In the last two columns we saw how government?s debt has mounted alarmingly since 1998, while direct tax collections grew quite nicely. The weakness in fiscal management had got worse, not because of weak tax growth, but in spite of improvements; the malaise lies squarely in unreconstructed expenditures.
The accompanying table tells us a story: That over the past five years expenses on subsidies have been fully liberated from whatever controls were imposed on them between 1993 and 1998. That revenue expenditure other than interest and subsidies were also similarly liberated. We often hear that high interest costs (not imprudent management) are responsible for the fiscal difficulties. Well, between 1993 and 1998 when interest rates were rising, the elasticity of interest with respect to gross domestic product (GDP) was 1.04, much lower than the 1.59 of the 1981-91 period when interest rates were fully administered. Between 1998 and 2003, however, the elasticity for interest rose to 1.19 despite a significant decline in interest rates. Which of course restates the obvious: that interest costs rise when we borrow more.
It is self-evident that quality of expenditure is important. A road to nowhere is hardly as useful as one that cuts the distance between two places by 80 per cent. The road to nowhere is yet better than the bridge built only on paper. Government expenditure on schools and public health is immensely more productive than that on the motorcades of our beloved leaders. Seed money, which enables villagers to pool their efforts to build a school or minor irrigation work, is infinitely superior to paternalistic handouts distributed by a corrupt system.
There is a popular belief that plan expenditures have a greater developmental content than non-plan. It is not correct. Take for an example a hospital or school built as part of a plan. Once the project is complete and the plan period over, its maintenance has to be met from non-plan resources. But the hospital or school does not change its developmental character, though finding resources to run them is far more difficult once it becomes non-plan.
There is another classification in common use. Expenditure classified under economic and social heads in the budget are deemed developmental, with the balance termed non-developmental. This is even more judgmental. There are dysfunctional things classified under economic or social categories. Subsidies to electricity boards and the losses of a thoroughly corrupt road transport department, for instance. And what development can you have without law and order?
Which is why it is imperative to continually reassess expenditure items. Weak-kneed budget control that permits expenditure to race away ahead of revenues will inevitably be accompanied by an expansion in those items of expenditure that have the least social utility and, unsurprisingly, the greatest power of private interests. A good example being the subsidy that government pays in the name of farmers to high cost producers of urea. There is no way out of the fiscal mess but to fix our expenditures pronto.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)