Former chief economic adviser, Government of India
Dear reader, we now rise to present our budget
I was asked at 4 pm what I would have done if I had been finance minister. I was supposed to answer by 7 pm. Here is an alternative budget worked out in 3 hours.
It is unrealistic to think one can start with a clean slate; let me start from the finance minister’s budget. A modest goal would be to eliminate the revenue deficit, which is what the government borrows simply to pay for its current expenditure. It is budgeted to be Rs 715 billion in 2007-08. A more ambitious goal would be to eliminate the fiscal deficit, which is what the government borrows overall to finance current expenditure and investment; it is budgeted at Rs 1.51 trillion.
The total budget revenue is Rs 6.3 trillion. So if expenditure were to be left completely untouched, eliminating the revenue deficit would require taxes to be raised by 13 per cent; eliminating the fiscal deficit would require a 24 per cent rise in taxes.
These are enormous increases; it is therefore necessary to reduce expenditure as well.
The biggest item of expenditure, interest payments, is expected to cost Rs 1.59 trillion. If interest cost were to be brought down, monetary and external policies would have to be changed drastically. Import duties should be drastically cut (and replaced by excise duties in some cases, to make the cut revenue-neutral), the rupee should be appreciated to cut import prices, and the Reserve Bank should reverse its tight-money policy.
Inflation must be countered by a wider range of policies, and monetary policy should take the back seat. If interest rates can be brought down to what they were three years ago, the marginal cost of borrowing would drop commensurately.
The bulk of internal debt carries interest over 10 per cent; it can then be refinanced at half the cost or less. Let me assume just a 20 per cent cut in interest costs — Rs 300 billion.
Fertiliser subsidies are budgeted to be Rs 224 billion. There are four fertiliser subsidies — on nitrogenous fertilisers, on imports, on phosphatic fertilisers whose price has been decontrolled, and subsidies to high-cost government factories. Instead of supplying fertilisers at a controlled price, the government should be buying fertiliser at the lowest cost by tender or a similar mechanism.
It should allow fertiliser imports duty-free, and let foreign as well as domestic manufacturers compete to supply. It should stop subsidies to private manufacturers of phosphatic fertilisers. And it should close down fertiliser factories that cannot produce without a subsidy.
These measures together would save Rs 150 billion on a rough estimate. Foodgrain subsidies are budgeted at Rs 256 billion. They largely leak out in corruption. Kirit Parikh demonstrated this graphically while he was director of the Indira Gandhi Institute of Development Research. I am sure he would confirm his findings, although he has now become a government servant.
The government should get completely out of retail distribution of foodgrain; insofar as it wants to keep down foodgrain prices, it should operate at the wholesale level. It should aim to maintain a buffer stock large enough to give it a commanding presence in the market. The inventory should be stored in privately owned silos. It should buy foodgrain at the lowest price on tender, without distinction between domestic produce and imports, and sell it periodically in the open market to ensure low and stable prices.
Food subsidy should be entirely abolished; that would adversely affect only politicians and their trader friends. The three measures I have outlined – a reduction in interest of Rs 300 billion, a cut of Rs 150 billion in fertiliser subsidies, and abolition of foodgrain subsidies – would eliminate the revenue deficit. The government is proposing to buy the shares of State Bank of India from the Reserve Bank for Rs 400 billion. I would cancel this purchase; that would reduce the government’s capital expenditure by an equal amount.
Internal security is the responsibility of the states under the Constitution. The centre has budgeted Rs 188 billion for its own police, most of which are lent out to states. The states should pay for these forces; if some, such as northeastern states, cannot pay, they should get a subsidy to cover their net deficit — which they do even now. I think Rs 100 billion can be transferred to the states.
To make India a superpower, the government is planning to spend Rs 419 billion on military equipment. There is no imminent threat at present, and I am sure the march to superpower status can be spread out over a longer period. If I halve it, I would save Rs 200 billion.
The National Rural Employment Guarantee scheme is a latter-day PDS — it is perfectly designed to divert bribes to politicians and bureaucrats. I would stop it at the present early stage and save Rs 108 billion.
These four measures —leaving State Bank as it is, making states pay for the police forces they borrow, going slow on the superpower business, and refusing to create bogus rural employment — would save me Rs 800 billion.
Together with the three previous measures, there would be enough to eliminate the fiscal deficit. And this could be done without raising any taxes. If taxes were raised, a 10 per cent rise in taxes would be equal to an improvement of 1.3 per cent in the ratio of fiscal balance to GDP. Once the fiscal deficit is eliminated, additions to expenditure should be kept below increases in revenue every year to generate a growing surplus; it should be used to pay off government debt.
As its debt comes down, its interest payments, which currently make up almost a quarter of its total expenditure, will fall, making room for productive expenditure.
More important, the government’s net creditor position will bring down interest rates to a level not dreamed of. It will stimulate investment so much that we will come to think of 10 per cent growth as child’s play. This is the plan I have made up in three hours; what could I do in three years' I would probably turn into a superbore.