A K Bhattacharya: A three-point test for UPA I & II

The Congress-led United Progressive Alliance, or UPA, will soon complete 10 years of its reign at the Centre. No other political alliance or a single political party has achieved this feat in post-reforms India. It is natural, therefore, to go back in time and evaluate how the UPA performed in managing the government's finances in the last 10 years. One way would be to subject the UPA's 10 Budgets in this period to a simple three-point test - with regard to fiscal discipline, tax reforms and expenditure management. Here is a quick analysis.

In the last 10 years, the Union government's fiscal consolidation efforts have see-sawed, much to the economy's discomfort. In 2004, the UPA government inherited a fiscal deficit of 4.5 per cent of gross domestic product, or GDP, from Jaswant Singh's 2003-04 Budget exercise, but quickly got down to reducing this gap. Of course, revenue buoyancy propped up by economic growth was responsible, but the fact is that in the first four years of the UPA rule, the fiscal deficit declined successively each year and settled at as low a figure as 2.7 per cent of GDP in 2007-08.

Unfortunately, however, that bright patch could not be sustained in the succeeding years and indeed 2007-08 marked the end of the fiscal consolidation phase for the UPA. Since then, thanks to the pressures on the government for fiscal stimulus to ward off the adverse impact of the global financial crisis in 2008, the government's fiscal deficit kept rising and touched 6.4 per cent in 2009-10. Since then, however, some recovery has taken place; the fiscal deficit for the current year could well be restricted to a little below 4.8 per cent of GDP.

But in spite of a lower trajectory for the fiscal deficit in the last couple of years, macroeconomic concerns over fiscal slippages have only got more serious. One, the deficit level for the current year, even though it is lower from the 2009-10 level, is still too high for the economy's comfort. Two, the UPA government used the argument that the financial crisis required a fiscal stimulus as a justification for pausing the implementation of the deficit reduction plan - and, since then, not too many voices have been heard in the government about reimposing the kind of target-based fiscal discipline that was envisaged under the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.

In his Budget speech in February 2012, Pranab Mukherjee talked about redefining some of the deficit target parameters by amending the FRBM Act. But there hasn't been any movement on this front. And three, even though the UPA government in the last couple of years has tried hard to restrict the deficit to the level promised in the Budget, the fact is that the achievement of these numbers has relied heavily on one-off revenues (be they from disinvestment, cross-holding sales in public sector undertakings or even telecom spectrum auctions).

Thus, the fundamental imbalance in the government's revenue and expenditure has got worse. While its expenditure has been rising with its long-term commitments, thanks to the newly legislated rights-based programmes, a good part of the government's receipts growth continues to remain unsustainable because economic growth has decelerated and the reliance on one-off revenues has not declined.

If the absence of any improvement in the government's fiscal situation is cause for concern, the pause on tax reforms in the last 10 years is no less problematic for the Indian economy. The last big tax reform in this country was the switch-over to the state value-added tax system. The Vajpayee government pushed for this reform aggressively and the new tax system was finally enforced in the early days of the UPA regime. Since then, however, the country has been hoping for some more reforms on both the direct tax and indirect tax fronts. But apart from promises and some unsuccessful initiatives, nothing concrete has been achieved in the form of either a new direct taxes code to provide a stable and more efficient direct taxes regime or a goods and services tax system that should help create an integrated Indian market to improve savings and efficiencies across sectors. You may blame it on politics. But shouldn't the UPA leadership have shown some enterprise and political sagacity to build political consensus or remove internal differences to usher in what would have certainly fundamentally improved the taxation system in the country?

What about expenditure management? Three unhealthy developments mark this area of governance under the UPA regime. There is no doubt that in the last 10 years, the government has managed to keep its overall expenditure to around 15 per cent of GDP, a couple of points lower than what Jaswant Singh had managed in 2003-04. But that appears to have been achieved at the cost of a major squeeze on the government's capital expenditure. Thus, from about four per cent of GDP in 2003-04, the size of capital expenditure has remained well below two per cent of GDP in almost six of the last 10 years. This distortion has taken place probably to keep the revenue expenditure plans intact since it has gone up from 11.85 per cent of GDP in 2004-05 to 12.63 per cent of GDP in the current year. In between, it had even crossed the 14 per cent mark for two years in 2007-08 and 2008-09.

What this also highlights is the UPA government's failure to rein in subsidies, especially in the last few years. In 2003-04, the year of the National Democratic Alliance government's last Budget, subsidies accounted for 1.61 per cent of GDP. In the subsequent four years, they declined steadily only to breach the two per cent mark in 2008-09 and have stayed at the high level since then - a reflection of the UPA government's failure to weed out poorly targeted subsidies from the system. Similar laxity has been in evidence with regard to the UPA government's approach to reducing the size of the bureaucracy. It was as large as 3.3 million in 2003-04; and, as the UPA completes its 10-year tenure, the strength of central government employees is estimated at around 3.45 million.

Looking back, therefore, it seems the UPA's 10 years saw little tax reform, a clear deviation from the path of fiscal discipline and no clear strategy to prudently manage the government's expenditure. An opportunity, arising out of relative political stability and a long tenure at the Centre, was lost.