One of the key issue this Budget would focus on would be cutting down expenditure. While the debate in the US is evenly balanced between raising revenues and cutting expenditure, the discussion is unfairly tilted towards cutting expenses.
According to a survey, In terms of government spending as percentage of gross domestic product (GDP), India ranks a poor 111 of 180 countries. The Indian government spends 26-27 percent of its GDP. All European countries, the US, the UK, Canada have government spends at 40-50 percent of GDP. Government expenditure in most middle income countries account for over 30 percent of GDP.
As far as government spending per citizen is concerned, topping the list are Norway and Sweden who spent USD 40,908 and USD 26,760 respectively per citizen. The US Federal Government alone spends an average of USD 11,041 per citizen. The 2010 world average spending per citizen was USD 2,376. Among Brazil, Russia, India and China (BRIC) countries, Brazil spends USD 2,813 per citizen, Russia spends USD 2,458 per citizen, China spends USD 1,010 per citizen and India spends USD 226 per citizen.
The Indian government spends 1.2 percent of its GDP on health and 3 percent on education. In India, with 25 percent of the population below the poverty line, even with a frugal definition of - the poverty line.
Hence, the questions before the government are - can it afford to cut expenditure without hurting long term and even short term growth? Can the government politically manage to cut expenditure on subsidies and spend that money on capex and infrastructure even with the exigencies of current account and fiscal deficits? Does it need to give more attention to raising revenues than curbing expenditure? Will steps like Aadhaar based cash subsidies save money without hurting the poor much?
In an interview to CNBC-TV18 Subhasis Gangopadhyaya, former advisor to the finance ministry and currently working as economist with the India Development Foundation and Shiv Nadar University, Himanshu, Professor of economics at JNU and Seshagiri Rao, Group CFO, JSW Group share their views on these issues.
Below is the verbatim transcript of the panel discussion on CNBC-TV18
Q: Has the debate in India raged or ranged way too much about cutting expenditure? Should not the revenue side get more attention or should we be less eager to cut expenses?
Gangopadhyaya: These are not mutually exclusive statements. You can cut expenditure, you can increase revenue. But when you talk about cutting expenditure, you should focus on what would be wasteful expenditure. There is a lot of discussion on Aadhaar but what is the Aadhaar doing? There is a lot of cash transfer that is already taking place through various national and state level programs.
Aadhaar said that it is going to put all the cash transfers into one bunch and give it out through the Aadhaar but that is not cutting expenditure. That is not making new expenditure. It is ensuring that the money goes to the beneficiaries and is something that is to be lauded. I do not see the criticism that is being raised about this particular program.
Q: It is not criticism. Will that be a painless way of cutting expenditure because one hopes that will remove some of the leakages in the way in which subsidies are dispensed? Do you believe a lot of savings can happen?
Gangopadhyay: It is the transmitting of subsidies. You still have the problem of targeting the right people. Administrative efficiency would be hugely affected in a positive way. In terms of reaching whoever you have rightly or wrongly marked as the beneficiaries - that transmission process would be more efficient and less expensive. Those would be obvious savings if you are doing it through the Aadhaar program.
Q: Can the government take some credit for lower expenses on the subsidy account simply because there is going to be direct cash transfer?
Himanshu: The direct benefit transfer that is currently being talked about is not about the big ticket items such as food and fertilizer. In case of savings, this will save only for food and fertilizer. Now the standing committee on parliament has already given a recommendation on Food Security Bill which is going to increase the expenses. So, I don’t see how Aadhaar or direct transfer benefit is going to affect the expenses on the big ticket items.
Currently, direct benefit transfer and Aadhaar are considered to be saving tools, I don't see either it being a tool of cutting expenditure or it being helpful in terms of managing the fiscal. The quantum of money that is currently going through is the scholarship expenses and that is very small. These are also schemes where you don’t have big amount of leakages, these are already going to the banks, they are already in cash format so there is not much of inefficiency that we are talking to save by switching to Aadhaar based transfer.
Q: If the Budget does come down heavily on subsidies, do you think consumption will be anaemic this year? After all you are going to supply steel to two-wheeler makers, to construction industry. If they have less money to spend, won’t that be a problem for your demand?
Rao: When these products are not properly priced as per the market then a lot of wastage takes place. When diesel is priced as per the market or petrol or kerosene, then the wastage being done in India gets reduced. So indirectly, it will also help to reduce the current account deficit and is a good step. I don’t think it will impact the consumption. By increasing the rates for electricity, it will be important to set up more power plants in India. This will allow more private sector companies to come up and set up those units.
Today, there is a demand that DISCOMs are not buying the power because they are not able to pay the attractive prices for the private sector companies to produce power by import of coal. If you take the whole holistic picture where the goods and services are priced as per market, taking away the inefficiencies, excess consumption is not there and the producer will get the right price.
Government's fiscal deficit will come down, more money will be available with the private sector to make more investment. It will lead to higher growth creating more capacity and higher growth. Therefore, if somebody looks at these two steps together, it is good for reducing fiscal deficit and also for reducing current account deficit by lower oil imports.