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Finances of the Nation ~ I

Shantanu Basu |

The rapidly growing indebtedness of governments and mounting non-performing assets of banks, mostly in the public sector, both of which strike at the heart of financial administration and include our legitimate personal finances as well, are of the highest concern. In seven successive fiscals till 2014-15, governments, state and central, cumulatively expended Rs.1.72 lakh crore while earning revenues of Rs.1.23 lakh crore, leaving a revenue deficit of Rs.0.49 lakh crore, i.e. 40 per cent of gross revenues on an average each year. While expenditure grew, only in absolute terms, by a factor of 2.33, revenues increased by a factor of 2.54. Yet the revenue deficit multiplied by a factor of 1.87.

Why did this paradox arise? The inflation rate in India averaged 7.38 per cent in 2012-16, reaching an all-time high of 12.17 per cent in November 2013 and a record low of 3.27 per cent in November 2014. This had an invariable effect on government spending. Although revenues rose by an average of about 25 per cent each in seven fiscals and in absolute terms, yet relatively high inflation and rampant waste and leakages massively reduced the value of every rupee the governments earned and spent. Social and community services accounted for about Rs.2.88 lakh crore or approximately Rs.2400 per head of India’s 1.20 billion population in 2007-08.

Reduced to 1990-91 prices, the real annual expenditure declines to about Rs.1.34 lakh crore or Rs.1160 per head or Rs.3 per day. If this were further conservatively reduced by 35 per cent for leakage and wastage and 8 per cent to a conservative inflation rate, the per capita development expenditure outlay collapses to barely Rs.661 per annum or a ludicrous Rs.2 per day. Today when lentils retail for over Rs.100 or sugar at Rs.50 a kilogram, the cost of government is almost the same as that of governance (development). Therefore, it is not as if there was any dramatic rise in government revenues and spending over the last several decades, notwithstanding substantial media publicity.

Today, the Indian rupee is worth less than a third of what it was in 1947 at a simple compounded average of 3 per cent per annum. Historically, governments have tried to make their ends meet via generation of internal revenue and resorted to deficit financing by market loans, small savings, provident funds, special treasury bills, overseas multilateral and bilateral borrowings, etc. All these instruments carry rates of interest that vary from 5-11 per cent per annum that must be mandatorily discharged. Non-tax revenues such as dividends and share of profits of state-owned utilities and companies have not risen commensurate with the giant cumulative state investment in them. Forty-seven CPSUs accounted for about 13.50 per cent of total market capitalisation as on January 31, 2017.

Not surprisingly, the capital-intensive monopolistic ONGC’s BSE share price at Rs.202.15 compared unfavourably with ITC’s Rs.258.05 and Infosys’ at Rs.929.30 per share. Likewise, SBI’s Rs.260 share compares unfavourably with HDFC Bank’s Rs.1,286.95, on the same date. A few CPSUs & PSBs turned in profits that were rooted in monopolistic control of the market, e.g. petroleum and telecom. Most others lived off grants and unending loans from the public exchequer with many having eaten away their net worth several times over. Of course, such non-performance and habitual indebtedness was not entirely the making of an entity’s management, rather imposed upon them partly by successive governments and dynamics of the economic environment. Yet the professional stewardship of these entities has seldom been questioned.

Simultaneously, whatever revenues were raised, lost a significant portion to sustaining unsustainable PSUs/autonomous bodies, foundation-stone projects by the thousands, unremunerative politically-motivated projects, write-down/waiver of loans advanced to various entities, rampant delays in completion of public projects, private and public and a giveaway culture of subsidies without much accountability. Rising indebtedness has therefore not translated, into the extent of on-ground development that should have happened. Today the public exchequer is caught in a giant cleft, viz. the huge demands of development versus availability of public finance, with the gap substantially widening every year and causing an almost unbridgeable chasm to emerge in popular demand and their realisation. In 2014-15, the revenue deficit of the Government of India was Rs 8.85 lakh crore. To cover this deficit, the Government resorted to market borrowings of Rs 6.82 lakh crore. As on January 1, 2016, the public debt of the Government stood at a whopping Rs 64.95 lakh crore.

The states accounted for another Rs 143.23 lakh crore making a total of about Rs 208 lakh crore. At a conservative 7 per cent interest rate and assuming 50 per cent retired debt reduced by the amount of state government debt annually, this could translate to a crippling Rs 8-10 lakh crore in 2017-18 and eat away 40-42 per cent of the total expenditure budget of all governments, provided states succeed in retiring 50 per cent of their previous debts during the year. In addition, 30 per cent of all non-development expenditure goes into salaries, establishment and pensions.

However, there is a caveat here. There are several lakh personnel ~ regular, casual, temporary and contract ~ whose salaries and establishment costs are met from development budget allocations like the cost of a field agricultural extension officer, his staff vehicle, assistants, office expenses, mobile labs and computers, etc. In effect, interest, personnel and establishment costs alone account for 80-85 per cent of the full budget of the Centre, leaving a paltry 15-20 per cent for development on the ground. Leakages such as the recent fraud in Assam of Rs 2250 crore on nearly 150 ghost Anganwadis (creches) that were fraudulently funded for Rs 250 crore/annum for close to a decade, plague agriculture, energy, public health, medical services and irrigation, reducing the money value of limited finances of governments further and reducing development to fodder for electoral campaigns alone.

Where such borrowing and expenditure cause appreciable rise in GDP and capital formation (hence income levels), budget deficits are seemingly justified even with relatively high inflation at the initial stages, such as in Japan that reported an estimated 7.01 per cent deficit in 2016. Attempts to peg the deficit artificially to low levels in a bid to curb inflation, is likely to damage capital formation, as little else changes in the pattern of non-development (revenue) expenditure, and low rise or even fall in GDP and capital formation could happen. This also often leads to camouflaging non-developmental expenditure in the development category.

In the end, governments that borrow but disproportionately devote such funds to revenue expenditure that have no return on investment, often run up high levels of debt. Owing to excessive revenue expenditure, borrowing for capital items like roads, bridges, etc., becomes inevitable. Every day of delay in commissioning projects runs a high potential of driving governments to unsustainable indebtedness and default, as happened in Greece.

Unfortunately, India is gradually progressing into a cusp of indebtedness that hovered around the 50 per cent of theGDP barrier in 2015-16. However, rising market borrowing, a large part of which is diverted to revenue expenditure could adversely raise this ratio in the next 5-10 years to unsustainable levels. Media reports show that the default on commercial borrowings by the infrastructure sector is alarming. While lenders are reluctant to lend, rising investigations and raids may be additional dampeners. What is worse is that cash surpluses available with the private sector are not forthcoming owing to uncertainties in acquisition of land, revenuesharing and tolls, etc. In 2007, the India Infrastructure Report stated that the country required about $320 billion in 2007-12 to repair and add to its physical infrastructure.

Similar moneys were required for capacity enhancement of the energy sector to meet a 55 billion unit energy shortage in 2006-07. Therefore, such brakes as the 3 per cent deficit of GDP in Fiscal Responsibility & Budget Management Acts may prove counterproductive unless sustainable and credible restrictive corresponding steps are taken to curb government spending on its establishment and personnel. Rampant leakages must also be curbed. In 2014-15, there was a divestment bonanza that reduced market borrowings by governments by only about 6 per cent. Although the lease of spectrum garnered about Rs 50000 crore plus some more in coal mine auctions, the revenues on these accounts were not substantial to appreciably reduce market borrowings.

The single major reason is that licence fees become payable in specified percentages every year over the long-term lease period (10-30 years) that does not make much major positive impact in annual budgets that run into several lakh crore rupees each year. The overweening obsession for revenue generation, post-2G CAG telecom report, has caused spectrum leases and FM radio licences to net just about 10 per cent of the estimated amount, leaving a gaping hole of about Rs.6.50 lakh crore in the Government of India’s budget estimates.

The 300 per cent explosion in splitting Ministries/Departments since 1947 has not caused much appreciable improvement in governance and accountability either. Instead, it has diffused responsibility considerably and slowed down decision-making. Unending command, control and coordination chains have also had the undesired effect of enhancing rent-seeking across levels, apart from rampant delays. Costs of administration have thus hardly kept pace with revenues. Even assuming that Rs.6.50 lakh crore were obtained, how much would have gone to sustainable development remains debatable.

(To be concluded)

The writer is a senior public policy analyst and commentator