Serious Expenditure Reforms India Needs

SERIOUS EXPENDITURE REFORMS INDIA NEEDS

INTRODUCTION

The Government will be spending over Rs. 31 lakh crore in the financial year 2019-20 (including about Rs. 3.5 lakh crore of off-budget/ below the line expenditure), roughly 15% of India’s GDP.

My note Expenditure Budget: How much and on what the Central Government spends Rs. 31 lakh crore describes myriad programme of development (centre sector schemes and centrally sponsored schemes), large subsidy programme (food, fertiliser, LPG, loans etc.), mandatory transfers to States, establishment, interest, investments and many others on which the Government spends this big pool of resources. It also describes what programme the Central Government has some control or discretion on and where it has only to spend with hardly any control or discretion.

Whatever be the nature of central government expenditure programme, it affects the economy, redistribution of incomes to poor people, infrastructure building, financial markets, welfare of people and so on very materially. It is in public interest that these expenditures are productive, efficient and provide value for the money to the nation.

There are three core objectives of Government’s expenditure policies and programmes.

          First, to promote economic growth with full employment of labour.

         Second, to provide a minimum standard of life for the poor people, providing adequate income support particularly to who are not in a position to earn their own livelihood.

         Third, produce and deliver all necessary public goods and services for assuring good quality of life to all.

An assessment of the expenditure programmes and policies of the Government of India from the perspective of these core objectives indicate that, barring few which are very well designed and implemented, most of the present expenditure programmes are too small and too poorly designed, targeted and implemented resulting in considerable waste of resources.

A panoramic view of the current expenditure programmes leads to an inescapable conclusion that fundamental and structural reforms are necessary for making India’s expenditure programme deliver value for money and achieve the three core objectives outlined above. It is extremely important in view of the fact size and scope of the Government of India expenditure (Rs. 31 lakh crore or 15% of its entire GDP) is quite large for a still poor and developing economy like India.

This Note discusses some large expenditure programme and policies and propose a significant expenditure reform therein.

INVESTMENT IN PUBLIC SECTOR ENTERPRISES  

India has built a massive public sector in last 70 years. Almost all these public sector enterprises produce what are essentially private goods. Private goods and services are those economic goods and services which can and should be competitively and qualitatively produced by the private sector (there is no real rationale for Government to produce these) and sold to consumers who buy these at their free will for their consumption paying the value they consider as price for the goods and services so purchased. For example, all transport services- taxis, buses, airlines etc. can be and are run by private sector companies and firms.

There is no reason why railway passenger and freight services cannot also be run by the private sector. Building roads, though, is different than running taxi and bus services which are run on these roads. Even roads business is now becoming private goods increasingly as roads can now be structured to be privately produced. Likewise, railway freight and passenger services, which are separate from railway line business can be easily provided by the private sector. Dispensing petrol and diesel to cars and other transport vehicles is purely and primarily a private sector business. One can do similar examination of all the goods and services which public sector enterprises produce which will lead to similar conclusion.

Production of private goods and services require use of capital and labour. India is a developing country with deficient capital and abundant labour. When the public sector produces such private goods, it uses much more capital than what the private sector employs for producing equivalent goods and services. Its’ cost of labour per unit of output is also far higher. Use of more capital and higher cost of labour for same unit of good or service produced compared to the private sector is a national loss. We need to put a stop to this lack of productive deployment of resources in fact amounting to national waste in many cases.

There is a general impression that recognising this, the Government, is now in disinvestment mode and it is aggressively disinvesting in and strategically selling public sector enterprises. This is quite far from the truth. The Government is still making a lot of investments. Even on net basis, there is larger investment expenditure than disinvestment receipts in last two years.

In the year 2017-18, Rs. 90000 crore was invested in the equity of public sector banks. Other equity investments included Rs. 685 crore in the Nuclear Power Corporation, Rs. 1800 crore in the Air India, Rs. 125 crore in the India Post Bank, Rs. 337 crore in the Indian Telephone Industries, Rs. 500 crore in the EXIM Bank, Rs. 100 crore each in India Infrastructure Finance Company Ltd and Industrial Finance Corporation of India, Rs. 3880 crore in NABARD, Rs. 3249 crore in Metro Rail projects, Rs.170 crore in Minorities Development Corporation, Rs.43,418 crore in Railways, Rs.23,892 crore in the National Highways Authority, Rs. 125 crore in the Sagarmala Company and Rs. 128 crore in Scheduled Caste Development Corporation.

In all, as per the Statement on ‘Investment in Public Enterprises (Statement 26 in the Expenditure Profile, Expenditure Budget 2019-20), a total of Rs. 1,69,290 crore of equity investment was made by the Government of India in 2017-18. The revised estimates for 2018-19 inform that equity infusion in public enterprises in 2018-19 was as large as Rs. 2,13,530 crore.

The budget estimates for Government’s investments in equity of public sector enterprises for 2019-20 BE is Rs. 1,86,125 crore.

Compared to these investment commitments, the actual and estimated receipts from all the disinvestments in the public sector entities, including some receipts like sale of enemy properties etc. was only Rs. 1,00,045 crore in 2017-18, Rs. 85000 crore in 2018-19 and is estimated at Rs. 1,05,000 crore in 2019-20 (though it is quite unlikely to be achieved).

On net basis, the Government of India made about 70% more investment in the equity of public sector enterprises (including departmental undertakings) than total disinvestment receipts in 2017-18 (Rs. 1,69,290 crore investment as compared to 1,00,045 crore of disinvestment receipts). In 2018-19, the scale of investment at Rs. 2,13,530 crore was nearly three times the scale of disinvestment of Rs. 85000 crore. The picture in 2019-20 is not going to be any different.

The fact therefore is that the Government is still making lot of equity investment in the public enterprises. Should India be making so large investment in the public enterprises producing essentially private goods, which the private sector can produce more efficiently. Should the Government continue to be expanding its’ footprint in the business of business?

Besides the quantum, the quality of this equity investment is also a major issue. Bulk of the Government equity investment in last three years (including the current one) is in three sectors- public sector banks, railways and road construction. There is no return on capital invested in these sectors for the Government. Other companies and corporations also where the Government is making investments are also the ones which have no ability to raise capital from the markets.

There would be no harm done to the nation if this equity investment is stopped completely by the Government. The first major expenditure reform, in the current juncture, is to stop completely making any equity investment from the budget in the public enterprises. The Government may end up saving Rs. 2 lakh crore on an average, which is about 1% of GDP and about 7% of the entire Government of India budget.

REFORMING AGRICULTURE ALLIED SECTOR PROGRAMMES

The Government spends a lot of public funds on agriculture and food programmes. The Government runs a plethora of development programmes and subsidy-based interventions aimed at agriculture, food and farmers.

The Government has launched several centrally sponsored schemes (CSSs) under three umbrella schemes of Green Revolution, White Revolution and Blue Revolution.

 Ministry of Agriculture, Cooperation and Farmers’ Welfare

The Expenditure Budget of the Department of Agriculture, Cooperation and Farmers’ Welfare lists 18 Schemes/ Programmes/ Missions under the umbrella scheme of Green Revolution as line items from serial number 17 to 35. Total allocation of Green Revolution is Rs. 12,560 crore in 2019-20. Incidentally, Green Revolution is not listed as a line scheme in the budget of Department of Agriculture. All the major interventions in agriculture are covered by these 18 schemes. It has important schemes like Rastriya Krishi Vikas Yojana (RKVY) with allocation of Rs. 3745 crore, National Mission on Horticulture with allocation of Rs. 2225 crore, and National Food Security Mission (NFSM) with allocation of Rs. 2000 crore. This Umbrella also shields small schemes National Project on Agro-Forestry (allocation Rs. 50 crore), Sub-Mission on Plant Protection and Plant Quarantine (allocation Rs. 50 crore), Integrated Scheme of Agriculture Cooperation (allocation Rs. 85 crore) and Scheme of Information Technology in agriculture (allocation Rs. 40 crore).

Department of Agriculture runs a total of 36 schemes with a separate budget allocation at line level. It has allocation of Rs. 3500 crore under the Pradhan Mantri Krishi Sinchai Yojana (PMKSY), also run as a centrally sponsored scheme (CSS). Thus, in all there are 18 CSSs under the wings of Department of Agriculture.

For last two years, the Government is also implementing a scheme of direct cash transfer programme to farmers to relieve them of acute distress caused by low prices of commercial agriculture crops, pulses and other food produce. This is budgeted under the Department of Agriculture. For 2019-20, a provision of Rs. 75000 crore has been made under the line Scheme- Pradhan Mantri Kisan Samman Nidhi (PM-Kisan).

Including PM-Kisan, the Department of Agriculture, Cooperation and Farmers’ Welfare has a total of 8 schemes under the rubric of Central Sector Schemes. Other significant schemes include Pradhan Mantri Fasal Bima Yojana with allocation of Rs. 14000 crore, Interest Subsidy for Short Term Credit to Farmers with allocation of Rs. 18000 crore and Market Intervention Scheme and Price Support Scheme (MIS-PIS) with allocation of Rs. 3000 crore. Relatively minor schemes include Distribution of Pulses to State/Union Territories for Welfare (allocation Rs. 800 crore), scheme of Promotion of Agriculture Mechanisation for in-situ Management of Crop Residue (allocation Rs. 600 crore) and Pradhan Mantri Annadata Aay Sanrakshan Yojana (PM-AASHA) (allocation Rs. 1500 crore).

In all the budget of the Department of Agriculture, Cooperation and Farmers’ Welfare for 2019-20 under the developmental schemes group of Centrally Sponsored Schemes is Rs. 16,060 crore and that of Central Sector Schemes Rs. 1,13,800 crore. Total Budget is Rs. 1,29,860 crore, which amounts to .64% of GDP.

Department of Agriculture Research and Education under the Ministry of Agriculture and Farmers’ Welfare also has a number of Central Sector Schemes (no CSS) although its allocation is much smaller. It runs in all 17 Central Sector Schemes with an outlay of Rs. 8,079 crore in 2019-20.

The two Departments under the Ministry of Agriculture and Farmers’ Welfare a total of developmental outlay of Rs. 1,37,939 crore.

Ministry of Fisheries, Animal Husbandry and Dairying

We now have a separate Ministry of Fisheries, Animal Husbandry and Dairying with two separate Departments- Department of Fisheries and Department of Animal Husbandry and Dairying operating thereunder.

The Department of Animal Husbandry and Dairying implements an Umbrella Scheme titled White Revolution. Its total allocation is small at Rs. 2240 crore in 2019-20. But, it still has 12 schemes (three discontinued in this year) under this umbrella. The largest scheme of National Livestock Mission has grand allocation of Rs. 480 crore. The next largest scheme of Livestock Health and Disease Control programme has allocation of Rs. 475 crore. Rest of the schemes have thin though quite evenly disbursed allocations. National Plan for Dairy Development has allocation of Rs. 325 crore, Dairy Enterprise Development Progamme also has allocation of Rs. 325 crore and Rastriya Gokul Mission has allocation of Rs. 302 crore. The smallest scheme is Agriculture Husbandry Infrastructure Development Fund with allocation of Rs. 25 crore.

The Government has started the largest Central Sector Scheme in Animal Husbandry sector in 2019-20. The Scheme of National Animal Disease Control Programme for Foot and Mouth Disease (FMD) and Brucelloisis has allocation of Rs. 500 crore.

In all, the developmental allocation under quite a few programme under the Department of Animal Husbandry and Dairying is measly Rs. 2740 crore.

Department of Fisheries is a new Department in the Government of India. It also has an Umbrella CSS under its belt- the programme of Blue Revolution with a total allocation of Rs. 560 crore under two Schemes- the scheme of Integrated Development and Management of Fisheries with an allocation of Rs. 550 crore and the Fisheries and Aquaculture Infrastructure Development Fund with an allocation of Rs. 10 crore. It has two autonomous bodies- Coastal Aquaculture Authority and National Fisheries Development Board- with total allocation of Rs. 85 crore, funded as Central Sector Scheme.

Two Departments under the new Ministry of Fisheries, Animal Husbandry and Dairying together has total developmental programme allocation of Rs. 2825 crore!

Ministry of Consumer Affairs, Food and Public Distribution

Department of Food under the Ministry of Consumer Affairs, Food and Public Distribution, in fact, has the largest allocation relating to management of agriculture produce, most importantly food economy.

It has total allocation of Rs. 1,92,240 crore or about .94% of the GDP- much higher than the allocation of the two Ministries of the Ministry of Agriculture and Farmers’ Welfare and the Ministry of Fisheries, Animal Husbandry and Dairying.

A massive food subsidy programme, costing over Rs. 150000 crore a year is implemented using interventions like minimum support prices, procurement of cereals especially wheat and rice, aimed at making consumer prices for wheat and rice almost free.

The allocation for Food Subsidy for the year 2019-20 is Rs. 1,84,220 crore.

The Budget of the Department of Food and Public Distribution provides for an allocation of Rs. 1,51,000 crore for Food Subsidy to Food Corporation of India under National Food Security Act and an allocation of Rs. 33,000 crore under the programme of Food Subsidy for Decentralised Procurement of Food grains under National Food Security Act. These two subsidies essentially cater to the subsidisation of wheat and rice.

In addition, it has a minor provision of Sugar Subsidy payable under Public Distribution System, which is Rs. 220 crore for the year 2019-20.

The Department of Food also implements quite a few (12) other Central Sector Schemes to take care of expenditure involved in management of food and sugar operations. The largest programme is for providing Assistance to State Agencies for intra-state movement of foodgrains and FPS dealers margin under NFSA (allocation Rs. 4102 crore in BY 2019-20.

There are quite a few programme to take care of the problems in the sugar industry caused by considerable over-production in last 2-3 years. There are eight schemes connected with various facets of sugar mills- Scheme for assistance to sugar mills, Scheme for creation and maintenance of Buffer Stock of Sugar, Scheme for extending financial assistance to sugar mills for enhancement and augmentation of ethanol production, Scheme for defraying expenditure towards internal transport, freight, handling and other charges on export and so on. Total allocation under these schemes is around Rs. 2500 crore.  

The Department of Consumer Affairs also manages a Price Stabilisation Fund aimed at reducing volatility in prices of agriculture produce. This Fund has an allocation of Rs. 2000 crore for FY 2019-20. The Department runs 11 Central Sector Schemes with total outlay of Rs. 2176 crore. The largest programmes, other than the Price Stabilisation Fund, is the Scheme of Consumer Awareness (Advertising and Publicity) with an allocation of Rs. 62 crore and Strengthening of Weights and Measures Infrastructure and Strengthening of regional reference standard laboratories and Indian Institute of Legal Metrology.

Total budgeted expenditure under the Ministry relating to agriculture is Rs. 186396 crore.

Department of Fertiliser

Department of Fertiliser under the Ministry of Chemicals and Fertiliser is the Department dedicated for one input of the agriculture economy i.e. fertilisers. The policies and programme of the Department has led to production of high cost fertilisers in the country. 

The way the Department operates the fertiliser subsidisation, it has also contributed in distorting the nutrient use in the country as well.

Agriculture and allied sector related interventions of the Government of India are truly spread in so many Departments and Ministries of the Government of India.

The Department of Fertilisers runs two Central Sector Schemes to support nitrogen- based fertilisers (Urea) and other nutrients-based fertilisers (DAP etc.). The Urea Subsidy scheme has separate line item provision for Payment of Indigenous Urea (allocation Rs. 43050 crore), Payment for Import of Urea (allocation Rs. 14049 crore) and Direct Benefit Transfer (DBT) in Fertiliser Subsidy, with a grand allocation of Rs. 10 crore. As there is a negative provision for some recovery of Rs. 3480 crore, the net provision for Urea Subsidy is Rs. 53,629 crore in FY 2019-20.

The Central Sector Scheme of Nutrient Based Subsidy has a total provision of Rs. 26,367 crore for FY 2019-20. It provides for Payment for Indigenous P and K Fertilisers (allocation Rs. 15906 crore), Payment for imported P and K Fertilisers (allocation Rs. 10429 crore and a small scheme of Payment for City Compost (allocation Rs. 32 crore).

Total provision for supporting fertilisers subsidy programme is Rs. 79,996 crore in 2019-20, or .39% of GDP.

Other Ministries and Departments

There are a number of other programmes spread over several budget heads for supporting agriculture interventions.

Department of Water Resources, River Development and Ganga Rejuvenation under the newly created Ministry of Jal Shakti has quite a few Central Sector Schemes for supporting irrigation and a Centrally Sponsored Scheme- Pradhan Mantri Krishi Sinchai Yojana. Allocation under these agriculture related schemes for FY 2019-20 exceeds Rs. 5000 crore. 

The CSS of Prime Minister Krishi Sinchai Yajana also has 10 separate line item schemes under its umbrella.

Department of Commerce spends around Rs. 500 crore for plantations related schemes and about Rs. 1000 crore for agri-export and infrastructure related programme. Department of Land Resources under the Ministry of Rural Development manages land and runs watershed programme aimed at improving agriculture land productivity. Their allocation for FY 2019-20 is Rs. 2047 crore.

A good part of the Mahatma Gandhi National Rural Employment Guarantee Programe and a part of National Livelihood Mission is also spent on agriculture related operations. Assuming that about ½ of these resources are spent on agriculture related operations, a amount of about Rs. 35000 crore out of total outlay of MNREGA and NLM can be taken for spending on agriculture.

There are quite a few other Departments and Ministries which run schemes for benefit of agriculture and farmers. Some of these are Ministry of Tribal Welfare, Ministry of Social Welfare and Ministry of North Eastern Development. Let us assume this expenditure is about Rs. 10000 crore only.

Agriculture related allocations under these Ministries, not directly connected with agriculture as such, but having significant impact through their own programme exceeds Rs. 52,500 crore.

Overall Central Government expenditure on agriculture and allied sectors

Budget allocations described above adds up to over Rs. 4.6 lakh crore. The Government runs in excess of 100 programme spread over several Ministries and Departments.

This scale of expenditure and multiplicity of programme are all being implemented with the objective of raising agriculture production and productivity, providing income support or reducing cost of their produce for consumption and building agriculture infrastructure and support services.

This scale of expenditure amounts to about 16.5% of total central government budget for 2019-20. If we exclude expenditure on interest, establishment and mandatory transfers of the Finance Commission, the expenditure commitments of Rs. 4.6 lakh crore makes up almost 33% of total discretionary budget of the Government of India.

States’ expenditure on agriculture programme

This expenditure of the Government of India is additional to the expenditure which the States incur from their budget. Many of the central programme also require the States to put in at least 40% of the cost of the programme. The states have their own programmes. The biggest programme of supporting agriculture production is provision of subsidised electricity (in some states, free electricity). This programme alone costs the States over Rs. 100000 crore a year. The States also tend to provide fiscal grants to write off the crop loans from time to time. There are no firm estimates available of how much the States spend on agriculture and food programme in a year. This expenditure is, however, not less than what the Central Government spends.

Public expenditure on agriculture in the context of gross value added

Entire gross value addition (or GVA) taking place in agriculture is about 30 lakh crore at current prices (Rs. 30.47 lakh crore as per advance estimates for 2019-20 released by CSO on 7^th January, 2020).

Expenditure by the Centre on agriculture related schemes is Rs. 4.6 lakh crore. The Government of India spends over a whopping 15% of the GVA (Rs. 4.6 lakh crore/ Rs. 30.47 lakh crore).

The Centre and the States spend from their budgets amount exceeding Rs. 9 lakh crore a year which makes up about 30% of the entire agriculture and allied sector GVA.

GDP is GVA plus taxation minus subsidies. As the taxation of the sector is almost negligible, public expenditure on expenditure should be exceeding 40% of agriculture and allied sector GDP.

Such excessive expenditure is too high a level of public expenditure on any one sector of economy. Agriculture GDP is growing at an average of less than 2.5%. As population growth in rural households is much higher than the national average of 1.1%, the per capita income growth of farming households may barely be increasing by about one percent a year. 

Therein lies the fundamental fact of rural poverty, most specifically in the farming households.

Need to have a careful look at our current agriculture expenditure strategy

A very legitimate question to be asked is why should the Government be spending so much on farming sector which is neither leading to high growth of agriculture nor leading to improving the income status of farming households.

There is too big a dependence of rural households on agriculture and allied sector. About 50% of labour is still in agriculture and allied sector. Agriculture output of comparable GVA in most parts of the world is produced by one-fiftieth to one-tenth of labour. Another public policy question of enormous legitimacy is- does India need to change its agriculture and rural employment and income generation strategy and programme?

Most of the programmatic governmental interventions in agriculture field were designed to address the issues of the first 20 years of India’s independence. India was a hugely food deficit country. Droughts and famines used to recur with regular frequency. Almost entire agriculture was rainfed. There was no movement of agriculture produce even within the country. India had to go with begging bowl to many countries seeking food assistance. PL 480 of the United States of America was used to make India toe the American line to get the food aid. Prime Minister Lal Bahadur Shastri used to call upon Indians to observe fast to save food to provide millions of hungry stomachs some cereal to carry on with their lives.

In such circumstances, bringing technological interventions to raise food production was quite good government response. Inventions of high yielding varieties (HYV) of rice and wheat provided that opportunity to India. Growing such varieties required assured irrigation and use of supportive inputs like fertilisers and insecticides.

Understandably, India went for making considerable investment in creating irrigation infrastructure, both surface and underground. Ministry of Agriculture funded several programmes to raise “production and productivity of crops”. Despite inefficiencies of public system delivery, coverage of irrigation soared, use of fertilisers became almost universal, HYVs of seeds replaced traditional low yielding varieties majorly and use of tractors and other farm equipment became widespread.

Agriculture used to dominate India’s GDP/GNI and its growth. Its growth volatility was so high that sometimes it would make India’s GDP growth negative. Very soon after adoption of new high yielding technology of agriculture very well supported by the chemical inputs and irrigation, India’s GDP volatility started declining.

1979 was the last year when India saw a negative growth of its Gross National Income. GNI declined by 5.1% in FY 1979-80 thanks to agriculture growth volatility, which saw massive degrowth of -11.9% GVA that year.

Agriculture GDP itself started becoming less volatile. The last year when India witnessed 5% degrowth of agriculture was 1979-80. It came very close to -4.9% in 2002-03, which was also the last year when agriculture declined in India.

During last 40 years since 1979-80, India’s real agriculture GVA growth has been negative only 4 times (1987-88, 1991-92, 1997-98 and 2002-03). Even in one of the worst ever rainfall years like 2008-09 and 2014-15, India did not experience negative agriculture GVA growth. It was low but positive growth of agriculture GVA at .4% in 2007-08 and 1.2% in 2014-15.

India today consistently produces more wheat and rice than it consumes. India’s pulses production has grown to meet roughly about 80-90% of its demand by now. India has been consistently over-producing sugar, cotton and jute. It is only oil seeds, for which India is consistently deficient in production.

India exports $35-$50 billion of agriculture produce now. It’s import of agriculture products is around $20-25 billion. India is a consistent net agriculture exporter now. In 2018-19, India was a net agriculture exporter of $14.7 billion.

The situation of agriculture production has transformed totally. Yet, India’s programme of intervention in agriculture and allied sector remain essentially what these programmes were in 1970s and 1980s. That is quite horrible and wasteful.

Taking States and Central expenditure together, India spends over Rs. 250000 crore in subsidising inputs of various types. Over Rs. 70000 crore are spent to subsidise fertilisers. Over Rs. 100000 crore is spent in subsidising power for agriculture. Over 50000 crore is spent in subsidising interest payments on crop loans. Over Rs. 15000 crore goes for supporting subsidised seeds. Free irrigation cost is not even counted. Other programmes- insurance subsidy, equipment subsidy etc. cost over Rs. 35000 crore.

Such large-scale inputs subsidisation does not promote the use of agriculture technology any longer. Farmers have learnt enough about the seeds, fertilisers, crop loans, electricity use and so on. In fact, on account of either free or highly subsidised nature of the inputs supply, the farmers tend to overuse these. Excessive use of free/subsidised electricity leads to over-drawl of water which actually adversely affects farm productivity. This also acts as disincentive for adoption of low water use technologies. Evidence of excessive use of urea, other chemical fertilisers and indiscriminate use of insecticides etc. is legion now. In fact, such excessive and indiscriminate use is leading to health and environmental degradation. Cancer express trains run from some parts of rural areas to the cities with cancer hospitals.

When the country does not need these production technologies to be promoted any longer for higher agriculture production, when these programmes are not succeeding in generating growth and employment in agriculture, when these programmes are not facilitating the movement of surplus labour from agriculture to non-agriculture, why run these programmes at all?

There is still poverty and misery in the farming households.

A very different approach is needed for helping the poor farm households, for agriculture diversification and for modernising our agriculture further.

Proposed restructuring of agriculture programme

Production and productivity programmes supported by free or cheap inputs need to be discontinued. Farmers need to be supported with direct income support, flexibility of land leasing and commercialisation of agriculture.

Agriculture needs to be developed as a business. Exploiting farmers by emotional calls of annadata etc. and delivery of free or subsidised inputs which end up depressing the final prices need to go out of the window.

We should begin with two important legislative reforms which are absolutely necessary in the agriculture sector to introduce modern agriculture and free up marketing and distribution system for raising the realisations of the farmers. First, give permission to the States which have proposed to adopt or amend their land laws on the lines of Model Land Lease Law, as drafted and circulated by NITI Ayog in 2016, and encourage all the remaining States governed by the BJP to adopt this Law at the earliest. Second, abolish the Essential Commodities Act to eliminate all controls over storage and distribution of agriculture commodities.

All the traditional production and productivity enhancement programme of the Ministry of Agriculture and Ministry of Fisheries and Animal Husbandry (Green Revolution, White Revolution and Blue Revolution) should be phased out completely over next three years. The Government can, for some transitory period, replace the present level of public expenditure on these production and productivity programme by investment in land improvement, farm mechanisation (most with farm equipment hiring) and promoting hiring of agriculture services (on Uber/ Urban Clap model). 

All agriculture input subsidies (seeds, fertiliser, power and loans) should be progressively phased out in next three years by providing compensating direct cash support to the farmers. During the phase-out period, the system should switch over to a genuine Direct Benefit Transfer (DBT) system to provide fertilizer purchase support to farmers based on their acreage.

Minimum Support Prices (MSP) programme have lost their relevance in the day and age of surplus production. Farmers need to get right market signals to assess the demand for different agriculture produce. The government expenditure under MSP programme should be replaced by a direct cash transfer system for ensuring ‘income’ to farmers. FCI and other Government agencies to undertake procurement of the food grains required for social security and nutrition programme and also for necessary buffers from the market at prevailing prices. It would be preferable if the Government were to tie it up in future markets before the onset of cropping seasons as this would provide right signals to the farmers.

The PM-Kisan programme should be withdrawn now as the situation of agriculture distress has eased out now. It can be re-introduced whenever there is pressure on rural incomes.

The game in agriculture needs to be completely changed. The reforms suggested above would lead to first, stabilizing the expenditure at current levels and later will get reduced gradually.

POWER SECTOR EXPENDITURES

Current scale of central government expenditures

Central Government expenditure on power sector is not massively large. Actual expenditure of the Ministry of Power was Rs. 13975 crore in 2017-18 with RE of 2018-19 being Rs. 15625 crore. Ministry of Power’s BE for 2019-20 is Rs. 15,875 crore. Budgeted Expenditure of Ministry of New and Renewable Energy is Rs. 5255 crore for BE 2019-20. As establishment expenditure is quite small, taken together, budgeted programme development expenditure is only about Rs. 20000 crore.

There is some off-budget liabilities as well. Ministry of Power spent Rs. 13,827 crore on Deen Dayal Upadhyay Scheme through fully serviced bonds (FSBs) route in 2018-19. In addition, it spent Rs. 5504 crore on Power Sector Development Fund projects raising money through FSBs. In all, about Rs. 19200 crore was spent through off-budget borrowings in 2018-19. Final expenditure details for 2019-20 are not still available. It might go to the levels of last year.

Thus, the Central Government’s expenditure on power sector development programme is estimated around Rs. 40000 crore a year.

The Central Government public sector enterprises run their power generation, transmission and financing business. While a good part of this businesses is commercial, some stresses have emerged which might need to be dealt with soon.

Lot of contingent liabilities

The Government of India (Ministry of New and Renewable Energy) has assumed contingent liabilities through Solar Energy Corporation of India (SECI) as it has guaranteed payment of power supplied by the solar and wind developers to the state utilities. There are some instances which have come, most prominently in Andhra Pradesh, where the state utilities have not paid for the renewable power supplied to them. It is likely that there is call soon on the Central Government to make payments.

The state utilities buy power from the central generation utilities. There are quite a few instances of payment not being paid for power purchased from the central utilities. Some of these generating companies have facilitated loans from the banks and power finance companies to the state utilities to recover their dues by guaranteeing repayment to the financing entities in case the defaulting state power utilities does not pay up. Power Finance Corporation and Rural Electrification Corporation have also lent funds to the state utilities under these arrangements. It is possible that there is default on some of these obligations.

The state utilities have continued to make losses and their accumulated losses have again crossed the pre-UDAY level. There is talk of another UDAY, may be named differently- ADITYA?.

Need to change power sector strategy

The Central Government funds essentially some small investment projects through the schemes it runs- Deen Dayal Gram Jyoti Yojana funds separation of agriculture feeders, strengthens sub-transmission and distribution infrastructure, and rural electrification. Investments in creation of new substations, metering, provision of micro-grids, high tension and low-tension lines etc. are funded through this Scheme. The other Schemes, like the Integrated Power Development Schemes does the same thing in urban areas.

There is no strategic or developmental reason for the Government of India to fund these small interventions. Normally, the state utilities should be funding these small investments as well like what they do for larger generation and transmission projects. The scale of expenditure is also quite small compared to the investment which takes place in the sector. Most of these investments are financially viable, with low pay back period, only if the utilities can recover power charges producing and pricing power to recover the cost.

The GoI does it so only to keep a lever over the state governments.

The Government of India should stop providing these investment support and focus on sector reforms instead.

Criticality of power sector

Power is extremely critical for India’s growth as well as for lifting the quality of millions of her people. Over last two decades, private sector has come in the generation of power majorly. Currently, most of the capacity addition in the renewables (both wind and solar) is taking place in the private sector. Private sector added considerable thermal power generation capacity for captive use and also for selling power. Private sector had also ventured into hydro-power generation in eighties and nineties, but has substantially stopped expanding in the sector for several reasons.

Distribution, barring some isolated cases of privatisation, has remained almost entirely in the public sector, that too, almost universally in the State Sector. The State Utilities generate and buy power, sell or provide it free or at subsidised cost to large number of consumers and consequently earn a hefty negative return on their business, piling up large losses, averaging over Rs. 75000 crore a year (post state government support).

UDAY programme was the fourth in last 20 years to relieve the power sector utilities of the financial stress, which these utilities keep building up regularly on account of the fundamental mismatch in their revenues and costs. Every time the Government of India stepped in to relieve the stress as the other end of the stress was in some central government entities. In 1998, it was the input suppliers like Coal India, Neyveli Lignite, Domodar Valley etc. (these were paid through by deducting from States’ Normal Plan Assistance). In 2002-03, it was Securitisation of the dues owned to power suppliers like NTPC, by issuance of bonds by these entities subscribed by the State Governments further backed by some tightening of the due payments in the form of letters of credit and payment security mechanism enforced by RBI by deducting from the State Government accounts. By 2011-12, the stress shifted to the Banks as they had kept lending to these bankrupt utilities on the strength of state government’s guarantees. This was relieved partly for some states by instituting the scheme of 50% of the Bank dues being taken over by the State Governments by issuing their bonds to the Banks. Finally, the remaining large uncovered stress of the Banking sector was sought to be relieved by the Government of India by bringing the UDAY Scheme. The Scheme provided for about 75% of the power utilities dues towards Banks being taken over by the State Governments by issuing their bonds to the Banks. For this, FRBM ceilings had to be relaxed for the States.

There is again stress building up in the power sector as the State Governments, which are supposed to backstop the losses of utilities and pay them cash for running their businesses, are not providing support. The power utilities have again started delaying payments to generators and inputs suppliers. This will get accentuated in the days to come.

Final Reform

Distribution comprises two businesses. First is the power distribution infrastructure of transformers, wire lines, metering and physical infrastructure. Second is the supply of electricity, sourcing it from generators, to the consumers. Transmission business, also comprising physical infrastructure of transmission lines and transformers etc. has been segregated as a separate business from the Generators (Powergrid is the principal transmission business in India. It was earlier part of NTPC, the generator). Likewise, the physical distribution business of the distribution utilities need to be separated from supply business and broken down in manageable regional/ district/ city businesses. The supply business needs to be privatised, with state utilities, becoming a licensee in each of the supply area. The Government can run subsidised business through such state utilities, including for agriculture consumers, if the Government so like.

Distribution business, so unbundled and re-organised, will bring considerable efficiencies and prevent electricity theft. There is enough evidence to believe this outcome. Delhi distribution privatisation has brought losses down from as high as 60% to around 10% now, bringing so much of revenue in the system from what leaked earlier.

The Government would also be able to target its subsidies and support better. The Government would also have the option to move over to Direct Benefit Transfers to the consumers it intends to support. For example, agriculture consumers can either be supplied subsidised power through the state distribution licensee or the farmers can be provided DBT transfers, like in case of LPG subsidy, and left free to buy their electricity needs from whichever source they consider most efficient and convenient for them.

The Government would be well advised to bring a new power sector reform programme asking the states to privatise their distribution and supply business. This is necessary for the States to be freed of this moral hazard of keeping power sector rates low for agriculture and residential consumers and price it very high for the industrial and commercial consumers.

The States will require substantial incentivisation for cutting this umbilical cord. The Government of India can agree to capitalise 25%-50% of the losses of the state utilities which privatise the power sector distribution and supply entities. This may require an outlay of about Rs. 2 lakh crore but that would be one time. If accompanied by stoppage of all the investment support programme this expenditure on part of the Central Government can be recovered in 5 years.

CENTRALLY SPONSORED SCHEMES

As explained my note last week, the CSSs (separately listed at Statement 4a, Expenditure Profile) are a bunch of schemes designed for redistribution, economic growth, investing in social infrastructure and improvement in human capital. The subjects where the Central Government intervenes through these schemes are in the domain of the States as per Constitutional Scheme of distribution of power. However, using authority given under Article 282 of the Constitution, by providing grants for undertaking the expenditures so desired by the Central Government, the States are persuaded/nudged to take up these CSS, including by providing the counterpart funding.

The CSSs are designed to serve different objectives. Two major schemes (classified as Core of the Core Schemes) National Social assistance Programme (NSAP) and Mahatma Gandhi National Rural Employment Guarantee Programme (MGNREGA) are essentially pure redistribution schemes. NSAP (outlay Rs. 9200 crore) reaches out to old, physically handicapped, widows and other sections of society who are not in a position to earn enough to keep the body and soul together. MGNREGA (outlay Rs. 60000 crore) provides a minimum wage insurance to manual and unskilled workers unable to find remunerative work in the labour market.

Four schemes in agriculture and allied area are designed to be growth-oriented schemes- Green Revolution (outlay Rs. 12561 crore), White Revolution (outlay Rs. 2240 crore), Blue Revolution (outlay Rs. 560 crore) and Pradhan Mantri Krishi Sinchai Yojna (PMKSY) (outlay Rs. 9682 crore). Together, these four schemes are budgeted to transfer a little over Rs. 25000 crore to the States for undertaking interventions for boosting agriculture growth. There are several other schematic interventions, which the Central Government makes in agriculture and allied areas, which I will discuss later.

Major infrastructure intervention under CSS umbrella are being made through four schemes of Pradhan Mantri Gram Sadak Yojna (PMGSY) (outlay Rs. 19000 crore), Urban Rejuvenation Mission: AMRUT and Smart Cities (outlay Rs. 13750 crore), Modernisation of Police Forces (outlay Rs. 3462 crore) and Shyama Prasad Mukherjee Rurban Mission (outlay Rs. 800 crore).

Rest of the schemes in the CSS stable are largely aimed at improving human capital and quality of life. Amongst the major CSS schemes in this category are Swachh Bharat Mission (outlay Rs. 12644 crore), National Health Mission (outlay Rs. 33651 crore), National Education Mission (outlay Rs. 38547 crore), Mid-Day Meals in Schools (outlay Rs. 11000 crore), Integrated Child Development Scheme or Umbrella ICDS (outlay Rs. 27584 crore), National Livelihood Mission- Ajeevika (outlay Rs. 9774 crore) and Jobs and Skills Development (outlay Rs. 7260 crore).

Most of the 30 CSS listed in the Union Budget Expenditure Profile have several more sub-schemes, operating as distinct schemes in practice. There are in all about 150-200 distinct schemes operating under 30 CSS. Rationalisation of CSS has been a subject of interest, debate and conflict for many decades now.

14^th Finance Commission had envisaged that the Central Government would reduce the plethora of CSSs after a much larger share of central taxes (42%) was recommended to be transferred as untied devolution to the States. However, the temptation of the Central Government to keep interfering in the subjects allocated to the States is so large that this did not happen. After some downsizing of CSS in 2015-16 and raising of the share of States counter-part funding, the CSSs have come back in full force as the preferred mode of development intervention by the Centre. The actual expenditure under CSS was 2.85 lakh crore in 2017-18, which has gone up to Rs. 3.05 lakh crore in RE 2018-19 and to Rs. 3.32 lakh crore in 2019-20.

The agriculture sector schemes have been discussed in the second section of this Note. For the reasons mentioned there, these four schemes need to be replaced by income transfer schemes.

The set of schemes which are designed to provide social security have become quite complex. Most states have their own scale of payments and most states scale of payments are much higher than the central government. The selection and eligibility criterion also differ a lot causing considerable confusion. The Central Government also runs a lot of social security schemes as Central Sector Schemes.

The only segment of society which needs to be helped by the State on social consideration are the people who cannot earn their livelihood on account of any reason- being physically and mentally handicapped, being too old and being socially dependent (widows, orphaned children and the like). It would be really helpful if the Government were to have a census of all these people who cannot earn their livelihood by their labour. The Government of India can come up with one single social security programme to provide an appropriate level of assistance by cash transfer to their account. This will bring enormous simplicity in the Government’s expenditure programme and would deliver appropriate level of assistance right in the hands of needy people avoiding leakages, wastages and delays.

Like social security, there is lot of duplicity in centrally sponsored schemes and central sector schemes in health, education and other human capital interventions. It would raise the productivity and results of the schemes if the Government were to consolidate and focus on key interventions in these areas rather than dissipating energy in so many small interventions.

DEBT REDUCTION TO REDUCE INTEREST EXPENDITURE

In 2017-18, interest payment at Rs. 528900 crore out of total budgetary expenditure of the Government at Rs. 2141973 crore was at 24.6% of total expenditure. This has seen minor decline in the year 2018-19 as per the provisional numbers released. In this year, net interest payments amounted to Rs. 582675 crore out of total expenditure of Rs. 2311422 crore exceeding 25% of total expenditure at 25.21%.

Expenditure on interest payments is the largest head of payment and a little less than 25% of total expenditure of the Government of India. About 1/4^th of all the resources which the Government of India raises every year, tax, non-tax and debt all taken together, goes only to service interest on the debt and liabilities undertaken by the Government of India in previous years. This is an extra-ordinary large pre-emption of resources.

Something needs to be done to control interest expenditure. There is only one way. If a way can be found to sharply reduce the stock of debt and liabilities, the interest outgo can be contained.

The Government of India has investments in non-financial companies, financial companies and it owns lot of land. Market capitalisation of listed CPSEs exceed Rs. 10 lakh crore. There is large market capitalisation in financial entities like LIC and SBI, which alone may probably be worth 10 lakh crore. Indian Government and CPSEs hold large chunk of land and buildings, which are also not less than Rs. 10 lakh crore worth.

It is impossible to sell these assets and possibly not very desirable also.However, there is one very good way to monetise these and also improve their profitability.

The Government can create three sovereign wealth funds- one for non-financial companies, another for the financial companies and the third one for land holding and buildings owned/held by the Government.

If the value in these three sets of assets is around Rs. 30 lakh crore, the Government can create the sovereign wealth companies at 20% equity and 80% debt structure. These three sovereign wealth companies, when transferred all the shares and assets held can raise debt equivalent to 80% to pay the Government close to Rs. 24 lakh crore for retiring the Government debt. This will bring down the interest cost by close to 1/3^rd of today’s cost, a savings of more than Rs. 2 lakh crore. The Government would also continue to hold 100% equity of the three sovereign wealth funds.

These three fund companies should be handed over to professionals to manage, like what happens in GIC or Tamasek of the Government of Singapore. The professional managers can be given simple objective to deliver. They must manage the assets so as to deliver a 10% rate of return over the equity holdings of the Government. This would assure the Government a steady income of Rs. 50000-60000 crore a year, which is more than what the Government gets by way of dividends today. Over the years, the Government can further monetise by selling stakes in the sovereign wealth funds.

OTHER EXPENDITURE REFORMS

For other expenditure reforms we need to look closely at the Central Sector Schemes, which has total expenditure budget of Rs. 8.71 lakh crore.  

This includes entire subsidies budget of Rs. 3.39 lakh crore and bulk of capital expenditure of Rs. 3.02 lakh crore. Remaining expenditure budget of Rs. 2.3 lakh crore constitute the major part of the rest of discretionary expenditure. Additionally, an expenditure of Rs. 1.27 lakh crore (Rs. 3.57 lakh crore minus Rs. 2.3 lakh crore), under the Other Central Expenditure and Other Transfers also constitute some kind of discretionary expenditure of the Central Government.

There are some possibilities of expenditure reforms in this group of expenditure.

First, the Government can reform the petroleum subsidy programme. The LPG subsidy (provision Rs. 29,500 crore) and kerosene subsidy can and should be eliminated over a three-year period.

Second, the Government would be well advised not to go for providing equity and other support to the BSNL and MTNL for taking 4G spectrum and incur expenditure on network creation. A lower cost option might be for the BSNL to buy-out Vodafone-Idea, which can probably provide 4G network and lot of customers without any cost to the BSNL and the Government.

Third, most of the expenditures under Central Sector Schemes are quite small. There are 235 line item schemes in the Central Sector Schemes where allocation for 2019-20 is less than Rs. 50 crore. An impact analysis of these schemes can lead to elimination of quite a few of them.

CONCLUSION

Central Government expenditure at Rs. 31 lakh crore is quite large. Expenditure reforms have not been looked at in our country from a strategic perspective. Most of the expenditure programme, especially in agriculture and allied sector, are funding needs of 40-50 years earlier making no real contribution to growth today. Too much public sector and very high levels of equity infusion in such enterprises even now when there is no need for producing these private goods in the public sector today claim large resources of the Government.

Serious expenditure reforms are called for.

The reforms proposed in this Note:

First, on net basis, the Government of India made about 70% more investment in the equity of public sector enterprises (including departmental undertakings) than total disinvestment receipts in 2017-18 (Rs. 1,69,290 crore investment as compared to 1,00,045 crore of disinvestment receipts). In 2018-19, the scale of investment at Rs. 2,13,530 crore was nearly three times the scale of disinvestment of Rs. 85000 crore. The picture in 2019-20 is not going to be any different.

India should not be making so large investment in the public enterprises producing essentially private goods, which the private sector can produce more efficiently. The quality of these equity investment is quite suspect. Bulk of the Government equity investment in last three years (including the current one) is in three sectors- public sector banks, railways and road construction. There is no return on capital invested in these sectors for the Government.

The Government should stop completely making any equity investment from the budget in the public enterprises. The Government may end up saving Rs. 2 lakh crore on an average a year, which is about 1% of GDP and about 7% of the entire Government of India budget.

Second, Central Government’s budgetary allocations in agriculture and allied fields adds up to over Rs. 4.6 lakh crore in the year 2019-20. The Government runs in excess of 100 programme spread over several Ministries and Departments. This scale of expenditure amounts to about 16.5% of total central government budget for 2019-20. If we exclude expenditure on interest, establishment and mandatory transfers of the Finance Commission, the expenditure commitments of Rs. 4.6 lakh crore makes up almost 33% of total discretionary budget of the Government of India.

Entire gross value addition (or GVA) taking place in agriculture is Rs. 30.47 lakh crore at current prices. The Government of India spends over a whopping 15% of the agriculture GVA on agriculture related programme.  

Production and productivity programmes supported by free or cheap inputs need to be discontinued. Farmers can be supported with direct income support, flexibility of land leasing and commercialisation of agriculture. Agriculture needs to be developed as a business.

Two important legislative reforms- giving permission to the States adopt or amend their land laws on the lines of Model Land Lease Law and abolishing the Essential Commodities Act to eliminate all controls over storage and distribution of agriculture commodities are very much called for.

All the traditional production and productivity enhancement programme of the Ministry of Agriculture and Ministry of Fisheries and Animal Husbandry (Green Revolution, White Revolution and Blue Revolution) should be phased out completely over next three years. The Government can, for some transitory period, replace the present level of public expenditure on these production and productivity programme by investment in land improvement, farm mechanisation (most with farm equipment hiring) and promoting hiring of agriculture services (on Uber/ Urban Clap model). 

All agriculture input subsidies (seeds, fertiliser, power and loans) should be progressively phased out in next three years by providing compensating direct cash support to the farmers. During the phase-out period, the system should switch over to a genuine Direct Benefit Transfer (DBT) system to provide fertilizer purchase support to farmers based on their acreage.

Minimum Support Prices (MSP) programme have lost their relevance in the day and age of surplus production. Farmers need to get right market signals to assess the demand for different agriculture produce. The government expenditure under MSP programme should be replaced by a direct cash transfer system for ensuring ‘income’ to farmers. FCI and other Government agencies to undertake procurement of the food grains required for social security and nutrition programme and also for necessary buffers from the market at prevailing prices. It would be preferable if the Government were to tie it up in future markets before the onset of cropping seasons as this would provide right signals to the farmers.

The PM-Kisan programme should be withdrawn now as the situation of agriculture distress has eased out now. It can be re-introduced whenever there is pressure on rural incomes.

Third, Central Government’s expenditure on power sector development programme is estimated around Rs. 40000 crore a year (including Government’s off-budget expenditure largely in the form of Fully Serviced Bonds). There are lot of contingent liabilities and stresses in addition.

The Government would be well advised to bring a new power sector reform programme incentivising the states to privatise their distribution and supply business. The States will require substantial incentivisation for cutting this umbilical cord. The Government of India can agree to capitalise 25%-50% of the losses of the state utilities which privatise the power sector distribution and supply entities. This may require an outlay of about Rs. 2 lakh crore but that would be one time. If accompanied by stoppage of all the investment support programme this expenditure on part of the Central Government can be recovered in 5 years.

Fourth, Reform the Centrally Sponsored Schemes.

Fifth, Government of India has investments in non-financial companies, financial companies and it owns lot of land with total valuation exceeding Rs. 30 lakh crore. The Government can create three sovereign wealth funds- one for non-financial companies, another for the financial companies and the third one for land holding and buildings owned/held by the Government.

The Government can create the sovereign wealth companies with 20% equity and 80% debt structure. These three sovereign wealth companies, when transferred all the shares and landed assets held can raise debt equivalent to 80% to pay the Government close to Rs. 24 lakh crore for retiring the Government debt. This will bring down the interest cost by close to 

1/3^rd of today’s cost, a savings of more than Rs. 2 lakh crore. The Government would continue to hold 100% equity of the three sovereign wealth funds.

These three fund companies should be handed over to professionals to manage. They must manage the assets so as to deliver a 10% rate of return on the equity holdings of the Government. This would assure the Government a steady income of Rs. 50000-60000 crore a year, which is more than what the Government gets by way of dividends today. Over the years, the Government can further monetise by selling stakes in the sovereign wealth funds.

Sixth, a close scrutiny of over 700 programmes run as Central Sector Schemes, over 200 programmes run as Centrally Sponsored Schemes and another over 100 programmes run as Other Central Expenditure and Other Transfers would lead to rationalisation, consolidation and closure of several of these programmes. There are also clear pickings like phasing out LPG subsidy, not investing in bailing out BSNL and so on which can be undertaken.

Subhash Chandra Garg

January 31, 2020 New Delhi