A spinal tap for fiscal management

NEW DELHI: The signs don’t augur well for fiscal management. A day after the government announced a decision that would have cut the food subsidy bill by 30%, the decision is put on hold, with the opposition coming not just from the perpetually-dissenting Left parties, but from the Congress Party - the main party in the coalition - as well.

At Rs 26,200 crore, the food subsidy bill accounts for 55% of the total subsidy bill, which itself accounts for close to 10% of total expenditure and 13% of government revenues.

At an interaction with the Forum for Financial Writers today, finance minister P Chidambaram tried to downplay the issue, saying the decision has only been put on hold till further discussions.

The government, he insisted, would meet both the fiscal deficit and the revenue deficit targets set out in Budget 2005-06 - 4.3% of gross domestic product (GDP) and 2.7% of GDP, respectively.

Remember, however, that in his last Budget speech, Chidambaram had said he was pressing the pause button on the Fiscal Responsibility and Budget Management (FRBM) Act.

“It will be politically damaging if even this scaled down target is not met,” says M Govind Rao, director of the National Institute of Public Finance and Policy (NIPFP).

But expenditure management, a huge challenge for any finance minister, is certain to become a major burden for Chidambaram, with a slew of new demands over and above inherited ones.

“A huge handicap for any finance minister is that only the revenue department is under their control, they don’t control expenditure,” rues Chaudhuri.

Economists may say the Budget can’t do much for growth, but there will be areas on which the government will have to spend to ensure that the growth momentum isn’t lost and is, perhaps, even accelerated.

“The government will have to spend on infrastructure, agriculture and education,” says Ashima Goyal, professor at the Indira Gandhi Institute for Development Research (IGIDR).

Rao points out, in a paper on the mid-year review of the economy, that the ratio of development expenditure to GDP declined from 17.1% in 1990-91 to 14.9% in 2003-04.

Infrastructure will be a huge challenge, with 17151 km of roads to be built, 10,000 mw of power to be added by the end of the 11th Five Year Plan, additional 1 crore hectare to be brought under irrigation by 2010, to list just a few heads.

But competing with these for funds are the government’s huge social sector commitments.

This year’s allocations for the flagship programmes of the government - Bharat Nirman, National Rural Employment Guarantee Scheme, Sarva Shiksha Abhiyan, Mid-Day Meals, National Rural Health Mission and the Integrated Child Development Scheme - are estimated at Rs 22,000 crore and the Planning Commission is reported to have sought a 40% increase.

There’s unanimity that most of these, barring the NREGS, are essential and can be broadly categorised as productive.

Two large components of Bharat Nirman, for example, are irrigation and rural roads. Some expenditure compression has happened this year by delaying the launch of the NREGS.

Besides, the finance ministry has taken the position that Bharat Nirman does not involve additionalities over current programmes like the Accelerated Irrigation Benefit Programme and the Indira Awas Yojana (for rural housing). But the administrative ministries have not accepted this argument and North Block may be forced to step up allocations substantially in the forthcoming Budget.

But where’s the money for all this? “Revenues will fall short, so the axe will fall on expenditure, whether desirable or undesirable is to be seen,” says Rao.

Where can Chidambaram cut expenditure? With close to 80% of the government’s revenues going into committed expenditure - salaries, pensions and interest payments - there’s very little elbow room any finance minister has. Subsidies, which swallow up close to 15% of revenues (45%, if you include implicit subsidies), could be one target for pruning. But given the political compulsions, not much action is expected on this front. Competitive populism will continue, says Rao.

“The government should remove those subsidies which do not have large positive externalities and where the leakage is high. It needs to remove handouts that have negative externalities,” says Goyal.

Unfortunately, that’s not as easy as it sounds.

Perhaps, ultimately, North Block may end up doing what Chaudhuri feels is the only option available - to try and commit to as little expenditure as possible.