| While India’s fiscal deficits have remained stubbornly high, the problem is not runaway expenditure. After all, the central government’s total spending has remained more or less at a constant in relation to GDP, from the early 1990s.
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| The main difference before and after 1991 is in the pattern of expenditure.
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| In the first period, government expenditure was oriented more towards the creation of assets, whereas after 1991 there has been a squeeze on capital spending while revenue expenditure has continued to grow.
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| The new orientation has been towards subsidies and interest payments on borrowings incurred to provide those subsidies; the interest payments themselves burgeoned because the government first freed them from government control (thus ending financial repression), and was then slow in reducing rates as inflation rates dropped.
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| Contrary to popular belief, expenditure on the government wage bill has remained fairly constant.
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| What this means is that expenditure control now will be even more difficult than in the past, because both subsidies and interest payments have been the subject of political skirmishing, and each time the government has had to beat a retreat from the sensible course.
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| The primary solution to the deficit lies, therefore, in raising the tax:GDP ratio—i. e. on the revenue side of the equation. To the extent that there has to be control of expenditure, it has to be in relation to the desirability of specific budget items.
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Like other finance ministers before him, Mr Chidambaram too has promised to curb wasteful expenditure. He has had some successes as reductions have happened in the food subsidy, which has been lower because of lower grain stocks and, consequently, a lower carrying cost.
The subsidy on kerosene and domestic LPG has fallen slightly because of, as the Mid Year review says, “a move away from an open-ended cost-plus subsidy structure”. But much more remains to be done.
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| An opportunity might be presented now by the pressure to start an employment guarantee programme. The finance minister could justifiably argue that he has to stay within the discipline of the fiscal responsibility law, which mandates eliminating the revenue deficit by March 2009.
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| Therefore, any allocation for a large new programme has to be matched by savings elsewhere, and transfer payments to those who are not poor should be chopped first.
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| The obvious candidate here is the large subsidy on cooking gas, which benefits mainly the middle class. Equally, the fertiliser subsidy is known to help inefficient fertiliser units more than poor farmers, and could be re-fashioned to focus on just the target population.
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| If these are done, then a substantial part of the immediately required expenditure correction would have happened.
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| The problem is that both the gas and fertiliser subsidies have been hot potatoes in the past, and it will require deft footwork to juxtapose them against the need to fund a job guarantee programme.
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| There has been talk in past years of introducing zero budgeting (which would mean examining the need for each budget item ab initio and not in relation to past spending patterns), but nothing much has resulted.
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Mr Chidambaram could try and use some of the old committee reports that today collect dust in his ministry: some of the Geethakrishnan reports on expenditure control come to mind.
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