Reforms’ progressive regression Government is growing, so are deficit and subsidy

By R. Balashankar

[The discussion paper on subsidies produced by the Finance Ministry in 1997 said, “The proliferation of subsidies in India can perhaps be linked to the expansion and growth of governmental activities. Apart from basic and traditional functions like defence and maintenance of law and order the government has extended into producing a wide range of goods and services often in competition with the private sector.” The study said in many of these activities the government incurred huge losses. The idea of downsizing or trimming the government had its origin in this analysis].

What has happened to the promise of down-sizing the government, lowering fiscal deficit to manageable limits and scrapping all pompous and wasteful subsidies which formed the core strategy of economic liberalization unleashed in 1991? We are back to square one. Blame it on global meltdown or an obstructive and deeply entrenched bureaucracy, or the monstrous political appetite for profligacy with public money for electoral gain—18 years into economic reforms—India is hostage to a burgeoning state machinery, double-digit fiscal deficit and a subsidy bill which is siphoning away an unprecedented chunk of the GDP into fanciful welfare schemes meant only to curry favour with entrenched vote banks.

It is fascinating to evaluate our present status with all that was promised at the time of introducing economic reform. Seven major areas of policy reform underlined by the then Finance Minister Dr. Manmohan Singh were fiscal, trade, industrial, financial, agricultural, poverty alleviation and human resource. A major plank of the fiscal policy was to improve the fiscal balance and eliminate budget deficit. For this, emphasis was laid on reducing the level of subsidies and eliminating open-ended cross-subsidisation, to direct government expenditure towards providing essential services of a high quality. It was promised that the government would withdraw from all areas where the private sector was better equipped to operate.

We were told that the Planning Commission had become redundant after the government said goodbye to socialist pattern of economic planning. The fate of the PIB (Press Information Bureau) and even the Information and Broadcasting Ministry was predicted to be similar. It was the socialist, totalitarian type of regimes that needed to plant stories to pep up their image. According to this liberal capitalist school of thought, the government was to wither away from many areas. They identified ministries such as Railways, Tourism, Civil Aviation, Industry, Food and Agriculture, Textiles, Petroleum, Coal and Mines, Steel, Programme Implementation, Shipping and Transport as areas for pruning. There were also suggestions to the effect that Communications Ministry was a drain on the exchequer and regulatory authorities like TRAI were enough to fix tariff and set rules. There was supposed to be level playing field for market forces. The flattening of the government however did not happen. Today the government has become a behemoth.

The government was then busy retrenching through VRS and golden handshakes. It was projected as if the government was not the agency to create jobs. The votaries of this new binge reform suggested that the quota and reservations under Mandal Commission, etc, would become useless as there was no job or opportunity in the public sector. Today, the nation is heavily leaning on the government to generate new employment opportunities.

Stimulus is the new word for bailout or, if you like, for subsidy. Everybody wants stimulus. Pink press is pleading for Stimulus Package—Three in the budget. Remember? They were in the frontline crazy yelling, “there is no free lunch” in free economy. Now industrialists who were supposed to be the saviours and job creators, in the new economy—the captains of growth—want more subsidy, lower interest loans than that to the poor farmer.

We were further told that there was no need for India to produce those costly, wheat and paddy, vegetable and fruits. These are produced cheaper and in larger quantity by American and EU farmers. We need to concentrate only on cut flower, shrimps and cash crops which will not compete with the West and earn foreign exchange. After last year’s food crisis the government is going to introduce a food security bill in Parliament. Is it that reformers have got a new insight? Or have their masters in the IMF-World Bank become wiser by experience? Clearly their original format was flawed. These are interesting input for an academic debate on globalisation in these days of recession and redesigning of capitalism.

Yojna Bhavan will become an extended coffee house (there was one) in the private sector, we were told. Because the Five-Year Plans sounded like the commanding heights of the public sector under Nehruvian socialism. What has really happened? Planning Commission chairman has today become more powerful than the Finance Minister and it has become so intrusive that the chief ministers are made to stand waiting with their demands. The number of ministries has only increased under Manmohan Singh. He created two new ministries—one for the minorities and another for overseas Indians. In the hey-days of reform, we were told, the External Affairs Ministry would double up for Industry and Commerce also.

Look at the humongous size of the ministry Dr Singh is presiding over now. Consequently the wasteful expenditure of the government has increased manifold. The new food security bill announced during the poll campaign is estimated to cost an additional Rs. 50,000 crore. The loan waiver which is supposed to have swelled the Congress vote cost another Rs. 72,000 crore. Another pet scheme, NREGS, which is now going to be further widened to new areas as it brought the rural poor closer to the Congress cost the country Rs. 1,62,000 crore. By the time you read this piece the new Finance Minister Pranab Mukherjee would have presented his budget for 2009-10. Unless he fudges the figures, as his predecessor used to do expertly, the budget deficit will cross double digit.

P Chidambaram, the man who presented the largest number of budgets in Independent India, had a fetish for Fiscal Responsibility and Budget Management Act, 2003, though it was passed under the Vajpayee government. Ever since in every budget he used to repeat, “I am happy to report that we are on course to achieve the FRBMA targets.” The statement placed in Parliament by P Chidambaram on FRBM in February 2008 promised zero revenue deficit for 2008-09 and 2009-10. Fiscal deficit for these years promised was 2.5 and 3.0 per cent respectively.

What has gone wrong with the government’s target of fiscal consolidation? Perhaps the UPA-II has decided that winning election is more important than managing financial discipline. Reform was expected to remove all unproductive, populist subsidies. The government has brought out a number of discussion papers on subsidies with a promise to do away with all cross-subsidies which essentially catered to various power lobbies. The discussion paper on subsidies produced by the Finance Ministry in 1997 said, “The proliferation of subsidies in India can perhaps be linked to the expansion and growth of governmental activities. Apart from basic and traditional functions like defence and maintenance of law and order the government has extended into producing a wide range of goods and services often in competition with the private sector.” The study said in many of these activities the government incurred huge losses. The idea of downsizing or trimming the government had its origin in this analysis.

This involved withdrawal of the government from many areas, divestment of the Public Sector and abolishing or merging the numerous ministries which were supposed to be encroaching upon the private economic space.

Under UPA-II subsidies have made a vengeful come back. They include, cash subsidies like in food, fertilizer and export, interest or credit subsidies as in loans given to farmers, industries and students at a lower rate than market rates, tax subsidies like exemption of medical expenses, deducting mortgage interest payment from taxable income, postponing collection of tax arrears, in-kind subsidies like provision of free medical services through government dispensaries, provision of goods to target population, equity subsidies like investment in equity in state enterprises giving low dividends, procurement subsidies as in purchase of food grains at higher than market prices, and regulatory subsidies as in petroleum products. The government of late has introduced new subsidies for its vote banks as in the case of Sachar Committee Report implementation. One estimate is that subsidies at present constitute over four per cent of the GDP. Socialism has in fact become the last refuge of neo-liberal capitalists. [From Internet]