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 /]
The Union government’s Cabinet Committee on Security recently gave clearance to the Home Ministry’s NATGRID project. The project aims to allow investigation and law enforcement agencies to access real-time information from data stored with agencies such as the Income Tax Department, banks, insurance companies, Indian Railways, credit card transactions, and more. NATGRID, like a number of other government initiatives (UIDAI), is being established through governmental notifications rather than legislation passed in Parliament. The examination of this issue requires an assessment of the benefits of legislation vis-a-vis government notifications. Government notifications can be issued either under a specific law, or independent of a parent law, provided that the department issuing such notification has the power to do so. Rules, regulations which are notified have the advantage of flexibility since they can be changed without seeking Parliamentary approval. This advantage of initiating projects or establishing institutions through government notifications is also potentially of detriment to the system of checks and balances that a democracy rests on. For, while legislation takes a longer time to be enacted (it is discussed, modified and debated in Parliament before being put to vote), this also enables elected representatives to oversee various dimensions of such projects. In the case of NATGRID, the process would provide Parliamentarians the opportunity to debate the conditions under which private individual information can be accessed, what information may be accessed, and for what purpose. This time consuming process is in fact of valuable import to projects such as NATGRID which have a potential impact on fundamental rights. Finally, because changing a law is itself a rigorous process, the conditions imposed on the access to personal information attain a degree of finality and cannot be ignored or deviated from. Government rules and regulations on the other hand, can be changed by the concerned department as and when it deems necessary. Though even governmental action can be challenged if it infringes fundamental rights, well-defined limits within laws passed by Parliament can help provide a comprehensive set of rules which would prevent their infringement in the first place. The Parliamentary deliberative process in framing a law is thus even more important than the law itself. This is especially so in cases of government initiatives affecting justiciable rights. This deliberative process, or the potential scrutiny of government drafted legislation on the floor of Parliament ensures that limitations on government discretion are clearly laid down, and remedies to unauthorised acts are set in stone. This also ensures that the authority seeking to implement the project is The other issue pertains to the legal validity of the project itself. Presently, certain departmental agencies maintain databases of personal information which helps them provide essential services, or maintain law and order. The authority to maintain such databases flows from the laws which define their functions and obligations. So the power of maintaining legal databases is implicit because of the nature of functions these agencies perform. However, there is no implicit or explicit authorization to the convergence of these independent databases. One may argue that the government is not legally prevented from interlinking databases. However, the absence of a legal challenge to the creation of NATGRID does not take away from the importance of establishing such a body through constitutionally established deliberative processes. Therefore, the question to be asked is not whether NATGRID is legally or constitutionally valid, but whether it is important for Parliament to oversee the establishment of NATGRID. In October 2010, the Ministry of Personnel circulated an “Approach paper for a legislation on privacy”. The paper states: “Data protection can only be ensured under a formal legal system that prescribes the rights of the individuals and the remedies available against the organization that breaches these rights. It is imperative, if the aim is to create a regime where data is protected in this country, that a clear legislation is drafted that spells out the nature of the rights available to individuals and the consequences that an organization will suffer if it breaches these rights.” As the lines above exemplify, it is important for a robust democracy to codify rights and remedies when such rights may be potentially affected. The European Union and the USA, along with a host of other countries have comprehensive privacy laws, which also lay down conditions for access to databases, and the limitations of such use. The UIDAI was established as an executive authority, and still functions without statutory mandate. However, a Bill seeking to establish the body statutorily has been introduced, and its contents are being debated in the Parliamentary Standing Committee on Finance and the Bill has also been deliberated on by civil society at large. A similar approach is imperative in the case of NATGRID to uphold the sovereign electorate’s right to oversee institutions that may affect it in the future.
