Is This A Mousy Budget?

Last week, I had voiced the fear that the unwillingness of the BJP’s coalition partners in the NDA to court unpopularity with their voters would force finance minister Yashwant Sinha to backpedal on his promise to reduce the burgeoning subsidies of the central government. At first sight, this fear has proved well founded. The budget has cut subsidies on food and fertilisers by at most Rs #5,000 crore and imposed Rs 6,900 crore worth of new taxes. Together, the Rs 12,000 crore of fiscal correction does not even begin to scratch the surface of the fiscal deficit, which rose by a whopping Rs 29,000 crore this year alone and now stands at an awesome Rs 108,898 crore. But a closer look shows that Sinha’s budget is not entirely without courage.

By far the most important change he has proposed is in the administration of the food subsidy. So far, subsidised foodgrain has been, in theory at least, the birthright #of every Indian, regardless of his wealth. If someone did not avail of the ration shops, it was because he did not wish to. That birthright has been withdrawn. Henceforth, only those below the poverty line-some 35 per cent of the families in the country-will be entitled to subsidised food at half its economic cost. Others may still buy food at the ration shops but they will have to pay the economic price, that is, the cost of procurement plus storage and distribution. This is four to five rupees higher than ration shop prices for rice and wheat today, and not far below the market price of foodgrain. For most of us, therefore, the ration shop will become a source of foodgrain at a stable-rather than a subsidised-price.

The change of principle is far more important than the amount of money that it will save. It signals an end to the days when governments announced concessions and handouts first and worried about how to finance them later. Over the past decade, this kind of political competition between increasingly unstable parties and coalitions had pushed up the fiscal deficit by leaps and bounds. As a result, in the ‘90s, the national debt grew two-and-a-half times as fast as the GDP. This has raised the share of interest payments in government revenues from an already high 39 per cent in 1989-90 to an unsustainable 49 per cent in 1998-99. Sinha’s decision thus holds out the hope that he will at least arrest if not reverse this disastrous trend.

As far as making an actual dent in the fiscal deficit is concerned, everything now depends on what the government will do to reduce if not eliminate the subsidies on kerosene and LPG. Kerosene, supposedly the poor man’s cooking and lighting fuel, is being sold at a paltry Rs 2.57 a litre, when its minimum economic price is Rs 9 a litre. Since it is being sold in neighbouring Nepal at Rs 10 and Bangladesh at Rs 13 per litre, smugglers are making hay directly at the Indian taxpayers’ expense. In addition, half the kerosene sold within India is being used to adulterate diesel, which is priced at Rs 14 a litre, and petrol, which commands Rs 26. The government is also selling cooking gas at just about half its economic cost. As a result, there is a subsidy on kerosene amounting to Rs 14,000 crore and on cooking gas of Rs 4,000 crore.

In the run-up to the budget, the ministry of petroleum is believed to have proposed eliminating these subsidies at a single stroke. But the Union cabinet shot this down on the grounds that it was far too harsh. Even a watered-down proposal was postponed for 15 days to give the Andhra Pradesh government time to complete its panchayat elections. One can only hope that the landslide of accusations that Sinha has faced of having been too soft in his budget will stiffen the government’s resolve and make it go for a single surgical removal of subsidies in this sector.

However, even halving the subsidies in this sector-the most that one can realistically hope for-would only reduce the fiscal deficit by another Rs 8,000 crore. One is, therefore, forced to conclude that the only sure way of reducing the colossal fiscal deficit drastically in the short run is to lower the interest rate on government borrowing. At present, this is around 11 per cent, but the present low rate of inflation, of less than four per cent over the past year, offers a golden opportunity to lower it by another 3 percentage points. This would reduce the interest payment burden of the government by more than Rs 30,000 crore. Unfortunately, the rate of interest on loans cannot come down so long as the overall borrowing by the government sector remains high. The most sensitive rate on this account is the rate of interest paid out on small savings, which was recently brought down from 12 to 11 per cent. While this remains so high, other interest rates cannot come down and any reduction in this is resisted by the state governments because small savings are one of the main sources of funds for them to bridge their own rising fiscal deficits. These had risen to Rs 59,725 crore in 1998-99.

Thus, beyond a point it is exceedingly difficult to reduce the central deficit without lowering the deficit of the state governments at the same time. That requires a drastic reduction in the subsidies being doled out by the state governments. The worst of these, by far, is the subsidy on power provided to the rural sector. In 1998-99, this sector received 31 per cent of the total power generated-130 billion units-but paid Rs 1.65 less than the cost of generation per unit. This accounted for Rs 23,500 crore of the Rs 31,000 crore of subsidy doled out. In 2000-2001, this is scheduled to go up to Rs 48,000 crore! The Indian State has, therefore, a long way to go before it becomes financially healthy once more. One only hopes Sinha can stay the course.