Last straw on the fisc back

Soumya Kanti Ghosh , Rajiv Kumar : 

Thu Feb 16 2012, 03:48 hrs
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The huge expenditure on the food bill, with the attendant leakages, could well make fiscal recovery impossible

In the first part of this article, we have estimated the actual cost of implementing the food security bill in its current form. In this part, we now examine the fiscal sustainability of the same. The current state of the revenue and expenditure trends of the Central government (refer table) show that while revenue growth has significantly weakened, expenditure growth has accelerated sharply. In particular, during the last five years (FY11 over FY06), tax revenues have increased only by 13 per cent, as compared to 15 per cent between FY04 and FY06.

On the other hand, non-Plan expenditure during FY06-FY11 (i.e. subsidies have grown by 30 per cent and interest payments by 13 per cent) is significantly higher than over the period FY04-FY06. Additionally, gross market borrowings increased by 32 per cent during FY06-FY11, against a decline of 2 per cent in the earlier period.

In fact, the fiscal stress being currently faced is worryingly similar to (if not worse than) the decade of ’80s that witnessed a sharp deterioration, finally leading to the 1991 crisis. For example, market borrowings had increased by 12 per cent for the decade ended 1991, while they have increased by 32 per cent in the last five years; non-Plan expenditure had increased by 20 per cent during the ’80s and has now increased by 30 per cent and fiscal deficit itself has increased at the rate of 30 per cent during the last five years as compared to 18 per cent for the decade ending 1991. Disturbingly, it is the composition of fiscal deficit that is worrying, with revenue deficit increasing at a much faster pace than fiscal deficit (same scenario as in ’80s) and thus productive capital expenditure being squeezed out. It is clear that some very urgent and strong steps are today required to avert any fiscal crisis. In this context, the fiscal sustainability of the food security bill is seriously in doubt.

Some observers, however, argue that it is churlish to argue against additional financial allocations for fighting the curse of hunger and malnutrition when the Central government regularly forgoes huge amount of revenues. This argument is based on the statement of revenue forgone included in the Annual Union Budget Statement (for the year 2010-11, the revenue foregone as stated in the budget was Rs 5,11,630 crore / 6.5 per cent of GDP).

It is important to examine the veracity of this argument specially because, as eminent a person as Amartya Sen cited this in his recent P.R. Brahmananda Memorial Lecture delivered at the Indian Economic Association’s annual conference in Pune in December. A closer look at these numbers, however, reflects the following:

One, excise duty concessions of Rs 198,291 crore: These are revenue forgone on account of mass consumption goods like medicines, tooth powder, candles, post cards, sewing needles, kerosene stoves, etc. Clearly, exacting the excise duty from these items would have worsened the fate of the poor.

Two, customs duty concessions of Rs 174,418 crore: These are concessions for importable goods consumed for exports as defined under Section 25 (1) of the Customs Act. It is important to note in this context that import duties on components used for exports are universally exempt as taxes are not supposed to be exported. Moreover, is it anybody’s case that these import duty concessions be removed because by doing so, we may lose a significant part of our total export revenue (of this, gems and jewellery exports alone contribute close to 15 per cent of exports). Furthermore, a simple exercise shows that if we strip gems and jewellery exports from our foreign exchange earnings, our short-term debt (residual maturity) as a percentage of reserves, touches 48 per cent from the current level of 44 per cent.

Three, personal income tax concessions of Rs 50,658 crore are primarily related to exemption limits for income tax — these will have insurance premia, contribution of charities and political parties, interest payments on loans for higher education, etc. This could arguably be eliminated, but are we prepared for the distress that it will cause to the salaried class?

Finally, tax concession of Rs 88,623 crore is primarily related to export undertakings established in Special Economic Zones and to 100 per cent export-oriented units. Other areas for concession under this head are accelerated depreciation for industries established in new and hilly regions, scientific research and even contribution to political parties. However, studies including one by ICRIER in 2007 (“Impact of Special Economic Zones on Employment, Poverty and Human Development” by Aradhna Aggarwal) and by Panduranga Reddy C., Prasad A. and Pavan Kumar G. show that SEZs have a significant positive impact on foreign exchange earnings, employment generation and hence poverty reduction. The net cost benefit impact of SEZ is therefore highly positive.

Given the above details, it may not be completely misplaced to argue that the additional expenditure for implementing the food security bill is far greater than any actual revenue forgone for promoting economic activity in the country.

So where do we go from here? We believe what is important is that we must strive to improve our tax base now. As Graph shows, India’s tax revenue as a percentage of GDP is much lower compared to its neighbouring countries. As a case in point, consider the following facts. The total number of assessees expanded at a measly 3 per cent for the five-year period ending 2009-10, the number of returns in excess of Rs 1 crore is only 0.06 per cent of 34 million assessees and the number of PAN card holders was 96 million for the year ending 2009-10 (hence the filing gap is more than 60 million).We must, therefore, expand our tax base immediately.

Second, to implement such food safety bills, we need to improve our delivery mechanisms drastically to plug leakages. A significant portion of foodgrains, mainly rice and wheat, meant to be distributed to eligible families under the PDS gets diverted to the open market. The diversion rate was estimated to be around 36 per cent in 2004-05 (study quoted by the ministry of food, consumer affairs and public distribution). Measures like involving gram panchayats, self-help groups, van suraksha samitis and other community institutions in the running of fair price shops could be used as an effective delivery mechanism to plug leakages (Banerjee and Tiwari, ET, January 28, 2012).

These apart, delivery mechanisms like cash transfers/ food stamps could also be successfully replicated in India. For example, the largest cash transfers such as Brazil’s Bolsa Família and Mexico’s Oportunidades cover millions of households. The food stamp programme is also a central component of America’s nutrition assistance safety net. The stated purpose of this: “to permit low-income households to obtain a more nutritious diet by increasing their purchasing power” (The Food Stamp Act of 1977, as amended, P.L. 95-113).

Food security, an urgent necessity, will be ensured only when Indian agriculture is modernised and productivity and yields rise in the coming years. In our view, it will, therefore, be far more effective and sustainable to allocate additional public resources for developing agriculture, infrastructure and delivering new technologies to the sector. This will more effectively ensure food security in the country.

Rajiv Kumar is secretary-general, FICCI, and Soumya Kanti Ghosh is director, economics & research, FICCI. The authors thank Nibedita Saha for research. Views are personal
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