Another February and along with it another budget -- the most important instrument for resource allocation and mobilisation. The budget not only helps allocate public resources, it also helps direct private sector spending to specific national priorities.
In the current Indian context, the central government budget is the most important tool for resource mobilisation, as the power to tax and borrow is effectively vested with the Centre. While the states spend more than 65% of the combined development and non-development expenditure in the country and about 63% their expenditure on economic (agriculture and rural development, energy, and infrastructure) and social services (education, health, and civic infrastructure), they don’t raise the resources in the same ratio.
With this in mind, we identify the characteristics of a good budget and argue that there is a need for reimagining our resource allocation and mobilisation strategy.
Purpose of government spending: Improving quality of life
A budget must have a purpose and we define it to be lowering a family’s cost of living, improving its quality of life, and enhancing its ability to invest in building capability to contribute to our economic and social progress. Investment in public provision of services like sanitation, education, healthcare, housing, etc. is expected to help achieve these objectives.
We must use the same approach to support businesses – help them lower the cost of doing business and enhance their ability to invest in creating employment, greater value-addition, and higher productivity through innovation. Once more, the mechanism involves public provision of economic as well as social services.
Fairness with economic rationale as the main principle for allocation
Since the family circumstances vary significantly at the time of birth, all societies create specific provisions to ensure that the under-provided families too have an opportunity to raise their quality of life and contribute to society’s well-being. It is true for businesses too, as they get started at different stages of the economic cycle.
MSMEs get supported for creating greater employment, managing the risk that the larger firms in the value-chain transfer to them, and for investing in moving up the value-chain.
The larger firms get supported for dealing with uncertainty that their shareholders find difficult to deal with. While the venture funds provide early-stage risk capital in rich countries, the government has the responsibility to invest in long-term risky projects in a capital-starved country like India. A publicly funded research programme in science and technology is a must.
Purpose of allocation narratives: Building symbiotic relationship between families and business
The government’s resource allocation processes and its narratives are expected to build a symbiotic, non-adversarial, relationship between households and business. While there will always be trade-offs that must be made, given the resource constraints, the discussion around allocation does not have to be described as arising from “revadi” mindset or that the government is doing a favour to people or businesses by providing a certain level of fiscal support for lowering their cost or enhancing their ability to contribute. It is morally wrong to position resource allocation as a favour in a democratic society. The government does not own resources, people do.
Negotiation for resources is a legitimate instrument, but timing of public spending to election cycles is not
The lobbies and interest groups will always try influencing the allocations, as negotiation for resources is a legitimate tool in a democracy. However, the elected government timing public expenditure to election cycles is not. The government’s primary duty (“kartavya”) is to allocate resources for the long-term wellbeing of society. Public resources don’t belong to a political party.
Focus on provision of quality public service, and not the lazy substitutes
The current economic and political narrative suggests that DBT is the solution for all our ills. DBT is an effective instrument, but only under certain circumstances. If we have adequate capacity and the general quality of services has reached an acceptable level, DBT enhances a family’s ability to spend and gives it a choice in selecting the provider. But if we don’t have the required capacity, DBT does nothing more than overload an already stretched system and/or pushes up prices. Similarly, health insurance is of limited use if the capacity to provide quality service is not being expanded at the same pace as the coverage.
PM-KISAN will neither help deal with climate change nor double farmers’ income
Prices for some of the key farming inputs are either controlled by firms with near-complete pricing power (e.g., seeds and pesticides companies) or are subject to geopolitics and the related government decisions (e.g., diesel and fertilisers). PM-KISAN, announced in February 2019, just before the general elections, is only a partial solution.
The farming community is also expected to deal with the cost of changes in global climate. Even as the government discusses the climate change related costs at global forums, it has not been investing adequately to mitigate the impact of these uncertainties on an average farmer.
A long-term programme of investment in irrigation and improving farming practices through technology, combined with a fairly determined MSP, is a far more effective use of public resources than trying to cover crop losses through the provision of insurance or a fixed quarterly transfer that is neither linked to cost of cultivation nor to the risk that the farmer takes.
Interest subvention: A poor substitute for public housing or lower cost of housing
The interest subvention scheme is no solution to the problem of housing. The scheme is available to households with annual income up to 18 lakhs but provides subsidies only on loans up to 12 lakhs.
The question that we must ask is – which cities do people earning 18 lakhs per annum live in and what is the cost of a home in the cities?
In most cases, these young families live in metro and state capitals where the cost of housing is far beyond their means – the families that are classified as affluent in a recent Goldman Sachs report. People in lower income groups cannot even dream of owning a home in these cities.
The solution lies in preventing land prices from going up through speculative purchases, leveraging of technology to lower cost of construction, improving the air quality through urban planning (currently non-existing) and investment in public transport and sanitation.
Public provision of services: Get guided by changes in cost of living
An analysis of personal consumption expenditure, as given in the table below, suggests that the share of non-food essential consumption (highlighted in blue) has gone up from 39.7% to 41.7% during the last 8 years.
Even though the health insurance coverage through government schemes is expanding, the spending by households on health has still increased significantly. Similarly, private expenditure on transport and communication is now at 18.8% - sectors where the public as well as private sector services are inadequate and poor. These are the areas where we need much larger public investment.
It becomes worse if the government uses the taxes on these essential services (with low price elasticity of demand) for balancing the budget, as has been the case with petrol, diesel and gas prices, and times price changes to the election cycle.
Resource mobilisation strategy: Fiscal consolidation is not the most important problem to solve
One of the recent arguments has been that there is a need for fiscal consolidation. Such an argument is based on the premise that the fiscal deficit must not exceed 3.0% of GDP, an artificially determined ceiling. While the government has currently given itself a bit of headroom at 4.5%, it is still obsessively concerned about its impact on India’s credit rating. Given that the Indian state does not borrow in global markets, we don’t have to worry about a rating firm’s concerns. We don’t even want to borrow in global markets, as we run a large trade deficit that is not going away anytime soon.
A government raising debt to finance programmes that lower the cost of living and improve quality of life for people or helping businesses become more innovative and productive is committing no sin. Similarly, it is perfectly legitimate to raise direct taxes from higher income households to serve a society’s need. In a market economy, the traditionally advantaged groups will often do better. In fact, raising indirect taxes on everyday consumption products and services is the only choice that comes close to being a sin. Increasing the rate of tax on speculative profit earned on trading capital, that is masquerading as investment capital, is not a bad idea at all.
The Indian state has been underspending for just too long. For example, the US government spending, least among the developed nations, is about 36% of the GDP whereas our government spending is about 26% of our GDP. The dream of being a “viksit” nation requires that we not only raise resources for consistent level of investment but also invest them wisely.
