The angst on economic growth surprisingly seems to have been influenced by the official talk of 8 per cent growth. It is an unrealistic premise to believe that government has the capacity to deliver pre-specified rates of growth, for if government was possessed of such economic omnipotence, there would hardly be a case for market economics. And the reasonable position on this would be to say that while compared to most of the world we are not doing poorly, we could certainly do better.
What is amazing is the wide prevalence of the fantastic view that only if government spent more, then voila, we?d have 7 per cent or higher growth. The advocacy of ?pump priming? is a remarkable admission of desperation, if not of bankruptcy, in ideas. The desperation stems with some justification from the feeling that policymaking has become the playground of nay sayers; that deregulation has virtually got stuck; and on law and order governance the less said, the better.
Whatever be the mitigating circumstance, the fact is that government finances are seriously stressed. Even if some fractions of percentage points of growth could be extracted from temporarily bidding adieu to fiscal prudence, the structural problem in public finance would not go away. Perhaps self-delusion is far gone indeed, and the advocates of fiscal priming believe that additional expenditure today would permanently raise growth to 7 per cent and beyond.
The fact is that too many little bits of incremental debt have got us into the problem in the first place. Despite which there continues to be major deficiencies in the principal residual role of government in the economic process ? that is, the large deficits in those parts of physical and social infrastructure where the private sector will not engage in for want of economic returns.
So what could the Finance Minister do in the forthcoming Budget? For one, he could deal with the outstanding issues of policy and de-regulation that come under his ambit. Second, he could show us how he intends to reduce the physical and social infrastructure deficit with non-debt resources. To do this, space in the Budget has to be created on both the revenue and expenditure sides.
On the revenue side are the reasonable demands for rate reduction, particularly in indirect taxes, counter-posed by the desire to raise the level of receipts. The Kelkar Task Force (KTF) has dwelt extensively on administrative reform, but it would be unduly optimistic to see sizeable revenue gains from this source in the short term. Given the reactions to the KTF and the interplay of political and other lobbies, there is doubt as to how the broad recommendations of KTF would shape the coming Budget?s revenue proposals. But surely there is little reason to believe that much additional revenues will be attendant on the Budget proposals.
Tax receipts have risen by nearly 20 per cent this year, after having declined by 3 per cent last year. Lower real growth and milder inflation have meant that the growth of national income at current prices has declined from 15 to 18 per cent of the mid-90s to 8 to 9 per cent today. Under these circumstances, and within the existing tax structure, at most we can hope to get is a 9 to 10 per cent growth next year.
Given that the rate of expansion of recurring expenditures has kept pace with revenue growth, something unlikely to change next year, the search for additional resources to fund higher outlays on infrastructure must end up primarily in an effort to trim subsidies that exceed Rs 40,000 crore. Of this, food subsidy is Rs 21,000 crore, fertiliser related subsidies are Rs 7,500 crore and subsidy on kerosene and cooking gas over Rs 7,000 crore. It is well-established that fertiliser subsidy goes not to farmers, but high cost manufacturers and is surely the easiest candidate for removal. What savings can be made on the other two, could be routed to rural physical and social infrastructure. Thus the path towards higher level of productive outlays is through the difficult terrain of squeezing the unproductive, rather than the dreamland of buoyant revenues or denying that debt matters.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)