Tuesday, 1 April 2014

Lock the checkbook

After considering the revenue side in the previous post, let us turn our attention to expenditure. This is important, as the pattern of expenditure reflects our priorities and the debate really ought to be on whether the priorities are right or should there be a different set of priorities.

Even if you disagree on my classification of "productive" and "non productive" expenditure when I outlined the current state of India's finances, it is obvious to anybody that we should decrease non productive expenditure and increase the productive expenditure. However exactly the opposite has been taking place over the last 30-40 years. There is little doubt in my mind that a correction is required. But the correction should be gradual - any sudden reversal will trigger a revolution on the streets and is impractical.

Here are my set of proposals for the expenditure priorities

  • You can do absolutely nothing on the interest line as these are past commitments. However the one thing that you can do is stop it from going beyond control. My proposal is to decrease the rate of increase over the next five years so that it peaks in the fifth year and thereafter falls. We cannot do any better considering where we are starting
  • In an ideal world, we can do away with defence expenditure, but humanity will never reach that state of idealism. Given the geopolitical situation we are in, it can be argued that we should be spending more. However given the state of finances I propose only modest half of inflation increase in the defence budget for the next five years. Once we reach somewhere near a balanced budget, our defence expenditure should increase gradually so that in 20 years it is at the same % of GDP as China
  • We now come to the most vexing of areas - subsidies. I am not a votary of zero subsidies. Far from it. In a poor country like India, the unfortunate need  assistance. What I am absolutely opposed to is subsidy to the "rich". Here are my proposals
    • Food subsidy should be retained and grown at a modest 3% per year. Subsidy to everybody but the real poor should be stopped (currently I am entitled to some rations). The Public Distribution System is very patchy in various states - the example of Tamil Nadu, where it is probably best done should be copied in other states. The combination of better implementation, a la Tamil Nadu and stoppage of subsidies to anybody above the poverty line means we can substantially cover and enhance the benefit to everybody below the poverty line.
    • There is zero logic to Petroleum subsidies other than kerosene subsidy (which is the only subsidy that goes to the poor). The argument that raising the price of diesel will affect the common man is specious - the level of deficit financing is a bigger cause of inflation that a diesel price hike.  Reduce petroleum subsidy over 3 years gradually leaving only the kerosene subsidy as an expenditure item.
    • There is also little justification for the fertiliser subsidy.  Phase it out over 5 years by drip feeding increase in price of fertilisers . More price increase when the monsoons are good, less or no price increase when the monsoons fail. We are a food surplus nation at the moment. Even if there is a temporary fall in foodgrain production, we can absorb it.
    •  Retain all rural development subsidies other than the NREGA, which is surely one of the most awful schemes of the previous government. Phase this out over three years.
  • Pensions to government staff is a monster - it is inflation indexed and most pensioners earn well above what their salaries were when they were working. There is little justification in cosseting this lot. Abolish inflation indexing and continue the pensions . However for current employees, make the pension scheme contributory - both employer and employee contribute every month and the corpus built up becomes the pension. Do this in stages. First abolish benefit scheme for new recruits, then for the under 30s, then for the under 40s, fiddle the inflation numbers to halt the runaway increase, then increase pensions by only half of inflation and so on. The power of creeping reforms is not to be underestimated.
  • Keep all other "non productive expenditure", but grow them only at half the inflation rate and demand efficiencies to make up for the balance. There are examples in India today of states which are efficient in implementation. We have to copy the most efficient states model to the other states
  •  Productive expenditure has to be increased substantially. Double the spend on Health and Roads over the next 5 years. Corporatise Railways (keep them in the public sector)  and let them raise their own borrowings in the market for investment. A  correction in passenger fares (amongst the lowest in the world) and freight rates (highest in the world) has to take place - drip feed the correction over  3 years.
  • Education is being heavily invested upon - both by the Centre and the States. I propose a further 50% increase over 5 years. The regulatory bodies in education are amongst the most corrupt in India. Abolish them and reconstitute a professional body of experts - not bureaucrats.
  •  Industry needs no substantial increase in investment (the private sector has to do this). Agriculture does. I am not an expert on agricultural policy, but there is a substantial need for reform. The level of investment needs to be doubled over 5 years. An expert committee with the likes of MS Swaminathan can draw up a comprehensive policy and the government must implement it in toto.
 Based on the above proposals the finances of the central government at the start of its term (now) , at  its mid point in 3 years time and the end of its term in five years is presented below.

                          2013                    2017                2019
                       Rs cr                 Rs cr              Rs cr

Revenues 1,056,381 1,406,043 1,701,312


Interest 380,066 447,811 471,727
Defence 203,672 222,558 236,112
Food Subsidy 92,000 100,531 106,653
Fertiliser Subsidy 67,971 27,188 0
Petroleum Subsidy 85,480 34,192 37,697
Rural Devp Subsidies  78,452 50,000 55,000
Pensions to Govt staff 74,076 63,511 57,319
North East Subsidies 24,262 28,086 30,965
Police 43,148 49,949 55,069
All Others 144,227 157,601 167,199
Non Productive Expenditure 1,193,354 1,181,427 1,217,740
Education 67,398 89,707 108,545
Health 30,145 45,847 60,632
Railways 30,223 12,089
Roads 21,399 32,545 43,041
Agriculture 17,557 26,702 35,313
Industry 22,393 25,923 28,580
All Others 88,926 118,361 143,216
Productive Expenditure 278,041 351,173 419,328
Grants to States for Plan Expenditure 119,039 149,955 174,907
Total Expenditure 1,590,434 1,682,555 1,811,975 

As you can see we can come close to achieving a balanced budget despite increasing productive expenditure significantly and not eliminating every subsidy. With some luck and a higher growth rate, we can even hit a balanced budget. Once that happens, we enter a virtuous cycle - interest burden starts to diminish and we can substantially up the productive expenditure. Massive step up in education, health and infrastructure would then be possible. That would be basis to seek re election.

I believe the debates we have had on expenditure  in the past are every cursory.  Expenditure is all about priorities. Any individual expenditure or subsidy can always be justified. The problem comes when we are presented with the totality of the revenue and expenditure situation and then asked to defend if our favourite subsidy has to be continued then what alternate item should be cut. When we agitate on the streets for the cooking gas subsidy, we would do well to remember that.

Yes I know I haven't tackled the political saleability of all this. I promise not to duck this and do a full post of how we can sell this to the voters.

Waiting for all your comments. By all means tear me apart on any specific proposal. But remember, you have to present what would be the alternative !


  1. Gaurav Jain1/4/14

    The title of your post was totally apt to its content. LOCK THE CHECKBOOK But this got me to some thinking. We need to remove the deficit in our budget - no argument there. But there are two possible ways - a) reduce your expenditure as you discussed or b) Increase revenue. Why not lay emphasis on b) too.

    Amongst us, Marwaris, we have a saying - Don't think about reducing your expenses, think about increasing your income. Now as far as the Indian economy is concerned, the first part cannot be accepted. We got to reduce our expenditure. But what about the income. I propose following for the same

    1) Widen the tax base. There are way too many exemptions and non tax filers. Also, agricultural income needs to be brought under taxation. Draft rules such that only the most deserving are not taxed.

    2) Draft a sound DTC and GST and implement them ASAP

    3) Root out the inefficiencies and corruption in coal block allocations, spectrum allocations and all such allocations so that the government gets its due share.

    4) Bring back the black money stashed in tax heavens. (I am not sure about the possibility of this but too many of our politicians apparently believe its doable.)

    5) An intelligently planned and phased disinvestment in PSUs. Revival or disposal of sick PSUs

    6)The north east is a store house of natural resources ranging from coal, oil, iron to even uranium. But the same has never been harnessed to the fullest, mainly because it is a troubled territory. Government needs to resolve issues with the people of the land and bring such resources to use.(Personal favorite since I hail from Assam)

    I am sure you can add much more to this list. I jotted what came to my mind instantly.

  2. @Gaurav - Wonderful Gaurav. You echo my thoughts completely. You probably missed my previous post - which argued precisely your point that we must raise revenues first before coming to cutting expenditure.

    Your items 1 & 2 are dear to me and I outlined them in my post too. Didn't talk too much about disinvestment, selling assets like spectrum, coal blocks etc, because (a) these are probably one time and (b) these are the fountainheads of corruption. But they are possible ideas too. I am not very aware of the richness of the North East - would be delighted if you do a guest post on this which I would be happy to put up.

  3. Gaurav Jain2/4/14

    My apologies. I did not miss that post. It just slipped of my mind while reading this one.
    As for the guest post, am not as skilled in the art of writing as you. But may be sometime.
    And while we are at it, you may perhaps shed some light on 4) above. Do you think its possible to bring back all the black money stashed abroad or is it just a political gimmick our aspiring leaders are trying to pull off.

  4. Not much to disagree with in this context. YAY!!!

    Especially about the government pensions--that is simply insane.

    Whether it is in education or in the railways, it is not the investment (or lack of it) alone that is an issue but the enormous wastage in every one of those. User charge adjustment is needed not only in the railways but in many, many goods and services that are provided. Unfortunately, since the Indira Gandhi years (she is way up there as one of India's worst curses), governments and political parties have made sure that the public is addicted to goods and services at highly subsidized rates--which is the vote-winning strategy, of course. Weaning the public, especially the urban public, off those subsidies will require enormous political will and commitment.

  5. @Gaurav - Its tough to fight the black money that might have gone outside the country. There's a lot inside as well (suitcases of cash from property deals). I would let the police and the judiciary tackle this, but wouldn't make it a political priority. There is a bigger prize to go for - 1,00,000 crores every year in tax revenue by growing at 8% p.a.

  6. @Sriram - I have taken much flack from my household, full of senior citizens, for being a horrible guy even to suggest reducing pensions !!

    You are right in that it is not just the resources, but the wastage that is to be tackled. Here my preference is to copy the model that has worked somewhere. India has enough example of states where something or the other has worked relatively well - public distribution system in Tamil Nadu. education in Kerala, land acquisition in Gujarat, irrigation in Rajasthan, etc etc. We must copy.

    Second your opinion on "Madam". She was one of the worst things to befall India.

  7. Ramesh sir, while on the subject of susbsidies, what is your view on the numerous freebies that the state governments dole out like free laptops, bicycles etc. and the hugely popular Amma canteens. Who foots the bill for these 'well intentioned' schemes and how do you wean the general populace away from the notion of 'free ride'?

    My suggestion would be to subsist with the PDS and not forward integrate to canteens. And simply scrap the other freebies. Any unrest due to that would be short lived and is a worthy enough price to pay......

  8. @floatingthoughts - Oh - the issue of state government irresponsibility is a big area by itself. Actually the Tamil Nadu example is a mixed one - some good and some awful. Motivated by your comment, I'll post a separate post on the TN finances which will, of course deal with the freebie issue.


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