If fiscal discipline is sought by curbing public expenditure on infrastructure, the long-term potential growth rate will get curtailed
The Election Commission's model code of conduct has delayed the Union Budget for 2012-13 on account of state elections until mid-March, beyond its usual date at the end of February. That leaves too small an interval for passage of the Finance Bill before the start of the next fiscal year, but it does give more time to design a retreat from the fiscal laxity that has been structurally wired into our fiscal system at the national level after the global crisis of 2008.
All eyes will be on the finance minister for his willingness and capability to do something to curb fiscal indiscipline. If he does, monetary policy will be freed from being a lone warrior against inflationary pressures in the Indian economy.
Although the principal focus will be on how much the headline fiscal deficit exceeds the Budget estimate of 4.6 per cent of GDP, and on where it will be pegged for 2012-13, the most critical feature to watch is the degree to which capital expenditure on infrastructure spending is compressed to enable fiscal containment. To the extent capital expenditure takes the rap, the long-term potential growth rate of the economy gets curtailed. The stage is then set for structural inflation, as the growing population presses for income transfers in place of earned incomes from productive employment.
Capital expenditure protection through fiscal legislation has conventionally stood at three per cent of GDP at the level of the central government, by the twin targets of zero on the revenue deficit, and three per cent on the overall fiscal deficit (if there is disinvestment, capital expenditure will actually be higher than the protected floor). Other countries achieve similar objectives by prescribing a balanced budget for current expenditure alone, which corresponds to our zero revenue deficit, and by freeing government borrowing to match capital expenditure.
The distinction between the twin deficits has become muddied by the capital asset creation hidden in current transfers flowing out from the revenue account. From a purely accounting perspective, this is unsatisfactory. The information conveyed by categorising an item of expenditure in the revenue rather than the capital account has become utterly lost. Budgetary practices need to be reformed to enable zero-interest capital account transfers, such that the important macroeconomic distinction between current and capital expenditure gets transparently revealed from Budget totals.
Luckily, the 2011-12 Union Budget provided, for the very first time, a Budget estimate for the reduced “effective” revenue deficit, after correction for the capital expenditure content in current grants, at 1.8 per cent of GDP. The difference between this and the fiscal deficit, with the further addition of disinvestment receipts, gives us capital expenditure protection at 3.25 per cent of GDP, by the Budget estimates. It is this which needs to be watched when the revised estimates for the year emerge.
But is the capital expenditure content in current grants really growth-promoting? For the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS), the capital content is estimated at the full budgetary provision for the programme. That surely is a bit of a stretch. MNREGS is principally an income transfer scheme through workfare, where asset creation is incidental. It does not correspond to a structured programme of public investment to expand the growth potential of the economy.
As opposed to that, the Pradhan Mantri Gram Sadak Yojna (PMGSY), also buried in the current account, goes entirely into well-defined road construction, with permanent asset creation properties. But the capital content of this programme is shown at only four-fifths of the full amount budgeted for this scheme. The lower capital content must be because PMGSY funding is partially round-tripped through the Central Road Fund (CRF), where the CRF funds road upgradation and is therefore treated as current maintenance expenditure. But the figures from Demand 82 on the contribution from the CRF are not an exact match. I have a dream, that there will one day be a Union Budget which will be internally consistent in every particular.
That dream will be easily realised if the Budget documents assemble detailed information for each scheme, which they do not at present on the same page, on direct and indirect budgetary allocations. MNREGS is partly funded through disinvestment receipts going into the National Investment Fund, but the PMGSY is not. The Sarva Shiksha Abhiyan is partly cess-financed. But it is difficult to match the revenue which should have accrued from the cess with what goes into the funding of this scheme.
The problem is not about unmatched arithmetic alone. For a scheme-based developmental expenditure programme, the annual fiscal statement must surely provide information by scheme in such a manner that a sensible discussion is possible on the relative budgetary allocation to each. Funding by the Centre for state Plans is indeed listed by scheme, but centrally-sponsored scheme (CSS) funding going directly to state governments is listed only by ministry of origin, not by scheme. And we know that even a single state Plan scheme fully funded by the Centre, like the Backward Regions Grant Fund (BRGF), can have different points of ministerial origin. The state component of BRGF flows from the ministry of finance and the district component flows from the ministry of panchayati raj.
When funding and expenditure by scheme are assembled in one place, in a time series going back at least 10 years, the needless complexity of the whole structure will be transparently visible, and hopefully lead to the simplification so sorely needed. More importantly, it will enable understanding and judgement of, and generate debate on, the budgetary allocation pattern by scheme.
The PMGSY generates rural employment during construction, just like MNREGS, but its employment generation does not cease with construction of the asset. It facilitates outsourcing of small-scale manufacturing, lowers transport costs and reduces wastage of agricultural produce, so strengthening incentives to improve productivity. But its budgetary allocation this year is half that budgeted for MNREGS.
The writer is honorary visiting professor, Indian Statistical Institute, New Delhi
The Budget tried to please politicians, rating agencies and reformists, and let them all down - slightly