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Budget needs to focus on visible deficits to create jobs, spur growth

The contest of ideas, ideologies and incremental hope is resonating across Echo chambers and the budget is around the corner.

Published: 29th January 2017 04:00 AM  |   Last Updated: 29th January 2017 12:19 PM   |  A+A-

The contest of ideas, ideologies and incremental hope is resonating across Echo chambers and the budget is around the corner. And the annual question is up in the air once again. Must the government stick to its fiscal deficit target—should it pause, ease or tighten? Should the government spend more than it is spending by borrowing more than it borrowed the previous year? Very simply the question before the government is about living within or beyond means.


For the record, the government would have earned `13.77 lakh crore in tax and non-tax revenues, and spent `19.78 lakh crore (if budget estimates hold good). To fund the gap the government borrows `6 lakh crore—that is, `1,643 crore every day or `68 crore every hour. To sum up, a third of what the government spends is funded from borrowings.


It is not only the Union government that is living beyond means. In 2015-16, as per budget estimates, the Centre and the states together earned `28.41 lakh crore in revenues and spent `37.94 lakh crore. The gap was funded with borrowings of `9.53 lakh crore—that is, `2,603 crore per day or `108 crore per hour. Total public debt in September 2016 was at `60.15 lakh crore (about $880 bn), that is roughly `46,000 per person for a populace of 1,311 million. 


History is witness to the fact that every decade since Independence, the flirtations with fiscal deficit to finance growth have led the economy to the brink. In 1991, for instance, borrowed funding of growth resulted in a consolidated (Centre and states) fiscal deficit of 11 per cent and a balance of payments of crisis. Much closer, in 2013, in the post reforms era, thanks to the farm loan waiver and stimulus post the 2008 global crisis, fiscal deficit rose to 5.7 per cent in 2011-12 setting off the spectre of a second 1991-like crisis.


Institutional records deserve a contemporary reference. On January 11, even as the budget was being finalised, the normally reticent Urjit Patel, Governor of RBI, chose the lectern at the Vibrant Gujarat Summit to lecture the government on fiscal prudence.

The governor pointed out that general government deficit of Centre and states is among the highest in G-20 countries and impedes India’s credit rating upgrade. He argued that borrowing even more would be “pre-empting resources of future generations” and cannot be a short cut for higher growth. Instead, he advocated, “structural reforms and reorientation of expenditure on public infrastructure for durable gains”.


The timing and the choice of Gandhinagar for the sermon is significant. So is the context. The government faces both a political and economic imperative to propel growth for consumption, investment and growth. While there is the argument about the effect of note ban aka demonetisation, fact is, the economy had begun slowing even earlier, as evident in the data for the first six months—thanks to the slump in exports, dip in private expenditure, poor savings and tepid pace in investments.


This week, the government will answer the Hamletian question. Really, there is no binary answer. To spend or not to spend is the wrong question. The question is whether the government is being expansive or simply expensive— whether the increased spending, backed by higher borrowing, is for productive purposes or feel-good sops.

The arguments about a pin-pointed deficit or a range-bound deficit are at best exercise in numerical semantics. What matters is the credibility of plans, claims and articulation. 


This government, in the past 30-odd months, has invested a lot of faith on investment allocations for infrastructure—for roads, highways, railways, airports, ports and urbanisation. For its own credibility, the government must articulate what it allocated, how much was spent and what the outcomes are. Did the idea of boosting investment in railways via bonds issued to LIC work? Have the hybrid annuity models helped in reviving highways projects?


Budget 2016 allocated `1.5 lakh crore for health and education, and `87,765 crore for the rural sector. Agriculture was allocated `35,984 crore. A sum of `17,000 crore was earmarked for completion of irrigation projects. How have these allocations panned out? Have interest rate subventions boosted affordable housing in tier II and III towns?


There is a popular clamour for reviving consumption through tax breaks and tariff cuts. The question is whether the government should spur incremental consumption or create new consumers by generating jobs; does it indulge the existing consumers or promote employment to create incomes for new consumption.


India faces capacity constraints across sectors—security, education, health. Why not invest resources to create capacity? In a country that sees a million persons join the job market every year, over 2 million posts are vacant in the Centre and states. Over 6 lakh posts are vacant in central ministries—over 2.25 lakh in railways, over 65,000 in para military forces and in PSUs and banks. And it is worse in the states—there are 5.14 lakh vacancies in teachers’ posts and over 5.4 lakh in the police forces.


Urbanisation is a proven growth multiplier. India has 3,784 Census towns—urban patches that are neither towns nor villages. The urban development ministry had asked the states to convert these into urban local bodies. The proposal is languishing between bureaucratic commas and semi-colons. The creation of municipal bodies in these towns could create over 3 lakh jobs and enable planned urbanisation. Who knows they could just produce the real smart city!


The discourse on resources cannot be just about what is not available, but also what is lost in transit. Nearly 20 per cent of government expenditure—particularly in public programmes—is lost in leakage and theft. States lose over `90,000 crore in power leakage and theft, PSUs lose over `25,000 crore, over `45,000 crore is lost the food security delivery system and cost escalation that afflicts most government projects. Induction of enterprise management systems and Aadhaar-based subsidy management mechanisms can mitigate losses and recover resources lost to corruption and inefficiency.


It is true that the government is expected to undertake counter-cyclical measures during a slowdown. Equally true is the obligation to deliver solutions to problems. There is a need for focus on deficits. And it must be on deficits in education, health and urbanisation to create jobs and spur investment. Growth in the GDP will follow.

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