The Hindu Business Line : Budget: Let down by leakages

The larger the number of schemes, however noble their intentions, the greater the leakages. One cannot ignore the realities by arguing that schemes would work if governance were good. But governance is not a commodity that can be readily purchased. What is important is that the leakages should be plugged before announcing social sector schemes, lest the expenditure growth outstrips revenue, worsens the fiscal position, and widens all deficit indicators, says A. Vasudevan.

ON REGISTRATION for doctorate studies in 1959, my supervisor who was a Fulbright scholar and a student of John Kenneth Galbraith, asked me why I wanted to work on deficit financing in India. My reply was simple: "After all, you were Finance Minister of a State and I would learn from your experience". That prompted him to give me the true story behind one of his measures as Finance Minister of a Part `D' State under Govind Ballabh Pant.

Pant advised my supervisor, who was in the mould of an academic, that in the interests of the Part D State, he should do what he loves most. Pant strongly recommended that as the State would not last long and would finally be merged with the larger State of Uttar Pradesh, it was best to create a huge budget deficit by spending as much as possible on primary education and let the larger State eventually take the tab.

So a number of new schools were opened in great haste and persons with certificates of having successfully completed eighth standard could become teachers. But this did not improve the literacy rate or the educational standards of the concerned region. The story, however, has something to convey. First, the quality of teachers counts and, second, there has to be accountability of what we do in the name of any scheme, which in this case is primary education.

It is important to recognise that the larger the number of schemes, however noble their intentions, the higher the leakages. One cannot ignore the realities of the day by arguing that schemes will work if governance were good. But governance is not a commodity that can be readily purchased. Nor can it be obtained merely by creating `institutions' that are built on unsound premise.

One, therefore, wonders what would happen to the scheme of providing primary education to be financed by a cess on taxpayers when it is well-known that the primary school teacher absence rate in India is high. Some estimates place the average all-India teacher absence level at 25-30 per cent of effective activity.

In some States, the teacher absence is placed at a much higher level of 45-50 per cent. In the rural areas, the absence is much higher than in urban areas. There could be a number of reasons for teacher absence, but one thing is almost certain. Having a large number of private primary schools in rural and small towns will not change the picture radically, given the low salaries and with practically no inspection or regulatory framework.

Similar problems arise when one looks at the health-care and employment guarantee schemes. Revenue avenues targeted for certain purposes rarely achieve the purposes for which they are intended so long as accountability is at discount. In such a situation, large expenditures on social sector development for bringing about growth with distributive justice would only warm the hearts of politicians, bureaucrats and middlemen.

This is not to say that expenditures for social sector development should be eschewed and social issues be left solely to the initiatives of individuals and groups of individuals.

What is important to note is that leakages should be plugged as far as possible before announcing social sector schemes and the pity is that this cannot be done within a year or two even if one were to grant that leakages cannot be eliminated entirely even where civil societies and institutions are strong.

Some commentators on the Budget supported the idea of issue of certificates with higher interest rates to senior citizens. Being a senior citizen myself, I believe that not all senior citizens are of the same class! There are some who get health and hospitalisation benefits from their previous employers besides pensions and honoraria.

In general, senior citizens, mostly above 70 years, spend disproportionately large amounts of their budgets on health-care and to an extent on transportation and small amounts on entertainment, clothing and food.

Where expenditure on health care is taken care of, there is no reason why senior citizens should be treated very differently from the rest of the community from the point of view of interest disbursements.

But, as it is not possible administratively to find out how many senior citizens get health-care benefits, it is best to avoid distortions by having on tap basis index-linked bonds that are tradable or that could be used as collateral for getting loans from banks.

It is important to remember that as ageing of the population increases, pressures for giving benefits for senior citizens would increase and the government should be careful not to succumb to them.

Already, there are discounts and benefits provided by different organisations for senior citizens. For example, commercial banks give an extra interest rate on fixed deposits of senior citizens and airlines give discounts to citizens of over 65 (there is ambiguity about the age at which a citizen becomes senior!) on air fares.

The Budget seems to believe in the philosophy of public expenditure for improving physical and human capital but it does not spell out how it would be sustained. There is little of detailed discussion on strategies to ensure a sustained increase in revenues. It is also not clear whether there are mechanisms to ensure that the physical and human capital generated will give rise to higher incomes.

In this context, it is important to realise that as money is fungible, monetary allocations do not necessarily lead to growth. The distinction between revenue and capital accounts is not as watertight as is assumed to be. In fact, the growth argument is unconvincing, given the fact that while revenue receipts and expenditures are estimated to go up respectively by 17.6 per cent and 6.2 per cent over the RE of 2003-04, capital receipts as well as capital expenditures are poised to be lower than the RE of 2003-04.

There is strong emphasis on revenue deficit and monetised deficit (deficit financed by central bank money) giving the impression that this is meant to protect the capital budget from being eroded. But when expenditures are not subject to appropriate performance audit, raising revenues through a variety of sources, even when they are legitimate and perfectly justifiable would not make much sense.

Revenue and fiscal deficits in relation to projected GDP are placed lower, a point of cheer for most observers. If the real growth assumption does not materialise, and prices go up at a rate higher than presently acceptable to the government — a possibility that cannot be ruled out — the deficit indications in the Budget could well be satisfied. But this would further depress the real physical capital formation and the real value of revenue disbursements.

However, as public finance pundits would say, during periods of rising prices, expenditure growth would outstrip revenue growth and worsen the fiscal position, widening all the deficit indicators. This is not a cynical view: India has a record of missing the targets.

(The author, former Executive Director of the Reserve Bank of India, can be reached at asurivasudevan@hotmail.com)