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 /]
Most legislative assemblies make Parliament look like a paragon of virtue A COUPLE of days ago, an MLA from Orissa made news for climbing on to the speaker's table in the assembly. Not so long ago, television screens beamed images of Karnataka MLAs snacking and sleeping all night in the assembly. But these are only indicative of the incidents of the raucous behaviour of several MLAs in the recent past across the country. And the poor behaviour of some MLAs is only one aspect of the pitiable state of several of our state legislatures. The other aspect of our state legislatures that goes largely unnoticed is how poorly the secretariats of legislatures are equipped and how several systems that are seen as essential in Parliament are nonexistent in states. Even to know the complete picture of how our legislatures function, you need data. And several state assemblies are notoriously poor at putting out data on the functioning of the institution or the MLAs. After one gets used to the quality of Parliament websites and the regularity of their updates, it would be shocking to see that there are some state legislatures that do not even have functional websites. It has been observed that some state legislatures are lagging behind by a couple of years in compiling the "resume of work" which summarises the work done in a session of the legislature. So the first bottleneck in several instances is the inability to access data of the assembly. From the data we have managed to access, it is obvious that state assemblies meet for very few days a year. A case in point is the Punjab assembly which has met for an average of 19 days per year for a 10-year period between 1997 and 2007. Delhi was only marginally better averaging 21 days per year during the same period. Kerala has averaged some 50 days a year for several years now. Some states like Karnataka have legislated that they should meet for at least 60 days a year, but since passing that legislation in 2005, they have not managed to do so for even one year. I am not even accounting for the time lost due to disruptions. Bills are passed with little or no discussion in many state legislatures. While in Parliament, referring bills to the standing committees is the norm, most state legislatures do not have standing committees. The only examination of a bill, if any, happens on the floor of the House. And if data from the Delhi assembly is anything to go by, the average debate on a bill before is passed is a little over half hour. There are any number of instances where bills are introduced and passed in state assemblies on the same day -so there is not even a pretence of the need for MLAs to read, understand and deliberate on the provisions of legislation they are supposedly passing. MLAs are often far more narrowly constituency-focused than MPs are. On average, MLAs have lower education levels than members of Parliament. There is no formal definition of a role of an MLA, and they mostly have no exposure to ideas such as the separation of powers between the executive and the legislature. In one particularly revealing conversation with an MLA, he said, "At the time of elections, each of the contestants represents his party. But after the elections, the chiefministerbecomestheleader of all MLAs in the House. If an MLAneedssomeadditionalprojects/ favours for his constituency he needs to be in the good books of the chief minister and his cabinet ministers. So where is the question of taking on the chief minister on the floor of the House on any issue?" There are many aspects of state legislatures that point to a steady and visible decline of these important institutions. But beyond the frequent highlighting of theatrics by some MLAs, there is almost no public discourse on this issue. It is necessary to ensure that the legislatures run smoothly, and the speaker, as first among equals, has the biggest responsibility to ensure this. If there are rules and everyone knows that those rules will never be used to enforce discipline, then the rules will be broken, and repeatedly so. This practice needs to be urgently reviewed. The larger question is whether our legislatures are the highest deliberating and policymaking bodies or whether they are being reduced to platforms for political theatrics. Policy can almost never be devoid of politics and public posturing. But if this means poor deliberation of critical policy issues and the woefully inadequate functioning of our legislatures, then we may need to come up with creative ways in which this problem can be addressed. This article appeared in the Indian Express on December 20, 2010.
