Increasing responsibilities

Fiscal management will become more difficult

In a country like India, the government is often expected to do everything. Given the pressure of electoral politics, governments, both at the Union and states, tend to react to popular pressures and expand the scale and scope of interventions. The state of government finances and quality of expenditure, as a result, suffer. It is worth noting that even before the pandemic, India was running one of the highest general government Budget deficits among its peers and mostly struggled to meet the deficit targets. The pandemic, of course, has worsened the situation, which would take years to correct even if concentrated efforts were made in this direction.

Some of the recent developments give a broad sense of how things are moving. As reported by this newspaper recently, the Union government is expected to allocate an additional Rs 25,000 crore for the Mahatma Gandhi National Rural Employment Guarantee Scheme. This would take the allocation to about Rs 1 trillion for the year. Sustained demand for work under the scheme indicates that the economy is not creating enough jobs. It is worth noting that there are demands for a similar programme in urban areas and some state governments have moved forward in this direction. The Union government recently extended the free food distribution programme for three months till December. This would lead to an additional expenditure of over Rs 44,000 crore. Consequently, the total food subsidy, which was estimated at Rs 2.07 trillion in the Budget, is expected to swell to about Rs 3.38 trillion. It can be argued that since the economy has opened up completely, some of these expenditures could have been avoided.

However, this is not all. The government does a lot more in a variety of areas. For instance, the government is expected to provide price support to farmers and also extend income support. The government has taken up the responsibility of building houses for a section of the population and it provides health insurance. Most state governments provide free or highly subsidised power, which has made state electricity boards unviable, and may have to assume their liabilities as has happened in the past. Some of these expenditures can be justified and the government has a responsibility to support the poor. But such programmes should be well targeted.

But government programmes are not limited to supporting the poor or a particular section of society. The government, for instance, is now supporting and subsidising the manufacturing sector through its ambitious production-linked incentive scheme. Further, it is not only supporting the faster adoption of electric vehicles but also cushioning the impact of higher crude oil prices through various means. Besides, some state governments are reversing the pension reform and going back to the old pension scheme, which would significantly increase future fiscal costs. The expansion in governments’ responsibility over time will make fiscal management difficult and could become a risk not only for growth but also for financial stability. Thus, it is necessary to prioritise expenditure. Since the governments are engaged in so many areas, they don’t have enough to meaningfully improve the state of critical sectors such as education and health care. Physical infrastructure has also been a weakness. Although the government is working in this area, more needs to be done. Governments at both levels will be able to push growth-enhancing expenditure only if allocations are more judicious.