State of spending

Centre's attempt to shift expenditure to states is misguided

Drafting the Union Budget for 2012-13 will not be easy. It is vital for macroeconomic stability that the central government attempt a return to fiscal prudence. In the 2011-12 Budget, it was estimated that the fiscal deficit would be 4.6 per cent of GDP. It is clear that the actual figure will overshoot this estimate, and settle at 5.5 per cent or more. The finance minister had also said that the deficit would be progressively reduced to 3.5 per cent by 2013-14, which looks like an impossible task. Disinvestment targets have been missed; and there is no equivalent of the 3G auction windfall which made the 2010-11 figures look respectable. It appears that the finance ministry is well aware of the difficulty of its task, and is looking everywhere for solutions. Many of these are of the quick-fix variety — for example, the endeavour to persuade cash-rich public-sector companies to buy back some of their own shares. It has now been reported that Finance Minister Pranab Mukherjee is likely to try and make state governments bear a greater share of social-sector expenditure.

The Centre has been unable to control its expenditure at a time when the tax-GDP ratio has fallen on account of the slowdown and fiscal concessions. The welfarist politics of the United Progressive Alliance, or UPA, has caused an expansion of entitlements and spending that cannot be withdrawn. Some of it may have served the purpose of insulating domestic demand from the global downturn that followed the financial crisis of 2008; but a stimulus package can be withdrawn, whereas an increase in entitlements cannot. Nor has the government been careful in its heavy expenditure elsewhere — including subsidies on petroleum products and a likely bailout of Air India, both of which benefit the middle class rather than the poor. Given political and social imperatives, however, it is clear that the increase in social-sector spending will be difficult to curb. Yet pushing a greater share of the expense onto states raises its own set of questions.

Why, after all, should states bear a larger part of the burden? It is true that some states are fiscally comfortable, relatively speaking. But if a state’s government is to bankroll an even greater share of social-sector spending, it should have – and presumably, will demand – greater control over the nature of that spending. Many of the key central schemes leave too little to state initiative, even as states time and again demonstrate their ability to produce efficiency-improving policy innovations. Meanwhile, the UPA in Delhi seeks to take credit for the schemes with voters, so there is little political benefit to be seen for a state administration, either. This does not appear to be a suitable long-term solution to the question of an increase in spending by the government. If India is moving to a higher level of government expenditure, true fiscal responsibility would require more revenue. Since that cannot come from significantly higher taxation, promoting growth is the only way out. It is important that the Budget clearly demonstrate that restoration of a high-growth path, rather than attempts to shove the responsibility for expenditure elsewhere, will be the key objective of the coming Budget.