Bureaucracy & Economy

Source: The Hitavada      Date: 18 Jan 2018 11:35:14









The Finance Minister has a few easy options to control the fiscal deficit. But options like PSU and PSB privatisation, disbanding of agricultural subsidies and simplification of GST deprives bureaucrats of opportunities of corruption. Ultimately the Finance Minister has to choose between the people and the bureaucracy.

BEWARE! Fiscal Deficit is increasing. Fiscal deficit is the money that the Government borrows from the market because its receipts are less than the expenditures. By November, the Government had borrowed more than projected for the whole year. This means that the Government will most likely borrow more than planned by the end of the present financial year ending March. IMF has cautioned that India’s fiscal deficit is highest among the G-20 countries. Moody’s had upgraded India’s rating recently but, in the same breath, warned that slippage on fiscal deficit would force it to reconsider. Foreign investors see increasing fiscal deficit as irresponsible behaviour.

They think that the Government will waste the money and the economy will land into trouble soon. Domestic investors are not enthused either. Increased borrowing by the Government leads to increase in the domestic interest rates just as the price of potatoes increases if there are many buyers. The increase in interest rates makes Equated Monthly Installments (EMI) higher for home and car loans. It makes it more expensive for the businesses to borrow and invest. The danger siren is therefore blaring.

Worse, the Budget to be presented coming February will be the last before the General Elections in 2019. There is pressure on the Finance Minister to lower individual- and corporate Income Tax rates. GST rates have already been lowered and there is little chance of their being increased. The disinvestment programme is also running in the slow lane.

Oil price has started increasing in the global markets. That will lead to increase in prices and demands that the Government reduce the taxes on petrol and diesel.
One way out is for the Government to indulge in financial jugglery. The money to be invested in Public Sector Banks (PSB) may made outside the Budget. Or one Public Sector Undertaking (PSU) could be asked to buy shares of another PSU from the Government. The Government will receive the money from the buying PSU. It is like using the pension of the father to cover losses incurred by the son. Such jugglery does not make the family stable or vibrant.

Another option before the Government is to abandon boldly the objective of meeting the target of fiscal deficit. We have seen higher growth rates along with higher fiscal deficit in the past. The targeted fiscal deficit for the current year 2017-18 is 3.2 percent of GDP and the growth rate is likely to be 6 to 6.5 per cent. In the two years 2014-16, on the other hand, the fiscal deficit was higher at 4.0 per cent of GDP and the growth rate was also higher at 7.6 per cent. Thus, an increase in fiscal deficit can go hand in hand with higher growth rate. It is acceptable for the Government to borrow more and invest more in making of highways. That is like an industrialist borrowing and investing in a factory. It is not acceptable, however, for the Government to borrow to pay high salaries to Government servants. That is similar to an industrialist running a loss-making unit providing increased salaries to its workmen. The Modi Government can be seen making huge investments in roads, airports and other infrastructure.

The Finance Minister should increase these capital expenditures and reduce salaries, yes, reduce salaries and pensions of Government servants and boldly say that fiscal deficit for investment is good. This is hard to implement though because the stranglehold of bureaucracy on the Modi Government is as strong as the honesty of the Ministers and Senior Bureaucrats.

The third option is to privatise the loss-making Public Sector Undertakings (PSUs) and Public Sector Banks (PSBs). These units have incurred losses because the ministers have interfered in their workings and officers have bled their finances. This problem is only very marginally solved by disinvestment—selling a part of their shares and getting them listed on the share markets. Disinvestment indeed leads to increased scrutiny by the investors but the inherent problems of political interference and bureaucratic corruption are not solved. The present approach of the Government investing more in PSBs is doubly harmful. It requires Government to borrow more and leads to increase in fiscal deficit. It also does not solve the structural issues. The alternative is to sell the majority shares of the PSBs and privatise them. The Finance Minister can get huge revenues that can cover the fiscal deficit.

The fourth option is to transfer the agricultural subsidies directly in the bank accounts of the farmers. Back of the envelope calculations show that the Union Government alone spends about Rs 500 thousand crores on food, fertilizer and irrigation subsidies. A good part of these subsidies is captured by the bureaucracy, for example, of the Food Corporation of India. The Finance Minister can scrap all these subsidies and pay about Rs 50,000 per family per year to the approximately 10 crore farmer households. This money will create a huge demand for goods and lead to increased collection of GST. A large part of the money captured by the bureaucracy finds its way in purchase of gold, foreign remittances or in real estate. It does not create a virtuous cycle of demand and supply.

The fifth option is to admit the mistake of demonetisation and cumbersome paperwork in the GST. The e-way bill will make things worse. Bank officials made huge monies in converting old note into new during demonetisation. Tax officials are now making huge monies because the small traders are not able to complete the paperwork.

The e-way bill will only increase the opportunities for collecting bribes by the tax officials. The dragon of the GST is threatening the economy. The GST is good in its conception but it has been turned on its head by enmeshing it in cumbersome paperwork. The Finance Minister must quickly establish a committee of businessmen (without Government officials) to suggest a revamp of the GST to make it business friendly.

The Finance Minister has a few easy options to control the fiscal deficit. He can revive the economy by taking the five hard decisions suggested above. Alas! Each of these
trample on the interests of the bureaucracy. Reduction in salaries of Government servants hits them directly. PSU and PSB privatisation, disbanding of agricultural subsidies and simplification of GST deprives them of opportunities of corruption. Ultimately the Finance Minister has to choose between the people and the bureaucracy.