Most social schemes, largely funded by the central government, show massive leakages at the state level. Recently, a performance audit by the Comptroller & Auditor General of the National Rural Employment Guarantee Scheme (NREGS), which currently has a Rs 12,000-crore annual allocation, threw up unflattering evidence of leakages in the implementation.
“NREGS had good intentions but it was known from past experience that it would collapse at the implementation level. That is just what has happened,” says Arvind Panagariya, Professor of Economics at Columbia University. Former finance minister and BJP MP Yashwant Sinha believes the scheme has turned into a bottomless pit and needs a serious review. “I hope this is one of the issues that the FM will tackle in the Budget. Most of the money has not served the purpose for which it was allocated,” he says. Planning Commission Deputy Chairman Montek Singh Ahluwalia, however, defends the scheme as being a better performer than earlier versions, and believes the UPA government “has put in place what was not there before”— the basic components of a social security net (the NREGS and the health insurance Jan Swasthya Bima Yojana for the poor and pension schemes for the elderly in poor households), which may well act as a precursor to second-generation reforms. Ahluwalia is clear that the schemes will be fully funded with budgetary provisions. “Wait and see what happens in the Budget,” he adds. Great electoral ploys they may be, but economists consider such spending programmes as suboptimal measures to fix economic issues. “We must accept the fact that our system cannot deliver even satisfactorily, let alone efficiently and (therefore, we must) begin to shift towards a system of cash transfers to the poor,” says Panagariya. These, however, are big agenda items not easily tackled through an annual budget. Slipping fiscal deficit? Subsidies: Necessary evil? India’s subsidy bill is its expensive concession to the poor, yet, inefficient delivery channels make for sub-optimal results. Largely made up of sops on food, fertiliser, and oil, this outgo has been steadily increasing. Between 2003-04 and 2006-07, these major subsidies swelled from Rs 43,569 crore to Rs 49,441 crore. This year, as global crude oil prices continued to climb, the bill is expected to bloat further. Last year, Prime Minister Manmohan Singh flagged off a rethink on the issue at the National Development Council meeting. “We need to question both the quantity and the manner in which subsidies are delivered,” he had said. Though this is a tough task to accomplish in an election-year Budget, most economists agree with the Prime Minister. “The government must abolish these subsidies and replace them with cash transfers to the senior-most female in the bottom 30 per cent households,” suggests Arvind Panagariya, Professor of Economics at Columbia University. It’s an economist’s solution to a problem that, unfortunately, a large part of the political system benefits from. Therefore, any moves to funnel subsidies directly to the poor will encounter resistance. |
Lax expenditure controls by the central government, however, seriously blight the fiscal deficit. Though the consolidated deficit of the Centre and states has dropped from a peak of 9.63 per cent of GDP in 2001-02 to 6.36 per cent of GDP in 2006-07, it is in danger of slipping again as the off-Budget items such as oil bonds increase in quantum. “In 2006-07, this offbalance-sheet borrowing on account of oil companies and the Food Corporation of India amounted to Rs 35,350 crore or roughly 1 per cent of GDP. Roughly speaking, these issues imply that the fiscal deficit in 2006-07 was understated by roughly 1 per cent,” says Ajay Shah, Senior Fellow with Delhi-based think-tank National Institute for Public Finance & Policy. Shah believes that the Fiscal Responsibility & Budget Management Act (which mandates reduction of the fiscal deficit to specified levels) perhaps gives the government an incentive to push more debt into such off-balance items. Subir Gokarn, Chief Economist, Standard & Poor’s Asia-Pacific, believes that the continued “risks to fiscal consolidation come from the sharp spike in expenditure going forward due to the rising subsidy bill, interest payments on Market Stabilisation Scheme bonds and the Pay Commission recommendations.” Gokarn, in fact, believes that the threat to fiscal consolidation is substantial enough to warrant no relaxation in tax rates this year. (See Sixth Pay Commission: A Fiscal Bomb). The increase in oil subsidies arises mainly from the government’s efforts to contain inflation (as measured by Wholesale Price Index) to 5 per cent and below. And the Economic Advisory Council (EAC), the RBI, and most economists predict a tough year going forward on inflation not just due to higher crude oil prices but also agri-inflation. |
"Total reduction of excise duties by 2% will give a welcome boost to the manufacturing sector. Also, the exemption of specified parts of set-top boxes from customs duties is commendable".
