A round of pre-Budget window-dressing

Print edition : February 13, 1999

The run-up to the Budget indicates that this year too there have been no efforts to correct avoidable tendencies in fiscal policy.

COME budget time each year and media attention is inevitably focussed on two issues. First, the likely level of the fiscal deficit in the financial year coming to an end and in the year ahead, and, secondly, pre-budget hikes in a range of administered prices that governments now almost routinely resort to. Such hikes, as suggested by their timing and nature, are not adopted as part of a larger exercise of fiscal restructuring but as ad hoc measures to dress up budgets and preempt adverse responses from international financial institutions, foreign institutional investors and the media.

On both these counts, the Finance Ministry has this year lived up to its deteriorating reputation. The deficit for the financial year 1998-99 is likely to run way ahead of Budget estimates not merely because expenditures are, as always, likely to exceed budgetary allocations, but because tax collections and receipts from privatisation are bound to be dismally low. Indirect tax collections, which account for the bulk of tax revenues, reportedly touched Rs.64,184 crores during April-December 1998, as compared with Rs.62,980 crores collected over the corresponding period in the previous year. This amounts to a 1.9 per cent increase as compared with budgetary estimates of a buoyancy of around 12 per cent. This points to a revenue shortfall of Rs.10,000-15,000 crores over the year as a whole, which itself amounts to close to nine-tenths of a percentage point of the Gross Domestic Product for 1998-99 as estimated in the Budget. However, we now know that GDP in 1998-99 would be way below the optimistic estimates of the Finance Ministry. In the Budget the Ministry had projected a nominal GDP growth of 14.8 per cent, while current indications are that the figure would be closer to 10 per cent. Thus, on this count alone an extra one percentage point of GDP at the least is bound to be added to the projected fiscal deficit of 5.6 per cent.

But that is not all. This year, the Government does have the benefit of the Voluntary Disclosure of Income Scheme (VDIS) which contributed Rs.10,000 crores to the Budget for 1997-98. The Government is likely to receive from its Samadhan scheme only around a fifth of this amount. The Government expected more than to make up the difference (to the Centre) through disinvestment to the tune of Rs.5,000 crores. However, with markets down and opposition to disinvestment of prime assets at throwaway prices strong, the Government has got virtually nothing under this head. In a desperate bid to remedy the situation, the Government thought up the devious buy-back and equity cross-holding schemes for the public sector. Cash-rich public sector corporations were expected to buy back the government's holding of their equity or the equity of other public sector enterprises, rather than invest in modernisation and expansion to face up to the competition unleashed by the government's liberalisation agenda.

A typical instance is the equity cross-purchase arrangement that has been arrived at among the three oil and gas companies: Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC) and Gas Authority of India Limited (GAIL). IOC and GAIL are expected to pick up 10 per cent and 2.5 per cent respectively of ONGC's equity. IOC and ONGC are to pick up 2.5 per cent of GAIL equity each. Finally, ONGC is to acquire 10 per cent of IOC's shares. It is likely that this decision would be finalised and would show up in the Budget in terms of relatively large "revenues" for the Government during 1998-99. In the long run, of course, the returns which the government gets in the form of dividends from these profitable public enterprises would fall, while its commitment to cover the losses of loss-making public enterprises would remain, thereby worsening the fiscal situation. Further, at a time when they need to restructure their operations using their surplus funds, these corporations are being forced to divert their surpluses to the Government's Budget to save it from the ignominy of resorting to a desperate sale of shares at rock-bottom prices to manage its fiscal position. This would affect their future performance adversely.

This tendency on the part of the Government to window-dress the Budget at the expense of other agents is also true with regard to the controversial effort to reduce food subsidies by hiking issue prices. As per the original announcement, the Government was to increase the price of wheat from Rs.2.50 to Rs.3.25 a kg and that of rice from Rs.3.50 to Rs.4.52 a kg for the below poverty line category. The increase for the population above the poverty line was from Rs.4.50 to Rs.6.50 a kg and Rs.7.00 to Rs.9.05 a kg respectively. Subsequently, the Government chose to roll back the price hike for the below the poverty line category. The hikes in the issue prices of wheat and rice from the public distribution system (PDS) came as part of a package which included a 5.3 per cent hike in the price of ration sugar from Rs.11.40 a kg to Rs.12 a kg, a 11 per cent hike in the price of urea from Rs.3,600 a tonne to Rs.4,000 a tonne, and a Rs.16 to Rs.18.40 a cylinder increase in the price of liquefied petroleum gas. As a result of these price increases, the Government was expected to save Rs.3,000 crores directly on its subsidy bill as well as contribute an additional Rs.400 crores to the oil pool account. Ostensibly, this and other accumulated surpluses on that account would be used to amortise petro bonds and would possibly affect the Budget positively.

Even after the partial rollback in the price hikes, the major chunk (Rs.2,100 crores) of the subsidy reduction in the Budget is expected to come from the hike in foodgrain prices. However, it is obvious from official statements that this reduction is calculated on the presumption that the change in price would not affect the volumes on which the subsidy paid is calculated. This is indeed surprising since experience indicates that a hike in issue prices does result in a significant decline in PDS offtake for two reasons. First, it forces a reduction in the food consumption of those who are poor, whether located above or below the poverty line. Secondly, it encourages the more well endowed to substitute better quality open-market grain for grain from the PDS, given the reduction in the price differential between the two. Experience indicates that the fall in offtake for these reasons would more than exceed the proportionate increase in prices, resulting in a fall in revenues from sale through the PDS.

Under normal circumstances, a fall in offtake resulting from these factors involves a loss on two counts: first, because of the difference between the value of the large stocks of grain bought at ever-rising procurement prices and the value of the smaller quantity of grain sold through the PDS, albeit at higher prices; secondly, because of the higher carrying costs of the larger stocks of grain which remain in the Food Corporation of India's godowns because of the lower offtake. Put together, these developments could result in a situation where the subsidy bill to support the FCI's operation increases rather than decreases as a result of a price hike.

In practice, it appears that such an increase does not show itself on the Government's Budget because the Government does not directly finance purchases of foodgrain for the PDS. Rather, such purchases are financed by food credit provided by the Reserve Bank of India. Thus the Government's outlay amounts merely to the FCI's cost of holding stocks, of transporting and distributing them and, of course, the interest cost on the RBI's low-interest food credit. Although it is not clear how subsidy projections are made, it does appear that the calculations being put out by official sources presume that procurement would remain at "normal" levels and even ignore the higher interest cost which the FCI would have to bear owing to reduced offtake.

Thus, there are two problems that are associated with the subsidy calculations and their implications for the fiscal deficit. First, it ignores the larger difference between procurement costs and PDS sale revenues resulting from lower offtake because they do not appear on the Government's Budget but are reflected in the higher average food credit availed of by the FCI from the RBI. Thus, it merely transfers a part of the monetised deficit of the Government on to the FCI's budget because of the accounting conventions adopted in the present institutional framework. Secondly, these calculations are in any case likely to be wrong since they seem to ignore the higher interest costs to be incurred by the FCI, which would, even under the current arrangement, have to be borne by the Government.

Seen in this light, the hike in the issue prices of food is just another means of window-dressing the deficit on the Government's Budget. The difficulty is that, as in the case of the equity buy-back schemes, this is done at the expense of other agents. In the case of food subsidies, however, those "others" are the poor who, even if above the nutritionally-defined poverty line, are at the margins of subsistence. The Government is clearly pleasing the World Bank, the International Monetary Fund, the foreign investor and the media, by a sleight of hand which involves an attack on India's beleaguered poor.

Such practices reflect, besides callousness, the inevitable consequence of one fundamental failure of the Government's fiscal strategy, namely, its inability to increase revenues to finance the expenditures it must make in certain areas, and it chooses to make in others to enrich certain sections of the population. The tax-GDP ratio of the Centre, which stood at 10.8 per cent in 1990-91 and 10.9 per cent in 1991-92, fell marginally to 10.6 per cent in 1992-93 before falling sharply to 9.3 per cent in 1993-94. Subsequently, the figure rose to 9.7, 9.9 and 10.1 per cent respectively each year during the period 1994-95 to 1997-98. The budgeted tax-GDP ratio for 1998-99 is placed at 9.7 per cent and it is likely that the actual figure would be even lower. Thus the 1990s as a whole have been characterised by a decline or stagnancy in the tax-GDP ratio, which, to start with, was low by international standards. This tendency results from the fact that through tax evasion, tax avoidance and pay-outs to the rich (as in P. Chidambaram's Budget), the state has become a site for primitive accumulation for the rich - a tendency which is at the core of the fiscal crisis of the state.

One consequence of that crisis has been the inability of the state to undertake needed capital expenditures. As the Ninth Plan document makes clear, there has been a huge shortfall in public investment relative to targets during the Eighth Plan period (1992-97). The ratio of public investment to GDP stood at 8.3 per cent as compared with a target of 10.4 per cent. The effects of this shortfall, it is admitted, have fallen "disproportionately on economic and social infrastructure". This only adds to the burdens imposed on the poor through administered price hikes, since it slows employment growth and deprives them of adequate access to basic necessities such as water, sanitation and health and education facilities. Further, if deficits on the budget are used to finance productive capital expenditures rather than current expenditures, the sustainable level of the deficit would be much higher. This would make the deficit much less of a problem than IMF and media attention seems to suggest. What the run-up to the Budget indicates is that this year too there have be no efforts to correct avoidable tendencies in fiscal policy. What we are left with are merely desperate manoeuvres to cover up the problem, which only intensify it in practice.

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