A Case Of Crash-Diet Blues

Democracy is a government by and for the strongest lobbies. And nowhere is it more apparent than in the unseen battle to cut government expenditure. It may sound unbelievable but a battle is indeed on in the government, led by the finance ministry, to find ways and means to cut outgo. An expenditure commission has been set up under former finance secretary K. Geethakrishnan and a panel under economic affairs secretary E.A.S. Sharma is drafting a Fiscal Responsibility Act (fra). This piece of legislation, common in many advanced countries, seeks to examine, among other things, the feasibility of a formal cap on the amount a government can borrow, even spend.

Why now? Besides the fact that the fra is a part of the nda’s manifesto, the interest in expenditure control is praiseworthy if only because there is no demonstrated crisis in the economy or on the balance of payments front, says Ashok Lahiri, committee member and chairman, National Institute of Public Finance and Policy. But there can be no dispute over the need for it.

Consider Budget 2000. In a clear admission of defeat on the fiscal deficit front, the government has budgeted it at 5.1 per cent of gdp. That is, Rs 1.11 lakh crore of new borrowings are necessary as the government will spend Rs 3.38 lakh crore, or 15 per cent of gdp, in the next fiscal. Most of this is revenue expenditure, another name for consumption expenditure. India’s revenue income can barely account for two-thirds of expenditure - interest payments, defence spending, subsidies and wages and salaries of government employees. The choice, therefore: sacrifice development or borrow more. In India, both has happened.

As a result, interest burden on past debt is an astounding Rs 1.01 lakh crore. Next year, we may have to borrow money only to service the interest burden. Besides getting into this vicious circle of debt, such a huge burden imposes an inter-generational transfer problem, an economic term for making your children pay for your sins by raising inflation and taxes. "You don’t put a cap on your debt or expenditure and you can say goodbye to dreams of becoming an Asian power in the next 10 years," says a senior finance ministry official.

This is where an fra helps. Says Lahiri: "If you don’t know where you’re going over a certain period, there’s a fiscal policy drift. An fra is to control that." The US, Kenya, Indonesia and the EU have stringent regulations on their governments. New Zealand, the most notable success, enacted its fra in ‘94 to make its fiscal policy accountable. Articles 292 and 293 of our Constitution allows Parliament to regulate the powers of the Centre/states to borrow from the Consolidated Fund (all money must go out of/come back to it). But a formal cap has its problems. One, it can encourage creative accounting by government, like central guarantees to psu borrowings abroad.

Two, an inflexible limit will not take into account disasters like war or the Orissa cyclone - our contingency fund allows only Rs 50 crore. As Lahiri says: "The idea should be to bite, not strangulate." Three, a medium-term target is needed for practicality and to establish a roadmap. Four, a cap out of nowhere may have the same impact as the abolition of 91-day T bills - borrowing via ways and means advances has not reduced debt. The government must back it up with a proven will to cut all corners.

It’s here that all good intentions run into a brick wall. For, beyond the obvious heads of subsidies and interest payments, the most apparent target for cost cutting is the government itself. Says a top-level ministry official: "Of course, there are significant vested interests. Forget bureaucrats, even ministers oppose any move to rationalise expenditure." Any government is an expenditure centre. But it’s not the quantity so much but the quality of expenditure that’s important.

Sample this. One-third of Plan spending in India is for social sectors. Yet, for instance, projects aiming to benefit rural women are implemented by three ministries - family welfare, hrd and rural development. Watershed management comes under water resources, agriculture and rural development. All such programmes need to converge. Says Sharma: "We’ve identified 26 such programmes with overlapping objectives." It should be accompanied by zero-base budgeting, as opposed to incremental budgeting where the budget outlay is hiked on the previous year’s level (see box).

Also, the idea is to ensure a delivery system through decentralisation. Rural projects can be transferred to local bodies, with central intervention coming only by way of technology; for instance, vsats for education projects. Says the finance ministry official: "Employment isn’t a must. Education projects in MP using volunteers or the Lok Jumbish project in Rajasthan are far more successful than in West Bengal, where work doesn’t begin till the pay commission hikes."

But can the Centre apply the axe to itself? It squanders Rs 40,000 crore on salaries for a 3.8-million staff. This doesn’t include Railways, defence, PM and his office, the President and state governments. The two departments and a ministry launched this year employ 313 at a cost of Rs 3.63 crore.

There’s more. Post-licence raj, why does the government still spend Rs 1,100 crore on the textile ministry or Rs 555.70 crore on the Department of Industrial Development and Policy? Says the official: "The industry ministry should have been leaner. Instead, it has four departments now."

In public, senior government functionaries say downsizing will not make any perceptible difference to the deficit. After all, there are 115 Union secretaries and 105 additional secretaries. But privately, they do admit the loophole in their argument. One per cent of Rs 40,000 crore is Rs 400 crore, a little more than next year’s budget outlay for the department of animal husbandry and dairying and surely, as dispensable.

But it’s still a long way to action. Minister of state for administrative reform and personnel Arun Shourie’s exercise on rightsizing government is still gathering dust. Says Shourie: "Sitam sikhayega rasme vafa (hardship will instil faith)." The only hope, the more the government spends, the more it is forced to withdraw from the commanding heights. As the official says: "The idea behind expenditure management is to see to what extent the government can get out of its activities." Amen to that.