The medium-term fiscal roadmaps and the Kelkar report on fiscal consolidation have not gone beyond aggregate revenue and expenditure categories. They have overlooked crucial details.
The Kelkar Committee submitted its report in September 2012 to suggest a road map for medium-term fiscal consolidation in the present economic situation.
India is going through a difficult period. Depreciation of the rupee, the current account deficit and fall in flow of foreign funds pose challenges. The growth rate is lower and the inflation higher than envisaged at the start of the financial year.
Fiscal consolidation in the medium term will boost our credit rating by external agencies and increase consumer and investor confidence.
The Government had earlier enacted the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act), which prescribed a cap on borrowings by the Central government. The targets stipulated were elimination of revenue deficit and reduction of fiscal deficit to 3 per cent of GDP in five years. It also prescribed a medium term fiscal policy for three years – the Budget year plus two more years.
A decade later, Union Budget 2012-13 projected a revenue deficit of Rs 3.50 lakh crore and a fiscal deficit of Rs 5.13 lakh crore ( 5.1 per cent of GDP). In the medium term projection, the target for 2014-15 is a revenue deficit at 2 per cent of GDP and a fiscal deficit at 3.9 per cent of GDP. According to the latest estimates, the deficit for 2012-13 will be higher than the Budget estimate.
The Kelkar report has pointed out that “the economy is poised on the edge of a fiscal precipice”. This poor track record, in spite of annual medium-term roadmaps being drawn up every year in the past 10 years, calls for an analysis of whether such roadmaps need to be re-conceived.
Fiscal consolidation is not mere deficit reduction. More important is how the deficit is reduced. The aim should be to reprioritise government expenditure to stimulate growth and raise extra resources to reduce government borrowings, thereby avoiding crowding out of private investment. Cutting non-Plan expenditure by an adhoc level of 10 per cent has been the usual practice, and was the government approach in this year’s Budget as well. This should change.
Not all non-Plan expenditure is bad, a case in point being operation and maintenance of assets. Similarly, not all Plan expenditure is above board -- for example, overlapping Plan schemes. The focus has to be on non-developmental and developmental expenditure instead.
Zero-based budgeting is required before a fresh budget proposal is submitted by Ministries. This is meant to weed out all ineffective expenditure. The Budget does not reflect the results of such a review.
LACK OF DETAIL
The medium-term fiscal plan projections are an aggregate of total Plan and non-Plan expenditure under ‘capital’ and ‘revenue’, with no further details.
For instance, allocations for subsidies could do with some detail on whether they reflect the proposed reforms in that area. Subsidies need fundamental reforms with respect to cost reduction, reform of the administrative price fixing mechanism, targeting, and avoiding understatement of liabilities and expenditure. The assumptions underlying the cost of oil imports, for example, are not spelt out.
Another example of an item of spending that needs to be critically viewed is the MGNREGS. MGNREGS leads to little productive rural asset creation. Leakages in wage payments are known to be widespread, while its larger macroeconomic impact has been the shortage of labour for agriculture.
Allocations for priority areas like improvement in agricultural production, infrastructure development, power and communications are not specifically mentioned in the aggregate medium-term road map.
Other major expenditure concerns are railway finances, the internal resources of public sector units and their dependence on the Government budget, non-closure of sick public sector units, and NPAs of public sector banks. Intrusion into the autonomy of PSUs, cost and time overruns on projects and use of output and outcome accounting as a management tool to review the results from schemes and projects are areas on which the fiscal road map could shed some light.
On the revenue front, the Budget estimates the tax revenue foregone due to exemptions and concessions at Rs 5.11 lakh crore in 2011-12, against the gross tax revenue of Rs 9 lakh crore in 2011-12 (revised estimates). No estimate for 2012-13 available in the Budget.
Areas of concern on the revenue front are: specific, time-bound action to bring back black money, reform of tax laws and administration, tax avoidance, recovery of tax arrears, and boosting non-tax revenues, including disinvestment.
KELKAR REPORT PROBLEMS
The road map in the Kelkar report suffers from all the deficiencies in the medium-term projections. The targets on expenditure and revenue are in the aggregate.
There is no review of Plan schemes for their priority and effectiveness. Subsidies are the sole item with some specific expenditure projections. The recommendation is to free oil prices from APM. The basis of arriving at the expenditure projections after reform is not indicated in the case of crude oil prices. There is no examination of the cost structure and accounts of government oil marketing companies.
There is a general warning of possible loss of revenue, in the event of implementation of the Direct Tax Code and marginal adjustment of VAT rates when the Goods and Services Act is passed.
Despite roadmaps over the last 10 years, implementation of the FRBM Act 2003 in letter and spirit has not been achieved. To pre-empt the impact of global economic uncertainty, we need to take steps to obtain good fiscal ratings, which will generate consumer and investor confidence. This will also encourage foreign investment and help bridge our current account gap.
The Government should prepare a White Paper on implementation of the FRBM Act for discussion in Parliament. The implementation of Government expenditure and revenue needs to be debated in more detail than the fiscal road map and Kelkar report have done so far.
(The author is a former IMF Budget Advisor.)