As the Kelkar Committee report reiterated, India’s fiscal deficit is a disaster. With the recent spate of announcements that broadly push the reform agenda, it would seem that the government has finally woken up to it as well. But we wonder if the recent measures will be enough, or if the reckless spending of UPA-II has managed to push India out of the growth orbit that was considered the new normal.
Or so goes the standard narrative. The standard narrative’s judgement on the Indian state is clear: It is too large and too reckless with its finances. It has always been so, but the progress which had been made in the post-1991 era has been reversed during the UPA’s rule, especially UPA-II.
The Indian state is indeed too large. But is it large in scope, or in size? At 17 per cent and 23 per cent of GDP, neither the consolidated receipts, nor the consolidated outlays of India’s Central and state governments combined are such that they would raise an eye on the global scales. The government(s) of every single developed country in the world, with the exception of the city-states of Singapore and Hong Kong, collects more from and spends more on its citizens.
Even the nature of the charges laid out against the finances of the modern Indian state is somewhat curious. They focus exclusively on the spending side, and there too on more recent welfare spending programmes like the MGNREGS and ad-hoc fiscal actions like farm loan waivers. Rs 40,000 crore for MGNREGS; Rs 60,000 crore for farm loan waivers. These are big, scary numbers in the absolute. But how big are they in the modern Indian context?
At around Rs 40,000 crore per annum, MGNREGS is less than 0.5 per cent of India’s GDP at market prices. The interest payment on the loan waiver — the right metric of comparison since loans are “stock” quantities and GDP is a “flow” quantity — would have been of the order of Rs 6,000 crore a year, at 10 per cent interest per annum. That’s less than 0.1 per cent of GDP at market prices. And these are the programmes that have bankrupted the nation?
By way of comparison, consider the fact that the sales and excise tax cuts enacted for the supposedly higher and prudent purpose of tiding over the global financial crisis reduced India’s indirect tax collections from 10.5 per cent of GDP in 2007-08 to 9.6 per cent and 8.7 per cent in the following two years. These cuts alone were larger than the sum total of the new welfare spending schemes. They are an order of magnitude larger than the interest payment on the farm loans that were waived off. Yet, the Indian public discourse has no space to discuss these cuts — and when it does, it typically applauds them.
To an outsider, the discussions around India’s government finances would appear schizophrenic, almost perverse. Quantitatively small entitlements directed at the weaker sections of the society are discussed threadbare and picked apart, blamed for everything from labour shortages (Unskilled labour shortage. In India! Price-free economics at its worst.) to economy-wide inflation.
There are, of course, the right reasons to dislike welfare spending. Our delivery mechanisms are corrupt and inefficient. That’s a good enough reason to oppose the proliferation of welfare schemes, though one could argue that this is more relevant to entrenched subsidies than welfare schemes per se. But that’s not the only charge being made. The main charge against this government is that its welfare spending has bankrupted its treasury. The analytical framework backing this charge is on surprisingly inadequate grounds.
The fiscal deficit is typically divided into the primary deficit and interest payments. India’s fiscal deficit is 6 per cent, but our primary deficit is only 2 per cent. Interest payments are in excess of 4 per cent. Who do we pay this interest to? Pensioners and fixed-deposit holders. To a first approximation, it could be said that India’s government borrows money to pay interest to its risk-free savers. There’s a lot of talk of how our government “confiscates” private savings, without the realisation that without a pool of government bonds to back them, our fixed deposits in banks would not be able to assure us of 9 per cent interest risk-free. At more than 4 per cent of GDP, the Indian state pays about 10 times as much to you, the prudent saver, than it does to the beneficiary of its flagship welfare scheme.
And what about that other blade of the scissor that determines the fiscal deficit — taxes? Our tax framework is upside down. Corporation taxes, double taxation in all economic frameworks, are the biggest chunk of our direct taxes. Personal income taxes are miniscule. Again, note the curious perversity of the discourse around income taxes. Everyone recognises the distortion created by excluding all rural income from the ambit of income taxes. But rural income is, even if some farmers might be extraordinarily prosperous, less than half of our total personal income. About 100 million urban employees generate nearly Rs 35 trillion in personal income — a mean annual salary income of about Rs 3.5 lakh. The median might be closer to Rs 2.5-3 lakh. With deductions and different slabs for women and the elderly, the tax-free personal income is close to Rs 3 lakh per annum. More than 50 per cent of urban, salaried employees pay no income tax. Yet we celebrate increases in the tax-free threshold, indeed root for them, while laying the blame of a deteriorating fiscal position on a scheme that tries to hand out Rs 12,000 a year to people who often live at the edge of existence.
Strengthening India’s government finances is necessary. But without looking at the components of our deficit from multiple angles, we aren’t going to be able to suggest the right solution. Indeed, at this moment, we haven’t even begun with the analysis.
The writer is a London-based consultant
