Expenditure reform

Financial Express, 21 February 2010

Budget 2010 will be the first UPA budget not constrained by the Left or by prospects of a recession. The Finance Minister's constraint this time is the size of the fiscal deficit. With some disinvestment, with growth in industry and tax revenue and without the pressure to spend more for a fiscal stimulus Pranab Mukerjee should be able to bring the fiscal deficit in control. In addition, he must outline a road map for bringing the fiscal deficit back on track to FRBM targets. This would increase the confidence of investors and help create an environment for sustainable growth.

How can the Pranab Mukerjee fulfil the political goals of the Congress and present a pro-poor budget without sacrificing the basic principles of fiscal prudence? Given the pressures on the fisc, it will be difficult for the Finance Minister to pursue the UPA agenda of creation of a social support system by initiatives involving large spending. Instead, the Finance Minister should turn to expenditure reform as the big idea of the budget. This would not only achieve the political goals of the Congress, consistent with the growth with inclusion and the aam admi focus of previous budgets, it would also help reduce the fiscal deficit and help genuninely protect the worst hit from the adverse effects of a slowdown.

Were one to suggest to the minister, a strategy that fulfils the political needs of his party, that does not sacrifice short term goals for long term objectives, that instead of merely populist slogans, delivers to the targeted groups, one would push for a change in the way government spends money. Public expenditure on education, health, drinking water, and sanitation is inefficient and involves huge leakages. Improved governance is an idea that can be found among the early speeches of Manmohan Singh in UPA-I. In times of a booming economy, high growth in tax revenue, and reasonable levels of fiscal deficits, it was possible to ignore the objectives of better governance and increased efficiency of public expenditure and merely spend more. More "yojanas" could be added to existing schemes without too much care about which ones were working well. Today the Finance Minister does not have this luxury. Large increases in expenditure could undermine confidence and slow down growth, something the government cannot allow to happen. Given the smaller spending capacity of the government, its best bet looking forward to the next election is to aim for a radical change in the efficiency of its expenditure. If all the money it spent on on various schemes, on schools that don't function, on leaking water pipes and on power leakages were to really reach the targeted directly though cash transfer programs, it could achieve a huge increase in political support and yet not involve extra expenditure.

The second big idea the minister should focus on is financial inclusion. Nearly half the Indian population does not have access to credit at reasonable terms. India's approach towards achieving financial inclusion has been opening of public sector bank branches in rural areas. Yet, despite many decades of this approach, a poor household has to turn towards the local money lender for credit. The Raghuram Rajan committee, set up by the planning commission, with a focus on financial inclusion, has outlined a series of initiatives that would address this issue. These focus on providing financial services, rather than merely banking to the poor. These steps would involve no expenditure by the government, no big ticket reforms and no major political opposition. Bureaucratic vested interests that stand the way of the changes required in regulations can surely be handled by Pranab Mukherjee, a politician both powerful, and adept at political bargaining.

The third theme for this bugdet is an old one but the need for change in the relevant framework has become increasingly clear in recent years. The framework for subsidies - food, fertilisers and oil - has been much debated in policy circles for many decades now. A number of government committees have pointed out a number of flaws in the framework. The most important of these is that subsidies do not reach those they are intended for. Food subsidy and the public distribution system, for instance, have huge costs and high leakages. Budget 2010 is an opportune moment to propose fundamental change to the system of food subsidies. High food prices provide the political environment to address this long standing issue. Food stamps will allow the poor to buy food from any kirana store participating in the program, rather than the PDS outlet. This can greatly expand the reach of the food subsidy program. Concerns about administrative handling, possible sources of corruption in food stamps, etc will arise and will need to be addressed, but considering how broken the PDS is, there is little risk of a new system being worse than the present one.

Finally, I would like to propose some expenditure switching from unproductive uses such as oil subsidies to building roads. Villages connected by roads are able to sell rural produce, labourers are able to travel to cities and neighbouring towns to work, and doctors and teachers are willing to turn up and do their jobs. The quality of life goes up and even far away growth becomes inclusive. Building more roads, whether through public private partnerships or through public investment where the private interest is not forthcoming, is one of the best uses of public money. The growth and inclusion impact of roads is unparalled by any almost other investment that the government can make. Budget 2010 should put focus on increasing the pace of road building and connecting the country to become one single market.

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