The unkindest cut

Schoolchildren in front of the National AIDS Control Organisation's Red Ribbon Express before its launch, at Safdarjung Railway Station, New Delhi, on January 12, 2012. The government appears to be planning spending cuts on the National AIDS Control Programme.

THERE is a reason why budgets have to be passed in Parliament (in India, certainly, but also in most other countries). There is a reason why, according to the Indian Constitution, the Finance Bill, which details the revenues and expenditure plans of the Central government for the coming fiscal year, is the single-most important Bill that must be passed for a government to stay in power. The underlying presumption is that these fiscal strategies, in terms of how resources are raised and the level and direction of spending, must be subject to democratic accountability. This matters because these decisions are not simply “technocratic”—they are fundamentally about the distribution of resources and incomes and are, therefore, deeply political. Therefore, attempts to make budgetary decisions without public scrutiny and discussion are anti-democratic.

Consider: if the government promises, and Parliament accepts, that a certain stated amount will be spent on rural housing or public health or nutrition programmes or the Integrated Child Development Services scheme, which is directed towards mothers and infants, then by what right does the Central government on its own decide that this amount will be reduced? Surely, just as the initial plans for fiscal allocation are considered and discussed extensively by elected representatives before being passed, and various amendments are made, any subsequent reductions should also be subject to similar scrutiny and debate in full public view. Making cuts that reduce the level of spending that was approved without such accountability runs completely counter to the very spirit of the functioning of Indian democracy.

Unfortunately, the closing years of the United Progressive Alliance (UPA) II government were marked by just such unacceptable tendencies. As December approached, with just one quarter of the fiscal year remaining, former Finance Minister P. Chidambaram would decide that fiscal targets (in terms of fiscal deficit to gross domestic product (GDP) ratios) were in danger of being overshot and would arbitrarily announce cuts to allocations of different Ministries—sometimes even blanket cuts of 20 per cent that the Ministries would then have to beg to reduce even partially. These cuts also fell in some important areas of public social spending, including the UPA’s “flagship schemes”, which would thereby be squeezed of resources.

This was bad enough and extremely reprehensible. But the current Narendra Modi government appears to have gone one step ahead of this, by not just imposing sweeping cuts on important areas of public spending but trying to do so by stealth without allowing any kind of public knowledge, much less scrutiny. Instead of an open declaration of such cuts, which would no doubt be controversial—and far from seeking Parliament’s approval—there are reports that the Finance Ministry has informed various Ministries that there will be significant reductions in allocations in the remainder of the financial year until March 2015.

The purported reason for this is the need to contain the fiscal deficit to the proposed 4.1 per cent of the GDP that was announced as the goal in the Budget speech. But this number depends not just on the revenues raised and the expenditure made but also on the rate of GDP growth, which forms the denominator. The Finance Minister had assumed a nominal GDP growth of 13.4 per cent, but both real GDP growth and inflation have been lower than anticipated, so the nominal GDP growth this year is likely to be around 11 per cent. This would obviously cause the ratio to rise, also because tax revenues are lower than expected as GDP growth slows. But the Finance Bill does not talk about this ratio: it refers to actual numbers for spending, and it is these numbers (approved by Parliament) that Finance Minister Arun Jaitley now seeks to slash.

The proposed cuts in social expenditure are alarming and likely to be really severe in their impact because Arun Jaitley’s Budget had already reduced proposed spending in these areas by around 15 per cent compared with the previous year. Even in areas where the nominal amount remained unchanged, this implied a cut in real terms because of inflation. Now on top of that, apparently, the Ministry is seeking further cuts in areas that are critical for public well-being. If media reports are to be believed, health sector Plan expenditure is to be cut by much as Rs.7,000 crore. The hugely important spending of departments such as Rural Development, Panchayati Raj and Drinking Water and Sanitation are to face cuts of around 25 per cent. (The last is particularly ironic given the Prime Minister’s much publicised brouhaha over the Swachh Bharat campaign.)

NREGA

One of the most egregious of the proposed cuts relates to the employment programme under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which this government has sought to undermine in myriad ways. Reliable sources that have been quoted in the media note that the proposed cut is Rs.3,000 crore to the already low Budget estimate. There are several reasons why this is not just wrong but illegal. To start with, the law (that was passed in Parliament with the consent of all MPs, including those of the Bharatiya Janata Party (BJP) and other National Democratic Alliance constituents) envisages the MGNREGA as providing demand-driven employment. In other words, the only cap is the 100 days a household (which is incidentally nowhere near being met except in the remarkable State of Tripura).

As long as there is demand for employment, State governments, and therefore the Central government, are duty-bound to provide work, and therefore there should be no question of a budget cap on this scheme. Yet the Central government (unfortunately, even the UPA II after 2011-12) has effectively exercised such a cap by keeping the budgetary allocation for this scheme nearly constant at between Rs.30,000 and Rs.33,000 crore. This obviously implies a decline in real terms. But what is worse is that this was not because of low demand for the scheme. On the contrary, the Central government simply delayed payment to States, which were therefore unable to pay wages to those who had already worked for the scheme. As a result, even in the current Budget year, there was an amount of Rs.9,000 crore worth of unpaid wages left over from the previous year. That means the actual budgetary outlay on this scheme this year was only Rs.24,000 crore because Rs.9,000 would have to go to pay the previous year’s wages. This is a huge nominal decline—on which a further cut of Rs.3,000 is now being sought to be imposed.

It is hard to think of a more effective way of killing the scheme. It is certainly not the case that there is no demand for work; in fact, around 10 Chief Ministers (including some in BJP-ruled States) have written to the Centre demanding more funds, which have thus far been denied. If State governments are unable to make the wage payments, workers will again not be paid for work they have already done. Indeed, there are reports of some workers having to wait for their wage arrears for more than a year. Obviously, State governments will try to avoid setting up new works in such a context. This will become easier because the workers themselves will get disheartened and not seek work from a programme that does not ensure timely wage payment. There are already reports from many parts of the country of workers migrating in search of short-term work because of this failure. The government will then find it easy to declare that the programme is not really working, so it may as well be reduced (to the poorest districts) or simply closed down.

AIDS control programme

Another shocking cut that is being talked about is that which has purportedly been proposed on the National AIDS Control Programme. Spending on this is actually a life-and-death matter for poor people afflicted with HIV-AIDS (human immunodeficiency virus/acquired immune deficiency syndrome), who rely crucially on the medicines and other support made available through this programme. Yet this is to be cut by around Rs.450 crore, a decline of nearly a quarter in nominal terms. Similarly, the project to create “one-stop crisis centres” for women, which was one of the official responses in the wake of the public outcry over the “Nirbhaya case” of gang rape and murder of a young woman in Delhi, had been given a budget of Rs.200 crore. That project is apparently now to be abandoned.

It is worth noting that even for budgetary savings, such cuts should not be necessary because of other price movements that have benefited the public fisc. This government is the (apparently undeserved) beneficiary of the sharp drop in global oil prices, which should certainly reduce the subsidy burden for oil and thereby lead to significant savings. So with appropriate fiscal management, there should really be no need to cut down on essential items of public spending. The deep cynicism of this approach is shocking, but what is possibly even more shocking is the comparative ease with which these strategies have been utilised so far. Much more public outcry is required to force the government to implement what is now a law of the land.

And much more outcry and protest is also needed to ensure that the government releases funds for spending on the other programmes that matter to ensure the basic needs of people. There is an obvious contradiction that must be highlighted: if the real GDP is growing by more than 5 per cent in the current year, why should spending on health, nutrition, education, etc., be cut at all? At the very least, it should grow by a minimum of 5 per cent, and in fact, it should increase by more to ensure that people at large rather than just some favoured cronies of the government benefit from this growth.

The sad part is that this strategy of imposing fiscal austerity will not even work in terms of its stated aim of delivering higher growth. The idea is that restraining the fiscal deficit to GDP ratio is crucial for attracting foreign investors, who are supposed to be the main force driving future economic expansion. But if the spending cuts operate to reduce people’s real incomes, this will have negative multiplier effects that will further cause aggregate economic activity to decelerate. And if the denominator falls, the fiscal deficit to GDP ratio will also not improve as desired.