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  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  FEBRUARY 21, 2007

    Please continue with the expenditure reform!
    MYSTOCKS | FREE NEWSLETTER

    In July 2006, the Finance Minister had put in place some expenditure management measures to curb non-plan revenue expenditure (the cost of running the government machinery). Resultant, the fiscal deficit for the first nine months is 12% lower than the last year's level in absolute terms and 64% of the budgeted target. The government actually had two months of fiscal surplus - September and December 2006, thanks to a 33% increase in tax revenues in the first nine months of FY07 as compared to a 19% growth in the previous year. But it (the government) has also been able to restrict expenditure to 68% of the budgeted Rs 3,837 bn in the first three quarters of the financial year.

    Unfortunately the lower expenses are thanks to lesser investments in agro and rural industry, civil aviation, communications, transport and roads, shipping, mines, urban development and water resources - exactly areas where the economy most needed that expenditure. Capital expenditure at 48% of the budgeted target has been axed to meet the fiscal deficit numbers to confirm to the Fiscal Responsibility and Budget Management Act (FRBM).

    Unlock the PSU value and reduce the internal debt
    Internal debt or the cumulative total that the central government has borrowed from the markets in the form of dated paper and treasury bills, as well as from people, in the form of small savings and provident funds, is 63% of GDP. Add to this the state government's past deficits and the total net of inter-governmental exchanges comes to a whopping 79% of GDP, as per the FY07 budgeted estimates.

    Interest payments of the Central government are 3.5% of GDP. As interest rates are raised (by the RBI) to keep inflation down, the government will borrow still more to pay out more! There is very little addition to the sum total of assets with the government.

    Presently, divestment proceeds are routed into the National Investment Fund and 25% of the funds are re-routed to sick PSUs (public sector units) many of which have negative net worth. It is a classic case of good money spent after bad. The rest is supposed to be spent on educational and other social developments. If this money were actually spent to retire debt, the future of the entire economy would be rosier. Or else like the US did in the mid-eighties, there should be an across-the-board cut in all expenditures, whether deserving or not.

    However, having said that, we would actually like to see a marked step-up in this budget in activities that have very high economic returns coupled with low financial ones, like rural and urban development, education, storage facilities, transport framework, to mention just a few. Further acceleration in economic growth and reduction of poverty will need greater investment and employment growth along with significant enhancement of productivity.

    Central government's expenditure on social sector and rural development
    As a % of central government's expenditure FY96 FY01 FY02 FY03 FY04 FY05 FY06
    1. Social Sector 6.5 7.7 7.9 7.1 7.5 8.8 10.8
    Education, Sports, Youth Affairs 2.0 2.4 2.4 2.4 2.3 2.7 3.6
    Health & Family Welfare 1.4 1.6 1.6 1.6 1.5 1.6 1.9
    Water Supply, Housing etc. 1.0 1.5 1.7 1.6 1.5 1.7 1.8
    Information & Broadcasting 0.3 0.4 0.4 0.3 0.3 0.3 0.3
    Welfare of SC/ST and OBC 0.4 0.3 0.3 0.3 0.2 0.3 0.3
    Labour & Employment 0.3 0.3 0.2 0.2 0.2 0.2 0.2
    Social welfare & Nutrition 0.7 0.7 0.7 0.6 0.5 0.5 0.8
    North-Eastern areas - - - - 0.9 1.3 1.8
    Other Social Services 0.3 0.5 0.6 0.1 0.2 0.4 0.2
    2. Rural Development 3.7 1.4 1.7 2.9 2.4 1.7 2.3
    3. Pradhan Mantri Yojanas - 1.5 1.4 1.2 1.0 1.1 0.8
    Total 10.2 10.6 11.0 11.2 10.9 11.6 13.9
    Source: Union Budgets

    Invest more in our future
    Massive investments in education (receives just 4% or Rs 241 bn of the central expenditure) are necessary. Even poor people are shifting their children from the dysfunctional government schools to the more expensive private schools. People have increased their spend on education in their consumption expenditure from 2% to 2.5% in the last five years (National Sample Survey). Lack of well-trained manpower will hurt the growth process as much as the infrastructural bottlenecks grabbing the headlines today. By involving industry participation at the local level, the costs could be shared as well as it will ensure that the training imparted is relevant to the prospective employers.

    Urbanisation
    It is ironic to note that though agricultural growth stagnated in the recent past, the urban population growth actually slowed during the 1980s and the 1990s. During these two decades only 12.7 m and 14.4 m people shifted from rural to urban areas. If more people had shifted, it would have relieved the pressure in rural areas. Actually it can be traced to low labour-intensity of industries as output growth far exceeded the employment generated by the manufacturing sector. Also, labour productivity in agriculture has stagnated for the last 15 years, preventing a shift in labour from farming without affecting the production. Lack of sanitation and low-cost housing in urban areas has also contributed significantly in lower urban conglomerations, leading to increased cost of industrialisation.

    But the central government has earmarked just Rs 36 bn or 0.6% of its total expenditure for the development of urban areas, which house 26% of the population!

    De-reserve industries
    Restrictions in many labour-intensive manufacturing sectors being reserved for the small-scale industries and rigidities in labour legislations have led to a bias against labour-intensive industrialisation. Coupled with fiscal benefits relating to the backward areas, the necessity to locate in distant locations where labour is not easily available also inhibited labour-intensive industrialisation. With inappropriate urban zoning laws, the transformation of land use in urban areas was made inflexible. Thus, location of industries in urban areas has been restricted since the 1970s, leading to a loss of agglomeration economies that the industries would have otherwise benefited from.

    Build up rural connectivity
    A slower growth rate in agriculture is very worrying as it means income inequalities are on the rise. Also, it will limit the increase in demand for industrial goods in the future. The increasing diversification in Indian diet away from the cereals holds a great potential for acceleration in non-food agriculture like, poultry, meat, aquaculture, wineries and horticulture. All this will come to a naught without the provision of a rural infrastructure: roads, storage facilities, transportation, power and telecommunications. User charges will need to be levied to supplement the budgeted allocations.

    The Budget 2007-08 can probably not meet all our forthcoming challenges, but it can take a few steps in the right direction. We need the public sector, but also for it to be in areas where it is for the betterment of all. Spend more, but where we see assets being built. That will give the base for our economy to continue growing in double digits for decades to come.

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