The need to separate necessity from largesse

Where does public welfare end and populism start? The answer to that question may not be straightforward. What’s clear is the rising mountain of debt.
Image used for illustrative purposes only. (Express illustration | Soumyadip Sinha)
Image used for illustrative purposes only. (Express illustration | Soumyadip Sinha)

John D Rockefeller, the primo uomo of America’s gilded age, once famously quipped, “I believe that thrift is essential to well-ordered living.” Before the post-1990s’ generation schmoozed on the hedonism of debt—spending unearned future incomes—every school-going child was taught to spend less than what they earned and save for a rainy day. In other words, live within your means. Thrift was a virtue, not a vice. However, financial profligacy and licentiousness, both sovereign and personal, have stood this maxim on its head.

Sri Lanka’s severe economic crisis resulted in an inflation rate of 54.2 percent and a 4.2 percent decline in the GDP. Nepal has a widely fluctuating debt-to-GDP ratio accompanied by unstable foreign exchange reserves because of exponential levels of import dependence. Pakistan’s economic decline has pushed millions into poverty. All these red flags serve as a stark warning on the catastrophic consequences of subverting fiscal conservatism and macro-financial stability at the altar of short-sighted populism.

As the next general election nears, the propensity for populism will only exacerbate further. Where does public welfare end and populism start is a question that confounds every public policy practitioner.

Does the disbursement of ₹6,000 annually to around 10 crore farmers under the PM-Kisan Samman Nidhi Scheme qualify as welfarism or populism? Does distributing free foodgrains to 81.35 crore people under the PM-Garib Kalyan Anna Yojana at the cost of ₹2 lakh crore a year qualify as a necessity or sop?

Do the Delhi and Punjab governments’ schemes providing free electricity to people qualify as a welfare measure—especially given that Punjab is borrowing money to service the interest component of its ever-burgeoning debt burden that today stands at a whopping ₹3.27 lakh crore?

To proscribe a repeat of the 1991 financial crisis, the Union government implemented the recommendations of the 12th Finance Commission and introduced the Fiscal Responsibility and Budget Management Act of 2003 (FRBM). This was followed by all states enacting fiscal responsibility legislations (FRLs).

Unfortunately, with time, both the Union government and the states have failed to meet the targets set under various fiscal responsibility legislations. As of March 31, 2023, the debt-to-GDP ratio of the Union government stood at 57.1 percent while India’s debt-to-GDP ratio was 83 percent. The cumulative debt of the states was 29.5 percent of the GDP in 2022-23. These numbers are way above the FRBM norm of 40 percent for the Centre and 20 percent collectively for the states.

The Chinese government’s debt-to-GDP ratio in 2022 was 77.10 percent, though from 1995 to 2022 it averaged 37.08 percent. Its macro leverage ratio or total debt-to-GDP ratio rose to a whopping 279.7 percent in the first quarter of 2023. This is why it is said that China’s growth is buried under a great wall of debt and therefore a bad example to emulate.

On March 31, 2014, India’s debt and other liabilities stood at ₹58.6 lakh crore. On March 31, 2024, it will touch ₹169.46 lakh crore. At current exchange rates, it is estimated at ₹172.50 lakh crore, an increase of ₹113.9 lakh crore. Who will service these debt numbers? The coming generations obviously, thereby completely eroding inter-generational equity. India’s external debt will also increase by ₹39,286.12 crore in 2024-25.

The Union government and state governments must mandatorily and strictly subscribe to the golden rule of public finance: A government should borrow only to incur capital expenditure and not fund revenue expenditure. Moreover, there is a need to revisit the very construct of the FRBM Act and the FRLs. Although the FRBM Act is not a money bill, it has been repeatedly amended surreptitiously by inserting clauses into the finance bills.

Given that parliament has failed to exercise its sovereign authority under Articles 292 and 293 to establish strict borrowing limits both for the Centre and states, should borrowing limits be imposed by providing a separate schedule in the Constitution and by appropriately amending the two articles or adding new ones?

The escalating burden of pensions also poses a grave challenge to the state of public finances in India. The Union government’s pension expenditure has increased three-fold in the last nine years, from ₹94,468 crore in 2012-2013 to ₹2,54,284 crore in 2021-2022. The pension expenditure of states increased eleven times, from ₹37,378 crore in 2004-05 to ₹3,99,819 crore in 2021-2022. Between 2012 and 2021, the total defence expenditure went up by a nominal annual rate of 9.5 percent, while defence pensions surged by 14 percent year on year. Ironically, the defence capital outlay only rose by 8.4 percent during that period.

India spends 18 percent of total government revenues—both the Union and states—on pensions for the public sector workforce. The sector accounts for a meagre 3.2 percent of the country’s total workforce. In contrast, the US’s funded pension programme benefits 94 percent of all workers, including those in the public sector. The US government spends 15 percent of total government revenues on the programme.

One of the major causes of the economic crisis in Greece in 2009 was the reluctance of the Greek government to change its antiquated pension system, fearing a public backlash. This ultimately resulted in the collapse of both the Greek government and its economy, requiring a bailout of 320 billion euros. Greece has now rescheduled its debt repayments to 2060. As a consequence of the debt crisis, pensioners lost most of their life savings.

It is therefore paramount to revisit the entire paradigm of pensions both at the central and state levels. These unfunded pension paradigms are unsustainable.

India’s political system, therefore, must rise above the one-upmanship of competitive populism and rededicate itself to returning the nation to the path of fiscal conservatism and balanced public finances—even if that entails practising severe financial austerity and aggravated thrift by relearning the old adage: ‘Today’s deficits are tomorrow’s taxation’. Otherwise, future generations will have to pay through their nose.

Manish Tewari

Member of parliament, lawyer, and former I&B minister

(Views are personal)

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