Ourviews, Pranab Mukherjee, Tax, GDP, Fiscal deficit, UPA
“My appetite is infinite and my greed is more.”
These words were uttered not by a banker or CEO from the top 1% of the income pyramid, but by finance minister Pranab Mukherjee. He was exhorting his officials to ramp up tax collection, according to a June report by the Press Trust of India. His government’s addiction to ever-increasing spending is decimating the nation’s balance sheet. India now is on the dangerous trajectory of persistently high inflation, increasing taxes and slowing growth.
Finance minister Pranab Mukherjee. (File photo)
The combined central and state receipts in 2004-05 were around Rs 5.87 trillion , whereas those for 2009-10 are nearly twice as much at Rs 11.83 trillion. Yet government spending has more than doubled from Rs 8.34 trillion to Rs18.30 trillion. The Union government is more at fault here because while its earmarked share of total receipts grew more slowly, central spending actually increased faster.
As a share of gross domestic product (GDP), net central taxes under the United Progressive Alliance has hovered around 7% whereas the state’s revenues (through grants and local revenues) has been around 8% – for a combined tax-to-GDP ratio of 15%. But combined spending has gone from around a fifth to a fourth of the economy, resulting in a consolidated deficit of around 10%.
Fertilizer subsidies have more than tripled from Rs 16,000 crore to Rs 52,000 crore. Pension and other retirement benefits increased from Rs 55,000 crore to Rs 132,000 crore. Yet annual disinvestment increased haphazardly from Rs.17,000 crore in 2003-04 to just Rs 26,000 crore in 2009-10, despite rapid development of the capital markets and the capacity of the private sector to absorb state assets over this period.
In the midst of this runaway spending, there is only one major sector where allocations haven’t increased much – defence services. Expenditure went up from Rs 32,000 crore in 2004-05 to Rs 48,000 crore in 2009-10, basically flat in inflation-adjusted terms and a decline as a percentage of GDP. These numbers dramatically betray the unfortunate priorities of the UPA - there has been a focus on populism and loan waivers galore with no priority being assigned to longer-term priorities like defence and physical infrastructure, the sorry state of which need not be repeated.
It is not the case that even the enormously increased central social expenditure has been well-targeted or has helped alleviate poverty in any way. Only recently have some steps been taken to make subsidies more efficient, with the enunciation of the UID project in 2009 and tentative reforms of fertilizer and petroleum subsidies.
There is also a belated realization that the “infrastructure” created under schemes like the National Rural Employee Guarantee Scheme (NREGS) is far from durable. NREGS bans the use of machinery and forces the poor to work strenuously without developing any significant skills for themselves or building long-term assets for their villages. It would be cheaper to instead have conditional cash transfers and to allow creation of rural infrastructure using industrial equipment.
The government’s reckless spending is crowding out the private sector and impeding growth. Slowing growth can be fatal for a country which has a demographic profile like ours, with nearly a million productive jobs needed to be created every single month till 2030 so that our youth can be gainfully employed. There isn’t a more deadly brew than an aspirational youth frustrated by the denial of opportunity and economic advancement - low growth in such a scenario may create even more social instability.
Till recently, the UPA had been politically lucky. It inherited the growth benefits of its predecessor NDA government’s reforms and a global liquidity boom, and used the consequent booming tax revenues to finance an unprecedented and uncompromising focus on politically-motivated social expenditure to buy votes. Then, with the global financial recession, it retrospectively justified part of the growing fiscal deficit as an astute fiscal stimulus. To top it off, the global downturn happened to play out in such a manner that inflation hit zero right around the last general elections were held, while hovering near double digits both before and after elections.
The postponement of tough economic policy decisions had to eventually lead to inflation, corruption, slower economic growth and consequently fewer jobs. Today, the government is insisting on passing the Food Security Bill that would further expand spending, with no clarity on how it would be paid for in the longer run. But with national elections over two years away, the UPA finds itself cornered without any solutions except raising taxes, reducing spending and initiating tough reforms.
Pranabda and other UPA leaders should know better - ravenous appetites have a nasty way of catching up.
(Rajeev Mantri is director of GPSK Investment Group and Harsh Gupta is director of Catallaxy Finance.)