Editorial: Responsible budgeting

Apr 01 2014, 21:14 IST
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SummaryTo begin with, cut subsidy spend back to 1.5% of GDP

Former finance minister Yashwant Sinha made an important point when he said that, should a BJP government come to power, expenditure reforms will be a priority agenda. While Sinha is in favour of setting up an Expenditure Reforms Commission once again, some reforms suggest themselves immediately. The biggest difference in expenditure patterns during the NDA and the UPA periods is the amount spent on subsidies. Subsidy expenditure is up from around 1.4% of GDP during the NDA years to an average of 2.4% during the UPA-II years—if the Food Security Act is to be implemented in spirit, this will rise to around 3.4%. Importantly, study after study has shown the money has been largely wasted. Around half the food subsidies don’t reach the targeted audience; only about 30% of the poor get job dole from the MGNREGA according to Surjit Bhalla’s analysis based on NSS data; according to the Kirit Parikh committee, just 0.07% of the LPG subsidy in rural areas went to the poorest fifth of households; and the education spending is full of holes—only 47% of students in Class V can read even the texts for Class II students.

Indeed, according to Bhalla’s analysis, India needs to spend just 0.44% of GDP to eliminate poverty in a perfect-targeting scenario versus the 2.3% budgeted in FY14. Given that growth can’t pick up till government savings get back on track—they fell from 5% of GDP in FY08 to 1.3% in FY12, a 1-2 percentage point cut in subsidy expenditure will have a significant impact in raising government savings.

In which case, the BJP’s first job should be to prune expenditure on subsidies and re-look the Food Security Act which will add to wasteful expenditure. It is a pity that several BJP leaders have been quoted as saying they will dump Aadhaar in the waste-bin. Not only has good money been spent on the scheme, it is one of a kind globally—it has already collected biometrics data for half the population in record time and, more importantly, has delivered proof of concept in 291 districts in giving R3,370 crore of LPG subsidies to 2.1 crore persons.

Where an Expenditure Reforms Commission will come in handy is in examining the distortionary impact of various government policies. So, for instance, giving per acre subsidies to farmers in place of the current MSP-based subsidies will help spread farm growth to states like Bihar. Similarly, research by

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