Opinion | Funds can be raised for covid control and an economic stimulus4 min read . Updated: 17 Apr 2020, 08:46 PM IST
Budgetary expense reductions and asset sales by the government could make ₹10 trillion available
Arvind Subramanian and Devesh Kapur, in an oped Business Standard (“Fiscal space: Not if but how", 9 April 2020), suggested that the government needs to spend an additional ₹10 trillion to fight the post-covid economic meltdown, both for disease control and for a stimulus package to support India’s economy. This sum was also suggested by an editorial in Mint (“It’s time to go for broke with a ₹10 trillion plan", 30 March 2020). The government’s earlier ₹1.7 trillion package is expected to be supplemented with further announcements of spending.
India’s nominal gross domestic product (GDP) is a little above ₹200 trillion, and the Union budget for 2020-21 planned an expenditure of ₹30.42 trillion, which implied a deficit of 3.8% of GDP, or about ₹8 trillion. This budget had availed of a special provision of the Fiscal Responsibility and Budget Management Act that allowed a 0.5% overshoot in times of stress.
Going by the fiscal expansion suggestions made, ₹18 trillion would have to be mobilized this fiscal year on an original receipt base of ₹22 trillion, a figure which cannot be relied upon because tax and other government revenues will fall now that the economy is in a tailspin. This is a mammoth additional requirement, indeed, but it is needed nevertheless. This is an extraordinary situation and will call for innovation, the pruning of wastage and a rewriting of rules if necessary. This is also a moment for bold moves, for which the government is likely to have the nation’s support. This is a good time, for example, to adopt zero-base budgeting, where every item of expenditure is put to the test of “is it necessary?"
Look at some items of the Union budget. A big part of it is deemed non-discretionary, i.e. cannot be reviewed, and these include interest payments ( ₹7 trillion), defence ( ₹3.23 trillion), subsidies (on food ₹1.15 trillion, fertilizer ₹71,000 crore and petroleum products ₹41,000 crore) and pensions ( ₹2.1 trillion). Each of these could share a burden of the pain.
Interest payments can be rescheduled with a one- or two-year moratorium, allowing interest on this sum as well. This is what most banks do when a debt default stares at them, so why not extend the concept to central finances?
Defence is both a white elephant and holy cow. Competition earlier and corona now have blurred our traditional hostilities. India imports vast quantities of goods from China. As far as Pakistan is concerned, Islamabad and New Delhi could arrive at a peace formula that lets both decrease expenditure. As of now, India allots about ₹3.23 trillion for defence, ₹67,000 crore for health, and ₹99,000 crore for education. Are these reflective of our priorities and threat perceptions? The ratio is lopsided, to say the least.
As for subsidies, with world oil prices being so low, these could be revised too. Our kerosene and LPG subsidy should be only for Below Poverty Line card holders. It is time to stop the universal subsidy on LPG, but we should ensure people do not pay for the high-cost purchases of LNG by public sector importers that have long-term take-or-pay agreements with suppliers. It is time to abolish the fertilizer subsidy, which breeds production inefficiency and does little for the cause of farmers.
Lastly, pensions account for ₹2.1 trillion of the budget, while government salaries are estimated to be at least twice that amount. To start with, Parliament can pass a bill to reduce the pensions, salaries and allowances of all government employees and ministers and parliamentarians by, say, 30%, including those posted abroad, for a period of two years. If a private firm faces financial stress, it either lays off employees or cuts their salaries; the same logic should apply to the government. This measure may be anti-Keynesian, but the money saved would go into our fight against covid and directly into the pockets of the poor daily-wage workers who have lost their only means of livelihood. This is along the lines suggested by Nobel laureate Abhijit Banerjee.
Last but not the least, counter intuitive as it may seem, this is the time for speedy privatization. The argument that public sector units will fetch low prices as asset values are down is countered by the principle that money in the hands of the government now is twice or thrice as valuable as money obtained after one or two years. The candidates for privatization could be the top three loss-making units with the top three profit-making units: Air India, BSNL, MTNL, ONGC, IOC and NTPC.
With all these measures, an interest moratorium could possibly yield ₹3 trillion, defence expenditure reduction, ₹1.5 trillion, salary/pension reduction about ₹1.5 trillion, and asset sales ₹4-5 trillion. This would meet the demand for ₹10 trillion.
The money should be aimed at those most in need of help. Large corporations with high credit ratings could avail of liquidity provisions made by the Reserve Bank of India.
V. Ranganathan is visiting distinguished professor at IIT Mandi and a former professor of IIM-Bangalore.