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The Mammoth Spending Machine

Omkar Goswami

The central government’s ‘Budget At A Glance’ contains two pie charts — one which says ‘The Rupee Comes From’ and the other, ‘The Rupee Goes To’. If you look at the expenditure chart for 2004-05, you will see that non-plan expenditure is budgeted to account for 69.5 per cent of total spending.

I have always found this ratio misleading. Suppose you were not the sovereign and did not have the right to either print money or borrow ad nauseum. How would you look at the income-expenditure equation? You would basically balance your various expenditures against your income. When you do that for the central government, the story becomes pretty alarming.

Total revenue (net tax receipts to the Centre plus non-tax revenue) for 2004-05 has been estimated at Rs.309,322 crore. Of this, interest payment on past debt will account for 42 per cent; defence will take up another 25 per cent; subsidies is expected gobble 14 per cent; grants to states and Union Territories 6 per cent; and pensions to central government employees, excluding the army and railways, another 5 per cent. These five items will blow up 92 per cent of the central government’s revenues. Today, the situation is such that revenues can no longer finance even non-plan expenditure, leave aside outlays on plan heads. The budget estimate of non-plan spending for 2004-05 is Rs.332,239 crore — which happens to be 7 per cent more than the expected revenue receipts of the central government.

This has worrying implications for the long term health of the nation’s exchequer. What it means is that the government’s expenditure on unproductive non-plan heads is so high, and its revenue collections relatively so low, that it has to constantly borrow and print money to finance plan outlays, especially those needed for building critical infrastructure.

Faced with such a situation, any responsible individual or corporation would immediately do everything possible to eliminate each head of needless expenditure. The sovereign — especially one represented by an unwieldy coalition government — can’t do that. There is very little room for manoeuvre. Interest payments reflect past profligacy, and there is nothing much that the government can do about them, except to issue new paper at lower interest and, hence, marginally reduce the average cost of debt. Defence of the realm has been considered non-negotiable and beyond the pale of debate. Given the preferences of this government, and the pressures from the 63-odd Parliamentarians representing the Left, one cannot see any significant cuts in subsidies. In addition, there are demands for new heads of expenditure, such as an extra Rs.19,000 crore in 2005-06 for the Employment Guarantee Scheme as suggested by the National Advisory Council; or the additional Rs.50,000 crore that the Left wants to implement the Common Minimum Programme. In such a milieu, there is not much that Finance Minister Chidambaram can do to significantly reduce non-plan outlays. So the government will have to continue to borrow to finance infrastructure, and pray that there will be many more projects funded by private sector money.

Of course, a way of mitigating this problem is to raise revenues. We have often heard that, at 10.2 per cent, the central tax-to-GDP ratio in India is far too low, and that it should be possible to raise it around 12 per cent through greater compliance and widening the tax net. Again, I am not so convinced. For one, agriculture is constitutionally outside the ambit of income tax; and if we net agriculture out, the tax-to-GDP ratio already rises to 11.6 per cent. For another, given the way the revenue administration actually runs, I am not sure how much more can squeezed by better compliance. Moreover, divestment seems to be a ‘no-no’ — and there isn’t much that Chidambaram can hope on that front.

So, that’s where we are. Huge non-plan expenses of a bloated government that is eating into our ability to finance infrastructure out of revenues; and not much hope for raising the revenue-to-GDP ratio in the near term. A mammoth spending machine that is sought to be supported by a sputtering earnings engine. Hats off to the Finance Minister for the courage to take up this job!    

Published: Business world, February 2005

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