Budget 2020-21 Is Falling Apart- Part II- Expenditure Reforms

COVID-19 Unravelling Union Budget 2020-21- Part II

REFORMING EXPENDITURES

Expenditure Cuts of April 8 Order Unlikely to Materialise

Central government’s budgeted expenditure for 2020-21 is Rs. 30.42 lakh crores- about 15% of India’s pre-COVID-19 estimated GDP for 2020-21 of Rs. 210 lakh crores. Rs. 3.11 lakh crores of public expenditure in 2020-21 is off-budget. central government’s total estimated public expenditure for 2020-21 is of the order of Rs. 33.53 lakh crores or about 16.5% of GDP.

April 8 Order exempts 17 demands under Category A from any cut. It subjects expenditures of category B ministries and departments to 20% and of category C ministries to 15% of their annual budget. The central government incurs about 30% of annual budget in the first quarter since 2017 when the budget started getting presented on 1^st Feb.

At 30% run-rate the expenditure in the first quarter would be Rs. 9.25 lakh crore. If category B and C ministries and departments were to limit their expenditures to 20% and 15% respectively, total expenditure in the first quarter would be Rs. 7.35 lakh crore. This should lead to potential savings of Rs. 1.90 lakh crore.

This, however, is unlikely to happen for several reasons which were explained in the Part I.

Besides being straight-jacketed and inflexible, present structure and objects of central government expenditure, in a very large measure, reflect the biases, priorities and mindset of 1950s to 1980s. India has changed quite a lot especially after reforms undertaken after 1991. However, objectives, priorities and schemes of central government expenditure reflect the mindset of the socialistic and planned development era.

Basic reforms of central government expenditures are called for to make central government expenditures productive and effective and to yield good value for such large amounts of money spent.  

In this Part II, I discuss possible proposals to reform the expenditures.

Central Government Expenditures Reflect Biases, Priorities and Structure of Planned Era

The Constitution of India speaks of division of central government expenditure in two broad categories of revenue expenditure and capital expenditure. It also has a small set of expenditures classified as charged expenditure on which the Parliament has no right to vote to recognise the obligatory nature of such expenditures.

The Constitution gives complete latitude to the government to plan expenditures according to its priorities and present these as grants for grants for approval. In practice, Indian Parliament has never disagreed with the expenditure proposals presented by the Government.

The raison d’etre of the government is to deliver public goods and services. 

Deeply influenced by the soviet model of planned development and control of means of production in the public sector, the government in the 1950s decided to classify expenditures in two principle categories of ‘developmental expenditure’ and ‘non-development expenditures’. Development expenditure was given priority and consequentially ever-increasing allocations. Non-developmental expenditure was muzzled.

It was decided that the principal sovereign functions like defence, police, jails, administration of justice, district administration etc. were non-developmental. These services and expenditures were clubbed under ‘general services’ for planning and accounting purposes.

It was also decided that expenditures of social and economic nature, without distinction of, whether such expenditures constituted public goods and services or not, were of developmental nature.

Provision of health, education, development of scheduled castes and tribes and other backward classes etc. were categorised development expenditures. Expenditure on establishment of steel mills, power plants, nationalisation of private industries, expansion of financial services etc. were also classified as ‘developmental’.

Curiously, new developmental expenditure only was recognised as plan expenditure. This required development expenditure incurred in the previous plan period to be shifted to non-plan.  

The government accorded the highest priority to plan expenditure. Development expenditure of previous plan came in second priority. The non-development expenditure, which was actually core sovereign function, was relegated to the last priority.

Distinction between plan and non-plan was thankfully abolished in 2017. However, the schematic expenditures of the central government even today mimic the plan schemes quite substantially. Only a few schemes focussed on sovereign or other public goods functions of the government see the light of the day even now.

What is the Role and Function of Central Government?

To reform government current structure of expenditures, it is necessary to look at what is the real function and role of central government.

In my understanding, there are two primary functions of the central government.

One, provision of public goods and services.

Defence, internal security, environmental well-being like control of pollution, law and justice, macro-economic stability, regulation of markets, currency and the like are some of these public goods and services. Some functions like provision of primary education and primary health, which have positive and negative spill-overs or externalities are also such public goods and services.

The central government, under the social contract with the people and under the constitutional scheme of things, is duty bound to deliver such services for the areas assigned to it under the Constitution.

Two, redistribution.

The poor have to be provided resources to meet their minimum needs. The rich have to be taxed to provide resources for transferring to poor people and to reduce inequality in the society.

There are three groups of poor who need support from government.

First, the destitute or the poorest of the poor.

The destitute are the people who cannot work and earn their living i.e. the old, infirm, handicapped and the like. These people need both financial (cash transfers/ pensions) and non-financial (health, housing, access to roads etc.) support.

Second, the economically poor.

These persons can and do earn but not enough for leading a healthy and productive life. Such people need two kinds of support. First, support for meeting basic necessities of life like electricity, gas, toilets, house etc. to build productive lives. Second, skills and financial support for undertaking economic activities to enhance their incomes.

Third, the vulnerable non-poor.

These people ordinarily earn adequate income to lead a healthy and productive life but in natural or man-made catastrophes fall back in poverty. They need support for meeting such adversities, like the present emergent situation caused by COVID-19.

What are not functions and responsibilities of central government?

There are two broad types of expenditures which are the central government might now undertake. Besides such allocations reflecting misallocation of scarce resources, the central government is not the best agency to deliver services which such expenditures seek to provide.

One, provision of private goods and services.

Post 1991 reforms have created an economy in which most of what are called ‘private goods’ are provided by the private sector. There are numerous such services like air transport, hotels, travel services, bus services, telecom, power, steel, engineering goods etc. which the private businesses can provide and is providing more efficiently and at lesser capital cost and price.

The government still spends lot of budgetary resources, for subsidising or covering the losses of public enterprises provide such services. For example, providing budgetary resources to cover the losses of telephone services (MTNL & BSNL), transport services (Air India & Railways), constructing and maintaining roads (NHAI), or what several other ‘public enterprises’ are delivering today is not the right use of scarce budgetary resources.

Second, excessive borrowings and post-retirement benefits.

Such borrowings have led to unsustainable burden of interest. Likewise, liberal and excessive post-retirement benefits cost a lot. These expenditures do not benefit the public at all in the present.

Classifying 2020-21 expenditures in these four meaningful categories

Before proposing any reforms, it is necessary to quantify what the current expenditures are on the four classes of expenditures described in the previous section. I have reclassified Rs. 30.42 lakh crore of budgetary expenditure and Rs. 33.53 lakh crore of total public expenditures (including 3.11 lakh crore of off-budget expenditures).

This has been done primarily going by the primary nature of function discharged by the expenditure covered under each of 100 grants. Wherever there is material expenditure of more than one type of expenditure in a single grant, I have split that expenditure into respective functions.

For example, the budgeted expenditures under the demand no. 1, which covers the expenditures of Department of Agriculture, Cooperation and Farmers Welfare, are primarily of the private goods nature supporting growth of production and productivity of farm crops. However, it includes redistribution schemes like PM KISAN with a substantial allocation of Rs. 75000 crores out of total allocation of 1.34 lakh crore. Likewise, the demand no. 29, which covers the expenditure of Department of Financial Services, also has some redistribution expenditures.

a. Expenditure on ‘public goods and services’

Central government budget allocates Rs. 6.88 lakh crores (23%) of expenditure for delivering public goods and services. Not much of such expenditures is off-budget. Including, off-budget, public goods and services expenditure amount to Rs. 6.96 lakh crore. These outlays are spread over about 60 demands out of 100 demands.

The largest allocation of expenditure of Rs. 2.09 lakh crores for providing public goods and services is in demand no. 19 Defence Services- Revenue essentially to cover salaries and other establishment expenditure of armed forces.  Demand no. 20 Capital Outlay on Defence also has substantial allocation of Rs. 1.33 lakh crores and is the public goods variety. The demand no. 48 Police has allocation of Rs. 1.05 lakh crores.  

Ministry of Health’s allocation of Rs. 65000 crores also meet this criterion as the spill over benefits of such health expenditures serve larger public good.

c. Redistribution expenditure

The central government implements its redistribution function through hundreds of schemes delivering benefits in cash (direct cash transfer or wages) or in kind (education, skill development and so on) to the households falling into two categories of destitute and poor.

A careful analysis of all the 100 demands reveal that 2020-21 budget allocates expenditures of Rs. 5.33 lakh crores to serve the redistribution objective. Lot of redistribution expenses, like food subsidy to NSSF, has been shifted to off-budget. Including off-budget redistribution expenditure of Rs. 1.13 lakh crore, total allocation for redistribution purposes is Rs. 6.46 lakh crore.

Three demands with the largest redistribution allocations are demand no 15- Food and Public distribution (Rs.1.22 lakh crores), demand no. 85 Rural Development (Rs. 1.2 lakh crores) and demand no. 1 Agriculture (Rs. .77 lakh crores).  

Other significant demands include demand no 100 Women and Children Development (Rs. .30 lakh crores), demand no. 75 Petroleum and Natural Gas (Rs. .37 lakh crores- basically LPG subsidy) and demand no. 59 School education (Rs. .59 lakh crores).

d. Expenditure on providing private goods and services

Budgetary allocation for 2020-21 for what essentially amounts to private goods and services exceeds total redistribution expenditure budget marginally.

Rs. 5.49 lakh crores have been allocated for such purposes. The largest amount of off-budget expenditure at Rs. 1.90 lakh crore also belongs to this category, making total public expenditure on provision of private goods and services at Rs. 7.39 lakh crore.

Largest allocations are for transportation sector under demand no. 84 Roads and Highways (Rs. .92 lakh crores) and demand no. 83 Railways (Rs.  .72 lakh crores) and demand no. Housing and Urban affairs (Rs. .25 lakh crores- essentially for metros).

There are also significant allocations under the demand no. 6 Fertilisers (Rs. .71 Lakh crores), demand no. 13 Telecommunications (Rs. .66 Lakh crores) and demand no. Higher Education 59 (Rs. .40 Lakh crores).

a. Expenditure serving no purpose in the present

Of Rs. 30.42 lakh crores of expenditure budget 2020-21, as much as Rs. 9.03 lakh crores (30%) does not serve any purpose in the present. There are no off-budget expenditure of this type.

This includes provision for interest payments (7.08 lakh crores) and pensions (defence pension Rs. 1.34 lakh crores and civilian pension Rs. .61 lakh crores).

In addition, there is provision for mandated transfer of 3.69 lakh crores to states (finance commission grants, GST compensation, special grant to J&K and the like). 

These expenditures are not carried out by the central government. 

Thus, as much as Rs. 12.73 lakh crores (42%) of the central budget for FY 2020-21 is not going to be spent on providing any public service or redistribution service or even a private service by the central government.

Reforming Basic Framework of Expenditures

There are five basic reforms required in our expenditure framework.

First, downsize budget allocations for private goods and services. This would require closure of loss-making and shuttered public enterprises and stoppage of budgetary provision of capital and loss-coverage support.

Second, numerous programmes and schemes run to provide inputs to agriculture and animal husbandry and cheaper credit to MSMEs and private enterprises need to be reformed for better competitiveness of our agriculture and industry.

Third, reform the redistribution progamme. This would require major overhaul of hundreds of redistribution programme into three basic schemes to support destitute, economically poor and vulnerable poor.

Fourth, refocussing and expanding the public goods expenditure.

Fifth, careful management of debt and grant of post-retirement benefits.

Roll back public sector and stop funding from budgets

India’s public expenditure objectives, structure and mode of implementation is steeped into socialistic era. In this period of about 40 years (1947-1990) lasting until serious industrial, financial and trade reforms were initiated in 1990s, the central government made lot of investments from budget in public sector enterprises to produce heavy machinery, basic goods, electricity etc. Public resources were also spent on nationalising a number of consumer industries and services like textiles, airlines, insurance, banking and so on.

The central government stopped making fresh investments and new nationalisations after 1990. However, several of these public sector industries and financial institutions undertake expansions or have become loss-making requiring constant provision of capital and survival support. The central government budget bears a heavy burden of such recapitalisation and loans and grants to pay salaries and maintenance cost.

Such expenditures on sustaining an unsustainable public sector can and must be stopped.

There were 70 lossmaking public sector enterprises which incurred aggregate losses of over Rs. 31000 in 2018-19. There were also more than 15 closed public sector enterprises. Most of these loss-making and closed enterprises are in heavy industry and consumer goods.

Every year the government has to come up with budgetary support packages, usually dubbed revival packages, to keep some of the public enterprises afloat, to pay salaries to the persons employed there or to give the voluntary retirement package. Sometimes, lot of capital is thrown for undertaking modernisation, expansion and adoption of new technology. Last year, the government decided to spend over Rs. 70000 crores for ‘revival’ of BSNL and MTNL. Much of this cost is budgeted in 2020-21.

There are financial sector enterprises in which the government is forced to pump capital year after year. In last three years, the government has pumped in over Rs. 2.5 lakh crore as capital in the public sector banks. In the year 2020-21, the government has budgeted considerable sums of money for providing solvency capital to insurance companies and growth capital to the IIFCL.

The government should stop making further capital contribution in these enterprises. All the equity investment of the government in profit making financial and non-financial public sector enterprises can be transferred to a sovereign assets management company. The sovereign assets management company can take appropriate call to capitalise further, sell-off or disinvest further minority stake in each of these companies purely on professional considerations. The government can get capital receipts against the disinvestment proceeds of today by selling stakes in the sovereign asset management company.

The loss-making enterprises need to be wound up with the land and buildings transferred to a sovereign land management agency. This agency can monetise the land and buildings in the best possible manner using all the available mechanism, as best befits a particular land parcel and building- outright sale, REIT, lease etc.

These reforms can save the government expenditures of Rs. 2-3 lakh crore a year easily without causing any welfare loss.

Reforming Models of Assistance to Agriculture and Small Industry

There is a very intrusive model of scheme development in several areas like agriculture, MSMEs etc. which are essentially private sector activities.

There are 33 schemes listed in the budget of Department of Agriculture, Cooperation and Farmers Welfare (other than PM KISAN and ANNADATA schemes which are direct benefit delivery schemes) to deliver all kinds of agriculture inputs, extension services, interest subvention, insurance cover, mechanisation support, water management and what not costing in all a little over Rs. 57,000 crores. Two dozen schemes have outlays of less than Rs. 1000 crore. The way these schemes are implemented in field, some farmers get some support but all the rest have to live with unmodernised farms, distorted input prices and rationed out supplies.

Indian agriculture and MSMEs would be much better served and develop into genuine businesses if such intrusive multiple programme but thinly delivered support were to be stopped and the savings made transferred to farmers as direct cash benefits.

Indian agriculture and MSMEs will get massively transformed and become competitive globally.

The expenditure allocations for such schemes exceed Rs. 2 lakh crores. Most of these schemes can be converted into direct cash grant support to the concerned class. The allocations meant for agriculture input schemes can be delivered as direct cash transfer to the farmers with decontrol of input prices. This will not only improve choices of farmers but would also make agriculture input markets competitive.

These reforms should be aimed at improving competitiveness of industry and agriculture and not at saving any budgetary allocation.

Reforming Redistribution Framework

Redistribution is a legitimate function of the government. However, the mode of delivering redistribution is still the schematic and micro-managed indirect delivery of services. There are hundreds of central government schemes to deliver redistribution in India.

There are numerous wage employment schemes. There are multiple skills acquisition financing schemes. There are several small capital/ grant support schemes for poor people to undertake livelihood enterprises. There are schemes for delivering education. There are numerous scholarship and funding support schemes. There are also cash transfer schemes aimed at specific groups. There are retirement savings support schemes. There are subsidisation schemes for specific products and services. You name anything and there would be a central government scheme to address that.

All these schemes, after going through so many pipes of bureaucratic organisations, ultimately reach (minus the amount lost in the leaks) the same poor households. A poor household may get 5, 10, 15 or 20 kinds of ‘benefits’ over a period of time, but such supplied benefits don’t respect his judgement. He is supplied benefits. Rarely does he have a say in determining what ‘benefit’ he wants. He is a recipient, not a demander.

A few schemes have been started by the central government to deliver direct benefit or cash to the ‘beneficiary’. Multiple ministries and departments implement such direct benefit schemes. The government still does not focus on a household and deliver a package of direct benefits suiting needs and aspiration of individual households.

This redistribution mechanism needs to be transformed.

For this, as proposed above, identify and categorise the economically poor households of India in three groups- destitute (who cannot earn a living), poor (who has deficiency between their objectively determined standard needs and the income they earn) and vulnerable (who are economically fine normally but tend to fall back in poverty during times of health emergency or natural/ manmade disasters).

The redistribution package for each of these three groups can and should be restructured.

The destitute can be provided only cash income support directly delivered.

The poor can be served by providing most of cash support and a few in kind products (largely delivered through vouchers).

Contingency support programmes for the vulnerable groups should kick in only during emergencies and disasters.

It is not very difficult to identify about 20 crores of destitute, poor and vulnerable households of India. Economic and Caste Census did a lot of ground work for this. A little refined methodology can deliver these households list. It will save so much of waste, delay and leakage which the present muddled and miscarried system entails.

Reforming redistribution- non-cash benefits

Economic cost of wheat purchased, stored and distributed by FCI for 2010-20 is Rs. 26.8 per kilo. MSP for wheat for the year was Rs. 18.40 per kg. Average price in most mandis were around Rs.19-20 per kg. Actual prices received by farmers (net of transportation etc.) would be around Rs. 15-16.

Wheat produced in villages comes back to villages through public distribution shops after doing the round of mandi and storage. Many Indians who don’t prefer wheat as a cereal crop ends up getting wheat.

Poor and non-poor households get wheat at hugely subsidised price of Rs. 2. For 35 kg of wheat the household gets, at economic cost of FCI, they receive a benefit of about Rs. 875 per month. At actual market prices, it is around Rs. 450 per month or about Rs. 5400 a year.

The country ends up footing the food subsidy bill of about Rs. 2 lakh crore a year or about Rs. 10000 per household (there are about 20 crore households receiving subsidised grain). About 50% is wasted. Only about 50% of this subsidy reaches the poor households.

Transformation of the system by providing a food coupon of Rs. 5000 per household, restricted to only destitute and poor households (estimated to be about 10 crore- 40% of the households) will bring down the food subsidy bill to Rs. 50000 crores.

Rs. 1.5 lakh crore can be saved by the government and poor households would also be happy being endowed with the choice of food.

There are several programmes where the central government delivers service to poor households at government cost. School education has a budget of Rs. 60000 crores (state governments spend another Rs. 3 lakh crores a year). Higher education has another Rs. 40000 crore budgeted expenditure. Skills department has budget of Rs. 3000 crores. There are several other demands which provide budget to meet the expenses of indirect delivery of a service to people.

A comprehensive exercise is needed for service by service examination of budget provision, service delivered, right mode of delivering the benefit- in kind or in cash or by voucher. Broad estimates would suggest that most of the benefits delivered by the central government can be restructured- some phased over a long period- for efficient delivery.

There are quite a few subsidy schemes like LPG subsidy to non-poor which have no real reason to exist. Such subsidies can be limited only for the destitute and economically poor.

It is also quite reasonable to expect that the government can save over Rs. 50,000 crores of expenditure from non-food sector as well in the short time as well.

The redistribution reforms can yield annual savings of about Rs. 2 lakh crores without causing any welfare loss.

Reforming redistribution- cash benefit schemes

Another reform in redistribution services is to think of delivering cash benefits from the household perspective and not from the departmental perspective. All the cash benefits delivered today- PM KISAN, payments to labour, scholarships and so on- can be pooled together in one three specific pools of funds- one for the destitute, another for economically poor and the third for the economically vulnerable. Depending upon a conditionality framework (health status, no of children, type of house lived in and so on), appropriate level of a single cash transfer can be made to each of the concerned household per month.

This reform can be made much faster. It will serve the poor households much better. It will also save a lot of money, not less than Rs. 50000 crore a year.

Augmenting Allocations for Public Goods and Services

Most of the ministries and departments concerned with providing public goods and services have relatively smaller allocations. This reflects old mindset of giving priority to ‘development expenditure’ and squeezing the sovereign and public goods functions earlier consigned to the dustbin of so-called ‘non-plan’ category. It is quite common to see these departments complaining that they don’t get enough funds.

Inadequacy of these expenditure allocations get exposed during some high- profile events like adequate defence equipment during war, inadequacy of national disaster response teams during disasters and inadequately equipped health infrastructure during Covid-19 crisis. It is also not very unusual to see overloaded hospitals, hugely deficient pollution control apparatus or over-crowded courts.

There is a case to improve productivity of some of public expenditure, but in general, the gross inadequacy of allocations for these services has to be made up for better governance and public welfare.

Reforming Debt and Pensions Payments

Massive allocation for paying interest on debt is the result of very high public debt in India. The debt problem can be resolved only over a fairly long period of time.

First, one has to begin with containing fiscal deficits in normal times. Abnormal times like the present crisis in the wake of COVID-19 do not allow containment of fiscal deficits. But, our tendencies to run large fiscal deficits in normal times is required to be curbed.

Second, a good amount of debt can be pre-paid by selling off the assets, including monetisation of land and buildings.

Pension reforms on civilian side have been undertaken with the introduction of new pension scheme in 2004. There is still lot of places where these reforms need to be brought in.

CONCLUSION

Reform of expenditures has to be based on reforming the role and function of the government.

Reclassification of budget expenditure of Rs. 30.42 crores and total public expenditure of Rs. 33.53 lakh crore (including 3.11 lakh crore of off-budget expenditure) reveals that as much as Rs. 12.73 lakh crore (42%) is allocated only for payment of interest and pensions. Expenditure allocation, inclusive of off-budget, for public goods and services is Rs. 6.96 lakh crores and for redistribution Rs. 6.36 lakh crores. The budgeted expenditure on provision of private goods and services is Rs. 5.49 lakh crore. Inclusive of off-budget allocation of Rs. 1.90 lakh crore, total allocation is Rs. 7.39 lakh crore.

The government should primarily concern itself with delivery two major functions- delivery of public goods and services and redistribution of income in favour of poor. The government expenditure on delivery of private goods and services has to be curtailed and made efficient to deliver better growth. The government also needs to manage its debt and pension liabilities better to contain expenditures which deliver no benefit in the present.

There are five basic reforms required in our expenditure framework.

First, downsizing of budget allocations for private goods and services. This would require closure of loss-making and shuttered public enterprises and stoppage of budgetary provision of capital and loss-coverage support.

Second, numerous programmes and schemes run to provide inputs to agriculture and animal husbandry and cheaper credit to MSMEs and private enterprises need to be reformed for better competitiveness of our agriculture and industry.

Third, reform of the redistribution progamme. This would require major overhaul of hundreds of redistribution programme into three basic schemes to support destitute, economically poor and vulnerable poor.

Fourth, refocussing and expanding the public goods expenditure.

Fifth, careful management of debt and grant of post-retirement benefits.

Specific proposals for reforms are presented in the paper.

Besides focussing the government on its core function and role, these reform proposals can result in annual savings of about Rs. 3-5 lakh crore.

SUBHASH CHANDRA GARG

NEW DELHI 15/04/2020