farmers are facing lower prices for most of their crops. In addition, there are large additional taxes and cesses on transport diesel, light diesel oil used for tubewell pumpsets, and crude oil. All of these will add both directly and indirectly to the costs of cultivators. Agricultural credit provision has all but collapsed, and the Finance Minister should realise that simply declaring that such credit should be available at 2 per cent below the Prime Lending Rate is not going to help when banks are simply not lending to agriculture in the first place.

Instead of trying to encourage employment generation, the Budget attacks the small-scale industrialists who account for the bulk of manufacturing employment in both rural and urban areas. The reduction in customs duty, the dereservation of as many as 75 items previously reserved for the small sector, and the increase in some excise duties produced by small scale producers from 4 per cent to 8 per cent, will all affect this sector adversely.

In both health and education, the thrust of the Budget is to force people to use private providers rather than a reliable and efficient public service. There are various tax incentives and insurance schemes which are designed to make ordinary people more reliant on private business in both health and education.

State governments are the dominant providers of these basic services, as well as of rural infrastructure, and here the Finance Minister has been ungenerous. The move to VAT will make the States lose considerable tax revenues, and the Central government has only promised full compensation for one year, with 75 per cent and 50 per cent in subsequent years and nothing after that. The main increase in direct taxes (on personal incomes above Rs. 8.5 lakh a year) has come in the form of a surcharge that does not have to be shared with the State governments, rather than a rate increase that States would also benefit from.

A relief to States is that the Finance Minister has finally admitted to a long overdue need - to replace high interest debt by lower interest loans. In this context it is worth noting that interest payments by State Governments form over 17 per cent of the Central Government's revenue receipts. In the current year these amounted to Rs. 40,571 crore, substantially more than personal income tax and nearly as much as total corporation tax. The Centre profits from the very high interest rates it charges to States and, unlike its evident generosity to the corporate sector, it has so far been reluctant to bring these down to market levels.

However, the debt swap announced in the Budget is a very miserly corrective from the usurious Centre. It requires States to forego 20 per cent of their small savings collections, which are in any case likely to decline as result of interest rate reductions also announced in the budget. This will actually worsen the current cash-flow position of most States, with the adverse impact greatest in States such as West Bengal and Maharashtra that lead the nation in small savings collections.

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.



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.



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.



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.



Themes > Features	10.03.2003


Budget 2003-04: Retarding Development

By now the country should be used to Finance Ministers who excel in the art of double speak, since that has been our fate for several years now. We can even recognise the possibility of double think, as Finance Ministers seem to believe in what they declare to be their goals, even as they institute actions which are likely to have the opposite effect. But this may be the first time that the Finance Minister's budget speech has been so full of "confusions and supple contradictions", that his own intent is simply not clear. Despite the apparent confusion, of course, the actual impact that the budget is likely to have on the economy is clear enough, just as it is quite clear what fiscal strategy the economy really required in the current circumstances. This has been a drought year, one of the worst in the past decade and more. Cultivators and agricultural labourers in many parts of the country are still reeling under the effects of that drought. The worst effects, in terms of loss of income and less employment, are going to be felt from now until the next kharif crop. Meanwhile, farmers continue to face volatile and falling prices because of trade liberalisation, even as their costs are going up. The greatest need in the economy today is that for productive employment. The mismatch between available jobs and people who need work has never been so great. In such a situation, the task before the Finance Minister should have been clear. The most urgent requirements in the economy relate to the crisis in agriculture and the need to generate more employment, and the Budget should have addressed itself primarily to these issues. Budget 2003-04 was therefore expected to be different from its immediate predecessors, and focus on rural India and the poor. This was also expected because the government is faced with elections in a number of states as a run up to the general elections next year. With large food stocks in the government's godowns and huge foreign exchange available with the RBI, the Finance Minister was expected to use the opportunity, by increasing spending on food-for-work programs aimed at creating rural infrastructure, which could have had positive employment and poverty-reduction implications However, Mr. Jaswant Singh has not met any of these expectations. Instead, the Finance Minister has chosen to go along the well-trodden path of furthering the interests of domestic and international large capital, while sacrificing cultivators and ordinary workers. There are a large number of tax sops and fiscal concessions made to the middle classes and to large capital, especially that involved in producing consumer goods. There are also major gains for financiers, with the elimination of long-term capital gains tax in an effort to boost the sluggish stock market. These measures have been instituted despite the trend decline in the tax-GDP ratio, which is discussed in more detail below, and the large shortfalls in tax collection in the current year, as shown in Chart 1. There have been significant shortfalls in most tax revenues, amounting to nearly Rs. 14,000 crore in the aggregate. Personal income tax collection has been 12.2 per cent less than anticipated, and corporation taxes and excise duties around 5 per cent less. These could have been blamed on the domestic recession, but for the fact that the only taxes to exceed the budgeted amount were customs duties, indicating that at least import demand remained buoyant. Inadequate enforcement in the context of lower tax rates, remains the single most important factor behind low tax collection. The Finance Minister spoke for a long time about the importance of reviving agriculture in his Budget speech. But despite all the fine words, the Budget has almost nothing positive to offer rural India. Total central plan outlay for agriculture and allied activities along with rural development, will be reduced by more than Rs. 4,000 crore, from Rs. 16,053 crore to Rs. 12.047 crore. The argument here is that there was additional expenditure over the past year because of drought relief work – but in fact the most crucial need for drought relief may be now, in the next few months, as the lean agricultural season stretches the survival strategies of those already affected by the poor monsoon. Instead of alleviating the problems of agriculture, the Budget actually makes conditions worse for most cultivators. Far from offering a package to aid the recovery from drought and help farmers cope with import competition, the Budget will contribute to increased costs of agricultural production. The price of fertilizers will go up, (by Rs. 12 for a 50-kg bag of urea and Rs. 10 for DAP and MOP) at a time when already farmers are facing lower prices for most of their crops. In addition, there are large additional taxes and cesses on transport diesel, light diesel oil used for tubewell pumpsets, and crude oil. All of these will add both directly and indirectly to the costs of cultivators. Agricultural credit provision has all but collapsed, and the Finance Minister should realise that simply declaring that such credit should be available at 2 per cent below the Prime Lending Rate is not going to help when banks are simply not lending to agriculture in the first place. Instead of trying to encourage employment generation, the Budget attacks the small-scale industrialists who account for the bulk of manufacturing employment in both rural and urban areas. The reduction in customs duty, the dereservation of as many as 75 items previously reserved for the small sector, and the increase in some excise duties produced by small scale producers from 4 per cent to 8 per cent, will all affect this sector adversely. In both health and education, the thrust of the Budget is to force people to use private providers rather than a reliable and efficient public service. There are various tax incentives and insurance schemes which are designed to make ordinary people more reliant on private business in both health and education. State governments are the dominant providers of these basic services, as well as of rural infrastructure, and here the Finance Minister has been ungenerous. The move to VAT will make the States lose considerable tax revenues, and the Central government has only promised full compensation for one year, with 75 per cent and 50 per cent in subsequent years and nothing after that. The main increase in direct taxes (on personal incomes above Rs. 8.5 lakh a year) has come in the form of a surcharge that does not have to be shared with the State governments, rather than a rate increase that States would also benefit from. A relief to States is that the Finance Minister has finally admitted to a long overdue need - to replace high interest debt by lower interest loans. In this context it is worth noting that interest payments by State Governments form over 17 per cent of the Central Government's revenue receipts. In the current year these amounted to Rs. 40,571 crore, substantially more than personal income tax and nearly as much as total corporation tax. The Centre profits from the very high interest rates it charges to States and, unlike its evident generosity to the corporate sector, it has so far been reluctant to bring these down to market levels. However, the debt swap announced in the Budget is a very miserly corrective from the usurious Centre. It requires States to forego 20 per cent of their small savings collections, which are in any case likely to decline as result of interest rate reductions also announced in the budget. This will actually worsen the current cash-flow position of most States, with the adverse impact greatest in States such as West Bengal and Maharashtra that lead the nation in small savings collections. 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. 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. 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. 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.



© MACROSCAN 2003