It is increasingly clear that the government is making heroic attempts at what is now called "expenditure compression". A much-discussed recent Reuters report quoted Union health ministry officials as saying that the finance ministry had asked them to slash expenditure by as much as 20 per cent - in spite of the fact that India's public health expenditure is already low. Indeed this cut will come even as the government promises universal health coverage; how the two can be managed simultaneously will be a challenge for the government.
In the past few years, the question of "expenditure compression" has been looked at purely from the perspective of the overall fiscal deficit target sought to be achieved, instead of paying attention to the quality of the expenditure reduction needed to achieve the budgeted goal. In many cases, it is not real expenditure that is being compressed. Plan budgets for many ministries, especially social-sector ministries, often come under scrutiny whenever the need for expenditure compression arises; and then, to achieve fiscal targets, this expenditure is not incurred. Meanwhile, many other payments are artificially postponed to the next financial year. In other words, only "essential" non-Plan expenditure like salaries survives. But this is not, naturally, a sustainable path for fiscal deficit reduction. The government has decided that it must stick to its fiscal deficit target of 4.1 per cent of gross domestic product this year. However, it must not lose sight of the logic behind this: that it must demonstrate to the world its willingness to live within its means. "Expenditure compression" that ignores reality, or that cuts only investment and not salaries, will not do that.
Part of the problem is that it is expenditure compression alone that is being tried. The government is particularly in a hole because it is Rs 70,000 crore short of revenue - according to its recent estimates presented before Parliament - thanks to over-optimistic forecasts and a slow economic recovery. The answer to this should be to look at the revenue side, not just expenditure. For example, there is no reason why the continually falling price of petroleum products should not result in higher taxes on fuel. If the Centre does not take advantage of falling prices to raise taxes, then the states will, as indeed some of them have already done. The government has underlined the fact that inflation has gone down, and so the Reserve Bank of India has "headroom" to cut rates. But, equally, lower inflation gives the government "headroom" to further raise taxes on fuel. Excise duty on some products has been raised by small margins and there is no reason why the government should not look at this option once again. Indeed the government's action on raising sufficient resources appears to have been inadequate. The target for selling of government-owned companies and shares was over Rs 60,000 crore this financial year. But an infinitesimal amount of that has been raised, although the stock markets have been at all-time highs.
In the past few years, the question of "expenditure compression" has been looked at purely from the perspective of the overall fiscal deficit target sought to be achieved, instead of paying attention to the quality of the expenditure reduction needed to achieve the budgeted goal. In many cases, it is not real expenditure that is being compressed. Plan budgets for many ministries, especially social-sector ministries, often come under scrutiny whenever the need for expenditure compression arises; and then, to achieve fiscal targets, this expenditure is not incurred. Meanwhile, many other payments are artificially postponed to the next financial year. In other words, only "essential" non-Plan expenditure like salaries survives. But this is not, naturally, a sustainable path for fiscal deficit reduction. The government has decided that it must stick to its fiscal deficit target of 4.1 per cent of gross domestic product this year. However, it must not lose sight of the logic behind this: that it must demonstrate to the world its willingness to live within its means. "Expenditure compression" that ignores reality, or that cuts only investment and not salaries, will not do that.
Part of the problem is that it is expenditure compression alone that is being tried. The government is particularly in a hole because it is Rs 70,000 crore short of revenue - according to its recent estimates presented before Parliament - thanks to over-optimistic forecasts and a slow economic recovery. The answer to this should be to look at the revenue side, not just expenditure. For example, there is no reason why the continually falling price of petroleum products should not result in higher taxes on fuel. If the Centre does not take advantage of falling prices to raise taxes, then the states will, as indeed some of them have already done. The government has underlined the fact that inflation has gone down, and so the Reserve Bank of India has "headroom" to cut rates. But, equally, lower inflation gives the government "headroom" to further raise taxes on fuel. Excise duty on some products has been raised by small margins and there is no reason why the government should not look at this option once again. Indeed the government's action on raising sufficient resources appears to have been inadequate. The target for selling of government-owned companies and shares was over Rs 60,000 crore this financial year. But an infinitesimal amount of that has been raised, although the stock markets have been at all-time highs.
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