Recently, the Kelkar Committee published a roadmap for fiscal consolidation. The report stresses the need and urgency to address India’s fiscal deficit. A high fiscal deficit – the excess of government expenditure over receipts – can be problematic for many reasons. The fiscal deficit is financed by government borrowing; increased borrowing can crowd out funds available for private investment. High government spending can also lead to a rise in price levels. A full PRS summary of the report can be found here. Recent fiscal trends Last year (2011-12), the central government posted a fiscal deficit of 5.8% (of GDP), significantly higher than the targeted 4.6%. This is in stark contrast to five years ago in 2007-08, when after embarking on a path of fiscal consolidation the government’s fiscal deficit had shrunk to a 30 year low of 2.5%. In 2008-09, a combination of the Sixth Pay Commission, farmers’ debt waiver and a crisis-driven stimulus led to the deficit rising to 6% and it has not returned to those levels since. As of August this year, government accounts reveal a fiscal deficit of Rs 3,37,538 crore which is 65.7% of the targeted deficit with seven months to go in the fiscal year. With growth slowing this year, the committee expects tax receipts to fall short of expectations significantly and expenditure to overshoot budget estimates, leaving the economy on the edge of a “fiscal precipice”.
Figure 1 (source: RBI)
Committee recommendations - expenditure To tackle the deficit on the expenditure side, the committee wants to ease the subsidy burden. Subsidy expenditure, as a percentage of GDP, has crept up in the last two years (see Figure 2) and the committee expects it to reach 2.6% of GDP in 2012-13. In response, the committee calls for an immediate increase in the price of diesel, kerosene and LPG. The committee also recommends phasing out the subsidy on diesel and LPG by 2014-15. Initial reports suggest that the government may not support this phasing out of subsidies.
Figure 2 (source: RBI, Union Budget documents, PRS)
For the fertiliser subsidy, the committee recommends implementing the Department of Fertilisers proposal of a 10% price increase on urea. Last week , the government raised the price of urea by Rs 50 per tonne (a 0.9% increase). Finally, the committee explains the rising food subsidy expenditure as a mismatch between the issue price and the minimum support price and wants this to be addressed. Committee recommendations - receipts Rising subsidies have not been matched by a significant increase in receipts through taxation: gross tax revenue as a percentage of GDP has remained around 10% of GDP (see Figure 3). The committee seeks to improve collections in both direct and indirect taxes via better tax administration. Over the last decade, income from direct taxes – the tax on income – has emerged as the biggest contributor to the Indian exchequer. The committee feels that the pending Direct Tax Code Bill would result in significant losses and should be reviewed. To boost income from indirect taxes – the tax on goods and services – the committee wants the proposed Goods and Service Tax regime to be implemented as soon as possible.
Figure 3 (source: RBI)
Increasing disinvestment, the process of selling government stake in public enterprises, is another proposal to boost receipts. India has failed to meet the disinvestment estimate set out in the Budget in the last two years (Figure 4). The committee believes introducing new channels [1. The committee suggests introducing a ‘call option model’. This is a mechanism allowing the government to offer for sale multiple securities over a period of time till disinvestment targets are achieved. Investors would have the option to purchase securities at the cost of a premium. They also propose introducing ‘exchange traded funds’ which would comprise all listed securities of Central Public Sector Enterprises and would provide investors with the benefits of diversification, low cost access and flexibility.] for disinvestment would ensure that disinvestment receipts would meet this year’s target of Rs 30,000 crore.
Figure 4 (source: Union Budget documents, PRS)
Taken together, these policy changes, the committee believe would significantly improve India’s fiscal health and boost growth. Their final projections for 2012-13, in both a reform and no reform scenario, and the medium term (2013-14 and 2014-15) are presented in the table below: [table id=2 /]
Latest in the string of litigations filed after the enactment of the Right of Children to Free and Compulsory Education Act, 2009 (RTE Act), the Delhi High Court ruled that the Act shall not apply to nursery admissions in unaided private schools for the unreserved category of students. The decision, given on February 19, was in response to writ petitions filed by Social Jurist, a civil rights group and the Delhi Commission for the Protection of Child Rights. It contended that the guidelines of the Ministry of Human Resource Development related to schools’ selection procedure should also be applicable to pre-primary and pre-school classes. The right to education is applicable to children between the age of 6 and 14 years. The RTE Act states that schools have to reserve certain proportion of their seats for disadvantaged groups. It adds that where the school admits children at pre-primary level, the reservation for children of weaker sections shall apply. However, it does not mention whether other RTE norms are applicable to pre-schools. It only states that the appropriate government may make necessary arrangements for providing pre-school education to children between the age of 3 and 6 years. Guidelines of the Ministry with regard to selection procedure of students:
The two issues that the court considered were: (a) whether RTE applies to pre-schools including nursery schools and for education of children below six years of age; (b) whether RTE applies to the admission of children in pre-schools in respect of the unreserved seats (25% of seats are reserved for children belonging to disadvantaged groups). According to the verdict, the guidelines issued by the government do not apply to the unreserved category of students i.e. 75% of the admission made in pre-schools in private unaided schools. This implies that private unaided schools may formulate their own policies regarding admission in pre-schools for the unreserved category of students. However, they apply to the reserved category of students i.e. 25% of the admission s made in these schools for disadvantaged groups. The court has however stated that in its view this is the right time for the government to consider the applicability of RTE Act to the nursery classes too. In most schools, students are admitted from nursery and they continue in the same school thereafter. Therefore, the RTE Act’s prohibition of screening at the time of selection is rendered meaningless if it is not applicable at the nursery level.
