The Hindu Business Line : Political economy of budgetary reform

THE Kelkar Task Force, set up by the then Finance Minister, Mr Jaswant Singh, was supposed to focus exclusively on Budetary reforms. Not on the reform of the economy as a whole. The `recommendations' of the Task Force on economic reform must, therefore, be treated as a mere side-show.

However, to be fair, the Task Force, for all its pretensions, did not go into the question of economic reforms, except in a very superficial sense. Nor was it required to do so. Its recommendations for Budgetary reform were based on two `fundamental' principles.

Reforms should be `front-loaded'. And they should focus on ways of increasing revenue, rather than on reducing expenditure — because expenditure cuts could lead to an economy-wide fall in demand for goods and services. Certainly, the Task Force felt, the Government ought not to consume more than what it `earns', through taxes. But this happy result ought to be achieved, within a realistic period, by increasing what it `earns', rather than by decreasing what it consumes.

The Executive Summary of the report gives six reasons for `front-loading' the reforms, rather than leaving them to work themselves out more gradually, more evenly, in the years to come. Among the reasons given were the proposition that `quick action would help generate quick results'; and the fear that the macroeconomic outlook in years to come might turn out to be `more sombre' — restricting the scope available for manoeuvre.

The report did not, however, mention the most important reason for `front-loading'. Namely, that it is advisable for a reasonably stable government to take `hard decisions' when it has just come into office, than leave these for a time when the next elections no longer seem so far away.

On the revenue vs expenditure point, the Task Force argued, among other things, that revenue — rather than expenditure-led reforms — would help the Centre strengthen `State finances'! But the basic fact is that many `heads' of revenue expenditure are, to a large extent, beyond the reach of reform.

The payment of interest on accumulated debt, for example, gobbled up more than half of the government's revenue receipts over the years 2000/01 and 2001/02. Then there is the patronage factor, for States, and for others as well. Raising revenues from an ever-widening base makes it easier to confer favours, while expenditure cuts, which tend to raise the ire of narrowly-defined and well-organised vested interests, are unlikely to make you many new friends.

This, incidentally, is also the reason why the Task Force favoured increasing (inflation-inducing) indirect taxes, rather than direct taxes — which, the Task Force apparently felt, but did not explicitly state, render a `disproportionate' burden on the rich.

As for the point about `demand', it is not sufficient to take the stand that government expenditure will henceforth be `tightly monitored' to see that, in addition to increasing overall demand, they would, or at any rate could, lead to the creation of tangible and urgently needed infrastructural assets, particularly in the agricultural sector.

After all, the Task Force failed to come out with any new ideas about how this was to be done. And it totally failed to address the problem of the lack of purchasing power that large portions of our population, in many different regions, suffer from.

Increasing agricultural production is one thing, increasing purchasing power, even for `surplus' agricultural production, is another. The main `solutions' that have been suggested over the past couple of months, namely bank credit and food for work programmes, are in no way different from the solutions touted, and energetically pursued, specially by Joint Secretary Bailur, in the 1980s.

In other words, they suffer from all the drawbacks that those solutions had to labour under the burden of. Indeed, thanks to low and rapidly declining ground water levels, and salinity, problems will prove a great deal more prickly to handle today than they were 20-25 years ago.

The basic common problem with the `solutions' is that they suffer from far too many `leakages'. It is not leakages to the rural rich that are worrisome. Such leakages are very much smaller than most people believe. More troubling is the fact that intended beneficiaries get only a very small fraction of every rupee the government spends to help them.

Apart from employee salaries, leakages include the requirement that 40-50 per cent of the money allocated to easily accessible, and therefore small and widely dispersed, rural works programmes are required to be spent on materials and equipment — for building roads that get washed away at the first hint of a drizzle — rather than on payments to workers.

And even the Rs 80-100 rupees per day that does end up in the hands of workers, when work is available, ought to be `netted' to allow for the costs they have to incur to access the food for work programme. In journeying to work, for example; and in simply having to sit under the sun pointlessly breaking boulders into stones, and stones into pebbles. And in being unable to access work opportunities because of sickness or age.

In fact in some programmes, such as loans for constructing new wells, or deepening existing ones, there is a negative `gain'.

In many parts of the country farmers were better off before they took loans for wildly unrealistic and ambitious projects. Because of low and declining ground water levels; and because diversification between hardy crops, rather than specialisation on sensitive albeit potentially lucrative ones, is the only way to provide for weather-related risks on a sustainable basis.

Surely, it is not too much to hope that the poor get at least ninety paise worth of `cash in hand' for every rupee the government spends to help them.