The Hindu Business Line : `Approaching' the resource challenge

With compulsions of coalition politics influencing spending on programmes set by the ruling alliance, the Eleventh Plan is beginning at an inopportune time. While the Prime Minister endorses the need for a larger Plan outlay, he also emphasises that it cannot come at the cost of fiscal prudence, says G. SRINIVASAN

The internal meeting of the Planning Commission to approve the Approach Paper to the Eleventh Five-Year Plan that is set to start from April 1, 2007 has concluded.

Dr Manmohan Singh, who chaired the October 18 meeting, had to do the balancing act between the escalating demands of funds for various programmes of the UPA Government, on the one hand, and the fiscal compulsion of sticking to the goalposts of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, on the other.

With compulsions of coalition politics influencing spending on programmes by the allies in the run-up to the 2009 General Election, the Eleventh Plan is beginning at an inopportune time, even as the economy has been showing unprecedented growth. That is why even though the economist in Dr Singh endorsed the need for a larger Plan outlay not only in absolute terms but also as a proportion of GDP, the pragmatist in him emphasised that it cannot come at the cost of fiscal prudence and stability. Hence, he urged the Plan panel to prioritise among programmes, indicating what they were — agriculture, irrigation and water resources, health, education, investment in rural infrastructure and the public investment in general infrastructure, and programmes for those belonging to the Scheduled Castes/Tribes which ought to have "the first claim on resources."

Mobilising resources

A day after the Plan panel meet, the Planning Commission Deputy Chairman,

Dr Montek Singh Ahluwalia, said that "our calculations suggest that the resources that we want for the Plan can be had, consistent with the fiscal deficit target, provided we are able to mobilise a lot of resources on the tax side — through better administration, tax reform and also controlling non-Plan expenditure." The latter is a politically sensitive issue as it covers subsidies, both open and hidden, to a number of agents in the economy.

Mr Ahluwalia did not sound very convincing when he remarked that "unproductive non-Plan expenditure can be contained." However, he raised a point to ponder: "Even if you have resources for the Plan, since we are shifting our strategy towards health and education, that expenditure tends to be revenue expenditure. This part of the revenue expenditure has to increase. So the Finance Ministry will have to control other types of revenue expenditure." The point is other types of revenue expenditure, such as subsidies on food and fertilisers, outlay on Defence and interest payments, are too rigid to be handled.

Containing Non-Plan expenditure

The Eleventh Plan Approach Paper circulated on October 18, however, elaborated this point when it said that containment of non-Plan expenditure is one plank of the resources strategy. Stating that the aim should be to limit the growth of non-Plan expenditure to five per cent per year in real terms, it said that with a targeted nine per cent growth in GDP, this would help to slash the non-Plan expenditure from 23 per cent of GDP in the Tenth Plan to 18 per cent in the Eleventh.

The Plan panel concedes that the "ability to curtail the growth of non-Plan expenditure depends critically on our ability to control subsidies. Subsidies must be curtailed by effectively targeting these to those who deserve them and reducing the non-merit subsidies." It goes on to state that it is not possible for the Central and State governments to "resist raising user charges and bear the burden of rising costs in a number of public services when most of those who use them can afford to bear a reasonable increase."

Whether it is electricity tariff, cooking gas price or transport charges, political parties are bound to oppose even a modest increase in cost. It would be a Herculean task for any government to stand up to criticism from its peers. Its advocacy of levying rational user-charges in many areas to keep the demands for budgetary support within limits and removal of untargeted subsidies that are not aimed at the poor and vulnerable sections will be easier said than done.

New approach

The Approach Paper argues that "we could face a situation where the fiscal deficit targets are met but the revenue deficit targets are not, because of the high revenue component of Plan expenditure." The shift in the Plan expenditure towards the social sectors has meant that a larger proportion of the expenditure would be revenue as per the current budgetary definition. The budgetary expenditure on Bharat Nirman, the National Employment Guarantee Scheme, the Backward Regions Grant Fund, the Jawaharlal Nehru Urban Renewal Mission and all the new schemes in agriculture such as the National Horticulture Mission are classified as revenue expenditure. As such, it said, the very vision of the Approach to the Eleventh Plan, combining innovative financing of infrastructure with a massive decentralised thrust on education, health and agriculture, may be defeated, since they are in effect grants to implementing agencies in States, even though they finance asset creation on the ground. To get over this difficulty, the Plan panel said that revenue deficits as defined in India are not regarded as essential elements of fiscal responsibility legislation internationally. As global practice also recognises the need for counter-cyclical fiscal policy and focuses on the cyclically adjusted fiscal deficit, there is a case for redefining the approach to FRBM to conform to global practice in the longer term.

It is now up to the Finance Ministry to accept this suggestion and ignore revenue expenditure on essential programmes which are "politically correct" but fiscally unviable . No wonder, the Approach Paper estimates that the gross budgetary support (GBS) for the Plan (Centre and States combined) would have to increase by 2.5 percentage points of GDP from an average of 7.15 per cent of GDP in the Tenth Plan to an average of around 9.7 per cent in the Eleventh Plan period.

In this mixed scenario for finding resources to match expectations, the Plan panel has aptly said that the strategy for inclusive growth proposed in the Eleventh Plan can succeed only if both the private and the public sectors play the role expected of them. Private sector activity in farming, small and medium enterprises and in the large corporate sector accounts for 75 per cent of the total investment and will be crucial for achieving the growth and employment objectives. Hence, it called for a progressive elimination of residual restrictions and controls in sugar, petroleum refining, fertiliser and drug industry, though industrial licensing has been virtually eliminated.

Focus areas

The Approach Paper focuses on the need for faster reduction in poverty and greater attention to employment generation and outlines a strategy for doubling the growth rate in agriculture from two per cent to four per cent, providing expanded access and better delivery in health and education and promoting double-digit growth in manufacturing with emphasis on labour-intensive sectors. To grow at an average rate of nine per cent over the quinquennium would entail an increase in domestic investment rates from 27.8 per cent in the Tenth Plan to 35.1 per cent in the Eleventh Plan. As half of this increase is to emanate from private investment in farms, small and medium enterprises and in the corporate sector with the rest coming from public investment, mostly on critical infrastructure sectors, how the reform brigade in the UPA unfolds an investor-friendly policy in the coming days to live up to the ideals of growth with equity it swears by would largely determine the massive resource flows for the Eleventh Plan.