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
Expenditure
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 !