Columns: Biz Column by Amit Mitra

The growing deficit and debt burden requires a reduction in subsidies--and a political will.

Today the nation has finally woken up to the perils of fiscal profligacy and rampant, irresponsible borrowing by the government. Yet the political leaders still seem prone to illogical populism when push comes to shove. Fiscal deficit had become almost uncontrollable in the US a few years ago. But with a determined political will backed by the force of wide consensus that country has extinguished all fiscal deficit and is expected to generate a surplus of $117 billion this year. The US is now likely to post a $1.7 trillion surplus by the year 2008. European nations too have shown similar determination leading to commensurate results. Should India remain far behind?

There is a wider consensus today to slash the decades-old subsidies offered by the government on non-merit goods. None of us would like to see the prosperous take advantage of subsidised consumer goods. It is shocking to know that the governments at the Centre and the states spent Rs 93,993 crore on non-merit subsidies in 1994-95 alone. Out of this mammoth figure the states contributed Rs 62,470 crore and the Centre Rs 31,523 crore. This unfair inequity amounts to 10.71 per cent of our GDP.

I strongly recommend that non-merit subsidies be courageously cut back, some immediately and some gradually in pre-announced phases. This type of subsidy on higher education, sports and art and culture alone amounts to Rs 11,000 crore. Shouldn't any user charges be instituted for those who wish to consume these relatively non-life-saving forms of consumption?

Finance Minister Yashwant Sinha

It is shocking to learn that 94 paise of every rupee that the Government borrows goes into paying the interest on debt.

On water supply and sanitation the government subsidises a massive Rs 3,200 crore simply because mechanisms for paying small amounts of user charges are non-existent or are mired in corruption. Similarly, in 1994-95 the state governments gave a subsidy of Rs 12,000 crore on irrigation to relatively prosperous farmers. There is no logic to the non payment of reasonable user charges for irrigation waters. It is astounding that the recovery rate for irrigation water dues was only 7 per cent. It is here that I must state that the subsidy offered by the state electricity boards in 1998-99 will amount to a phenomenal Rs 9,610 crore.

Only those areas which I have stipulated above amount to a non-merit goods subsidy of Rs 35,810 crore. I strongly recommend that during this year the Government should muster the political will to slash 25 per cent of these subsidies and resort to a staggered reduction of the remaining percentage over the next four years. This would result in an expenditure reduction of Rs 8,950 crore immediately.

Sapping our capacity to cut back on the fiscal deficit and pulling down the viability of our financial matrix is the stunning debt burden of the Central and state governments amounting to Rs 4,41,000 crore. This is the reason why a precious Rs 75,000 crore had to be allocated in the last budget for interest payments only. It is simply shocking that 94 paise of every rupee the Government borrows go into debt servicing. Therefore the nation has no option but to retire this debt in a planned manner year after year and simultaneously cut back on the interest payment burden in whatever manner possible. The primary instrument for reducing this mountain of debt will have to be the divestment of shares of public sector enterprises. In the last budget Rs 5,000 crore was to be divested but unfortunately only Rs 225 crore could be collected. It is my submission that not only we divest the shares of the four PSUs already earmarked by the government -- IOC, GAIL, VSNL and CONCOR -- but arrive at a principled decision that no PSU should have more than 75 per cent of government holdings. This goal should be achieved within two years, providing ample time for the PSU scrips to attract good market prices. I believe that such a principle alone will garner at least Rs 10,000 crore additionally per annum if properly planned.

In this context there is a sound case for the Government to consider across the board reduction of existing rate of interest which not only has a potential for stimulating investment at a time of near recession but will have a massive fallout of reducing the future debt of the Government. For example, if the Government were to reduce the interest rate by 1 percentage point, it could save future interest payment obligations by as much as Rs 6,000 crore annually. A similar bold effort could be made in the case of the oil pool surplus which has now reached an all-time high of Rs 17,500 crore. Let us withdraw Rs 7,500 crore from this surplus to purely retire government debt. This will radically lower the interest payment burden, yet leave enough resources to hedge against a future upturn in oil prices.

There is no difference of opinion that there is a 30 per cent overstaffing in government offices be it at the Centre, states or local levels. It was expected with reason that the decontrol and liberalisation of the economy over the last seven years would result in a cutback of this surplus manpower through early retirement schemes accompanied by strategic retraining. Since this expectation has been belied, I offer the second best solution. The Government must institute a freeze on further hiring at all levels. Such a step will have no political fallout nor will it generate any trade union wrath. It will only require the courage of conviction and a firm resolve. The steady savings to the exchequer from this policy would be significant over time.

While cutting back of expenditure has focused attention on this point, I want to make some suggestions regarding the radical expansion of the tax base. It was my considered view some years ago that the Laffer Curve (where tax collections go up when rates are brought down because more people are encouraged to pay taxes) would work very well in India. Such reduction in direct tax rates would result in clear increases in the collection of revenue. History has proved this right. The Government may now consider another radical reduction in the direct tax rate, this time accompanied by a commensurate pruning of deductions. This is bound to result in another historic Laffer Curve jump in revenues from direct tax reduction.

Let me also suggest that the Laffer Curve is bound to work in the area of indirect taxes. Reduction in excise duties will result in significant increases in revenue collection. Almost 85 per cent of excise payment to the government comes from a narrow base of 3,500 corporates. This is partly due to the high rate of excise duties which prevent middle and small companies from willingly entering the excise net. A reduction of the excise duty could well be a cornerstone in enlarging the indirect tax base along with a positive Laffer Curve effect.

It is my solemn submission that at this juncture of our historic reforms the nation can and must come together aggressively to reduce the fiscal deficit and the burgeoning debt burden. There is a significant area of informal consensus among political parties, offering enough space for the Government to act decisively. The early signs of this have appeared with the Government's bold decision to cut PDS subsidies for the undeserving. This will save Rs 2,500 crore at one stroke. I have suggested many such strokes which are politically feasible and only require an iron will.

(The author is a well-known economist and secretary-general of the
Federation of Indian Chambers of Commerce and Industry.)