Last straw on the fisc’s back.By Dr Rajiv Kumar

Last straw on the fisc’s back,

In many ways the fiscal stress being experienced today is similar, and in some ways worse, to that in the 1980s which finally led to the 1991 crisis.  The huge expenditure on the food bill, with attendant leakages, could well make fiscal recovery impossible.

In the first part of this article, we estimated the actual cost of implementing the Food Subsidy Bill (FSB) in its current form. In this part, we now examine its fiscal sustainability. The current state of revenue and expenditure trends of the central government (refer table 1) show that while revenue growth has significantly weakened, expenditure growth has accelerated sharply. In particular, during the last 5 years (FY06 over FY11), tax revenues have increased only by 13% as compared to 15% between FY04 and FY06.

On the other hand, non-plan expenditure during FY06-FY11 (i.e. subsidies have grown by 30% and interest payments by 13%) is significantly higher than over the period FY04-FY06. Additionally, gross market borrowings increased by 32% during FY06-FY11, against a decline of 2% in the earlier period.

In fact, the fiscal stress being currently faced is worryingly similar (if not worse) to the decade of 1980s that witnessed a sharp deterioration, finally leading to the 1991 crisis. For example, market borrowings had increased by 12% for the decade ended 1991 while they have increased by 32% in the last 5 years; non-plan expenditure had increased by 20% during the 1980s and has now increased by 30%; and fiscal deficit itself has increased at the rate of 30% during the last 5 years as compared to 18% for the decade ended 1991. Disturbingly, it is the composition of fiscal deficit that is worrying, with revenue deficit increasing at a much faster pace than fiscal deficit (same scenario as in the 1980s) and thus productive capital expenditure is being squeezed out. It is clear that some very urgent and strong steps are required to avert any fiscal crisis. In this context, the fiscal sustainability of the Food Security Bill is seriously in doubt.

Some observers, however, argue that it is churlish to argue against additional financial allocations for fighting the curse of hunger and malnutrition when the central government regularly forgoes huge amount of revenues. This argument is based on the statement of revenue forgone included in the annual Union Budget statement.

It is important to examine the veracity of this argument, especially because as eminent a person as Prof Amartya Sen cited this in his recent PR Brahmananda Memorial Lecture delivered at the Indian Economy Association Annual Conference in Pune last December. Table 2 gives us the details of revenue forgone under each tax category for the year 2010-11. A closure look at these numbers, however, reflects the following:

l Excise duty concession of R1,98,291 crore. These are revenue forgone on account of mass consumption goods like medicines, tooth power, candles, post cards, sewing needles, kerosene stoves, etc. Clearly, exacting the excise duty from these items would have worsened the fate of the poor.

l Customs duty concessions of R1,74,418 crore. These are concessions for importable goods consumed for exports as defined under Section 25 (1) of the Customs Act. It is important to note in this context that import duties on components used for exports are universally exempt as taxes are not supposed to be exported. Moreover, is it anybody’s case that these import duty concessions be removed because, by doing so, we may lose a significant part of our total export revenue (of this, gems and jewellery exports alone contribute closely to 15% of exports). Furthermore, a simple exercise shows that if we strip gems and jewellery exports from our foreign exchange earnings, our short-term debt as a percentage of reserves touches 48% (refer table 3).

l Personal income tax concessions of R50,658 crore are primarily related to exemption limits for income tax assesses. These will have insurance premia, contribution of charities and political parties, interest payments on loans for higher education, etc. This could arguably be eliminated but are we prepared for the distress that it will cause to the salaried class?

l Finally, tax concession of R88,623 crore are primarily related to export undertakings established in SEZs and to 100% export-oriented units. Others areas for concession under this head are accelerated depreciation for industries established in new and hilly regions, scientific research and even contribution to political parties. However, studies including one by ICRIER in 2007 (Impact of Special Economic Zones on Employment, Poverty and Human Development—Aradhna Aggarwal) and by Panduranga Reddy C, Prasad A and Pavan Kumar G in 2010 show that SEZs have significant positive impact on foreign exchange earnings, employment generation and, thus, poverty reduction. The net cost benefit impact of SEZ is, hence, highly positive.

Given the above details, it may not be completely misplaced to argue that the additional expenditure for implementing the FSB is far greater, by order of magnitude to any actual revenue forgone for promoting economic activity in the country.

So where do we go from here? We believe what is important that we must strive to improve our tax base now. As graph 1 shows, India’s tax revenue as a percentage of GDP is much lower compared to its neighbouring countries. As a case in point, consider the following facts. The total number of assesses expanded at a measly 3% for the 5-year period ended 2009-10, the number of returns in excess of R1 crore is only 0.06% of 34 million assesses and the number of PAN cardholders was 96 million for the year ended 2009-10 (hence the filing gap is more than 60 million). We must, therefore, expand our tax base immediately.

Second, to implement such type of food safety Bills, we need to improve our delivery mechanisms drastically to plug the leakages. A significant portion of foodgrains, mainly rice and wheat, meant to be distributed to eligible families under PDS, gets diverted to open market. The diversion rate was estimated around 36% in 2004-05 (study quoted by the ministry of food, consumer affairs and public distribution). Measures like involving gram panchayats, self-help groups, van suraksha samitis and other community institutions in the running of fair price shops could be used as an effective delivery mechanism to plug leakages (Banerjee & Tiwari, ET, Jan 28’12).

These apart, delivery mechanisms like cash transfers/food stamps could also be successfully replicated in India. For example, the largest cash transfers such as Brazil’s Bolsa Família and Mexico’s Oportunidades, cover millions of households. The food stamp programme is also a central component of America’s nutrition assistance safety net. The stated purpose of this “to permit low-income households to obtain a more nutritious diet by increasing their purchasing power” (The Food Stamp Act of 1977, as amended, P.L. 95-113).

Food security, an urgent necessity, will be ensured only when Indian agriculture is modernised and productivity and yields rise in the coming years. In our view, it will be far more effective and sustainable to allocate additional public resources for developing agriculture, infrastructure and delivering new technologies to the sector. This will more effectively ensure food security in the country.

Dr Rajiv Kumar is Secretary General, FICCI. Soumya Kanti Ghosh is Director-Economics & Research, FICCI. The views are personal. The authors thank Nibedita Saha for research.