What to reform: fewer subsidies, more investment

What to reform: fewer subsidies, more investment
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First Published: Sun, Jul 05 2009. 09 09 PM IST

Partha Mukhopadhyay. Senior research fellow, Centre for Policy Research, New Delhi. Madhu Kapparath / Mint
Partha Mukhopadhyay. Senior research fellow, Centre for Policy Research, New Delhi. Madhu Kapparath / Mint
Updated: Sun, Jul 05 2009. 09 09 PM IST
I do not have any predictions for the budget, notwithstanding an avant-garde Economic Survey, and a far out Railway Budget. With a looming fiscal deficit, and yet an enormous investment deficit in economic and social infrastructure, the finance minister has only hard choices to make.
He has, however, one easy task. To appreciate the gravity, people must understand the budget document. So far, it only provides the current year’s budget and last year’s revised estimates, never the actual expenditure. Uncovering this for specific schemes requires rummaging through many obscure documents—on occasion, fruitlessly. The survey says, “for every programme, an Internet accessible public accountability information system should be available”; the National Rural Employment Guarantee Scheme (NREGS) and the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) have shown it is possible.
Partha Mukhopadhyay. Senior research fellow, Centre for Policy Research, New Delhi. Madhu Kapparath / Mint
Will today’s document present actual expenditure in the ministry-wise demand for grants? Will an NREGS-type disclosure be mandated for all big schemes? I hope to be surprised.
Can the minister enable India to grow at double-digit rates, reap its demographic dividend and prepare for an urban future? You cannot have one without the other two. But last year, the allocation for all social and economic services was smaller than our subsidies. We cannot subsidize our way to the future.
To reap the demographic dividend, we have to ensure that an episode of ill-health does not nip an incipient journey out of poverty in the bud. We must guarantee that a child learns when she goes to school. The National Rural Health Mission, Rashtriya Swasthya Bima Yojana and Navodaya Vidyalayas are good starting steps, but more is needed.
A high-growth edifice cannot stand on a foundation of crumbling infrastructure. “Public-private partnership” (PPP) has been the United Progressive Alliance’s (UPA) infrastructure mantra. But not only does the government expect the private sector to carry the burden, it also wants it to pay for doing so. PPP is used to raise revenue from user charges instead of structuring contracts to hold the private sector accountable and improve service delivery. The private sector will not risk building capacity that can meet the needs of an India growing at 10% for 10 years. Where expansion is lumpy, as in highways, mass transit, electricity transmission, water supply and pipelines, and not in bite-sized chunks, as in telecom, public funds must supplement the efficiency of private delivery.
Finally, to have a say in their future, our cities need self-directed governments and independent fiscal sources, not handouts such as JNNURM.
In this era of fiscal overshooting, where is the money? Two answers are savings from subsidy reform, which the survey discusses, and smarter taxes, which it doesn’t.
The lack of accountability means that government is replete with waste. Start with the small Rajiv Gandhi National Fellowship for 1,333 scheduled caste students in master of philosophy and doctorate courses, on which the survey says “an expenditure of Rs87.94 crore has been made” during 2008-09. At first blush, this seems commendable; but wait: Do the students really get Rs55,000 per month as fellowship? That’s more than a professor’s salary!
The survey also indicates that financial inclusion for poor families may be complete. At least “7.01 crore poor households” are in the SHG (self-help group) Bank Linkage Programme, and as of March, 12.1 million beneficiaries received a total of Rs27,183 crore under the Swarnajayanti Gram Swarozgar Yojana, that is, Rs22,486 each on average. Incredible, but true?
Now, the big numbers. Last year, the total fertilizer subsidy of Rs99,456 crore supported inefficient plants and, by subsidizing prices, benefited those who own more land and use more fertilizer. A smaller cash transfer to poorer farmers would be more equitable and may enhance production, by rationalizing fertilizer use; but this would hurt a powerful political bloc.
The food subsidy, costing Rs43,668 crore, is less expensive but may be more egregious. The 2004-05 National Sample Survey (NSS) shows that only 24.4% of rural Indians used the public distribution system (PDS) for rice and only 11% for wheat— spending an average of Rs4.22 and Rs1.37 per month, respectively. They also bought Rs55.7 of rice and Rs28.5 of wheat from the open market, that is, an average monthly total of Rs90. If the food subsidy were directly distributed to 60 million poor households, each individual would get almost twice this average NSS rural expenditure on wheat and rice. Much can be saved from such subsidies by better targeting.
Finally, the Rs30,100 crore for NREGS in this February’s interim budget. Even accepting that it played a major role in the UPA’s electoral success, expanding it is no achievement. The real goal is for NREGS to be available to everyone, but for no one to use it because they all get higher wages elsewhere. If the Economic Survey’s growth projections come true, such a large safety net may not be needed.
Turning to funds, the goods and services tax (GST) may increase revenue, along with direct taxes rising with recovery and disinvestments adding to the pool. But when taxpayers distrust the government’s spending judgement, higher cesses that limit spending flexibility by dedicating revenue for education, health and infrastructure are politically smarter than an overall tax increase. The fears of fiscal balkanization on account of these multiple cesses must be set aside. In addition, smart carbon taxes can both green and grow India.
If India is to grow consistently at near double-digit rates, it will need educated healthy citizens supported by adequate infrastructure. Investment in these must precede growth; without this, growth will not follow. It is possible to find the resources for these investments, but they require hard choices about subsidies; flagship schemes such as NREGS; the fiscal purity of tax structures; and, yes, from the rich who may have to make higher contributions to take India to the next level. The choices are stark, but the reward glorious.
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First Published: Sun, Jul 05 2009. 09 09 PM IST