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Issues and PrioritiesBudget 1998-99
Budget 1997-98
Budget 1996-97
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Issues and Priorities
 | The most intractable and long-standing issue confronting us is that of
the fiscal prudence. The various aspects of the fiscal problem, namely the fiscal deficit,
the revenue deficit, unproductive expenditures and unsustainable subsidies are now fairly
well known. With the exception of the initial success achieved in 1991-92 under the
pressure of the balance of payments crisis, subsequent improvements have alternated with
set backs and reversal. As a result, the position today is not significantly better than
in 1991-92. There is therefore a clear need for building a political consensus on this
issue in terms of both constitutional and administrative measures that need to be taken. |
| The fiscal deficit is the key parameter of macroeconomic policy, which
has profound implications for inflation, interest rates, investment, growth, the financial
system, balance of payments and last, but by no means least, overall credibility of
Government’s macroeconomic policy. For the Central Government the fiscal deficit
simply reflects the net borrowing requirement of the Government. A high fiscal deficits
leads to excess borrowing from either the RBI or the market for loanable funds. Excessive
borrowing from the RBI leads to high monetary growth, which fuels inflation and puts
pressure on the exchange rate. When considering Government borrowing from the market, the
fiscal deficits of Centre and State Governments need to be aggregated (in 1997-98 (RE)
this was 7.4 per cent of GDP). Such a high level of Government borrowing pre-empts funds
which could otherwise have been used productively in industry, agriculture and services.
High deficits also keep interest rates high and investment and growth low. Excess
Government borrowing also places undue pressure on the domestic financial system and
capital markets. There is also the long-term issue of sustainability of fiscal deficit. |
| Long term fiscal sustainability generally requires bringing down the
Primary deficit (gross fiscal deficit minus interest payments) to below zero. For the
Centre and States together, the primary deficit is estimated at 2.4 per cent of GDP in
1997-98 (RE), with little prospect of improvement in 1998-99. A reduction in the primary
deficit to zero would, therefore, require at least a 2.4 per cent of GDP reduction in the
fiscal deficit. If the entire adjustment falls on the Central government, this would
require a reduction of the Central fiscal deficit to about 3.3 per cent of GDP. This
target assumes that the real interest rate in the economy is lower than the growth rate.
If this condition does not hold for any reason, a primary surplus and consequently a
greater reduction in the fiscal deficit would be required. |
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| Quite clearly, fiscal consolidation is absolutely necessary for
containing inflation, reducing interest rates, promoting investment and growth, and
fostering reasonable stability in the financial system and the foreign exchange market.
Experience from the rest of the world underlines the importance of fiscal deficit
reduction in regard to reducing interest rates and inflation. It is therefore essential to
put the fiscal deficit on an irreversible and unambiguously declining trend. |
| In a broader qualitative sense, sustainability also depends on the
quality of the government expenditure and the nature of the tax system underpinning the
fiscal system. Concern about the revenue deficit stems from the legitimate concern that a
significant part of revenue expenditures are of low priority. These low priority
expenditures and non-targeted subsidies need to be identified and eliminated. This is also
essential for freeing up funds for completing the unfinished tasks of universal primary
education, effective public health systems and modern water and sewage systems for the
entire population. The impact of the Fifth Pay Commission and its aftermath on revenue
deficits of Centre, States and local bodies lends urgency to the need to downsize
government. The time has perhaps come to reconsider the issue of constitutional limits on
the deficit as well as to take up the challenge of reengineering government. |
| The task of reforming the tax system must also be carried forward and
completed. But such reforms must be accompanied by determined efforts to augument revenue
mobilization through base broadening, improved administration and other means. The decline
in the tax to GDP ratio of recent years must be reversed. |
| The commendable but gargantuan task of decontrol and de-bureaucratisation
which every government in the nineties has set for itself remains unfinished. The extent
and depth of the economic distortions such controls have created are perhaps still not
fully appreciated by all, even though the negative effect on the public is known to all
who interact with the government. The remaining price and distribution controls must be
eliminated. At the State level this must be preceded by a major effort to identify such
controls. Investment controls are the second most pernicious legacy of the control era and
remain in several infrastructure service sectors. SSI reservation is another form of
investment control. The need to replace all quantitative restrictions by fiscal measures
was recognised even in the eighties, yet import and export controls remain widespread in
certain sectors like agriculture. Though reform of the foreign exchange system has been
one of the prominent areas of reform, the operation of exchange controls still requires
improvement, particularly for exporters and knowledge-based industries. Similarly, though
some of the well-known financial sector controls have been removed, many controls remain
embedded in the laws, rules, regulations, norms and procedures. |
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| The very uncertain global environment during 1998 has brought external
issues back into focus during 1998-99. As downside risk remains prominent in all the
forecasts of the world economy for 1999, the prominence of external issues in our own
policy making is likely to continue in the coming year. The deceleration in the growth of
exports over the last three years has mirrored to some extent the deceleration in growth
of exports from developing countries. It is somewhat disturbing that the deceleration in
the dollar value of our exports has been greater than that of ‘developing
countries’ during 1997 and 1998. Though real exchange appreciation since 1996 has
contributed to this decline, we have to now go beyond such macroeconomic variables to
address the more long-standing and intractable structural disadvantages faced by our
exporters (relative to those of exporters in China, Malaysia, and Thailand). |
| During the last two to three decades, the fastest growing economies of
the world have also had fast growth of (manufactured) exports and employment. Most of
these countries have built a much more positive environment for exports (and investment),
than we have been able to do. This has two aspects: a liberal and flexible policy regime
for export production and marketing and simplified rules and procedures for exporters. The
increased opportunity in the area of software and other service exports and
knowledge-based industries has thrown up additional areas for policy reform and procedural
simplification. |
| In terms of routine interaction between exporters and the organs of the
state, such as customs, exchange control, tax authorities and licensing authorities
(DGFT), a sea change in approach is required to bring it on par with successful exporters
of East Asia. Even a neighbouring country such as Sri Lanka reportedly has a much
friendlier operational environment for exporters than India. |
| The policies applicable to export production need to be transformed to
remove the controls and constraints facing exporters. This requires a comprehensive
re-examination of labour laws and SSI reservation as applicable to exporters, with a view
to bring them on par with successful, exporting countries, like China. Warehousing and
cargo handling of imports and exports at airports and ports remains a monopoly of the
state, with the consequent deleterious effect on service. The supply of infrastructure
services like electricity, telephones and rail transport to exporters, remain of as poor
quality as for the general economy. If these policy and procedural steps (along with
fiscal correction) are not taken, the balance of payments could again come under pressure.
Better export promotion policies also require a clear recognition that high import tariffs
discourage exports, while lower tariffs enhance the relative profitability of exports.
Greater liberalization of trade in agriculture is also desirable for promoting exports. |
| Radical reforms in the areas of infrastructure services, agriculture and
factor markets are necessary to initiate a virtuous cycle of export growth, employment
generation and economic growth. With only a year left before the start of the 21st century
it is perhaps an appropriate time to start preparing for a second generation of economic
reforms. Such a reform agenda must include reform of factor markets, public sector,
government and other public institutions, legal systems, State level policies and
procedures and reform of critical sectors such as infrastructure, agriculture, education,
R&D and agricultural/rural extension. |
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| Within factor markets, capital markets and the financial sector have also
seen considerable reforms. The financial collapse in East Asia and other countries has,
however, emphasized the fact that we still have some way to go in bringing the financial
sector (including banking) to international standards. Completion of insurance and pension
fund reforms is merely the first step in creating strong and vibrant long-term debt
market. Other factor markets areas such as labour, land, natural resources and corporate
management have not been tackled seriously by reforms so far. |
| The fact that primary responsibility for social sectors, agriculture and
rural development is generally assigned to the States under the Constitution, underlines
the importance of state level reforms. These include fiscal reforms, decontrol and
de-licensing particularly with respect to transport, storage and processing of
agricultural goods, reform of infrastructure sectors like electricity, canals and road
transport and decentralisation and involvement of local bodies, including NGOs.
Institutional reforms such as those related to size and quality of government, freedom of
information, economic laws and the legal system require involvement of the Central and
State Governments as well as the judiciary. |
| These reforms have to be designed to set in motion a process of
self-sustained, employment promoting growth. Democratic participation and empowerment of
the people through education, public health improvement and information/knowledge is an
essential element of such growth. Once policy distortions that promote capital intensity
or discourage hiring of labour are identified and removed, investment can create more new
productive jobs. Government administration and Public institutions will need to be
transformed to recognise and appreciate the centrality of efficient investment (physical,
human or knowledge capital) in any self-sustaining development process. |
| The award of the Nobel Prize in Economics to Prof. Amartya Sen has again
brought home to us (if such a reminder was needed) that growth and development are
ultimately about the entitlements of people. Universal literacy and compulsory primary
education are necessary not only for sustaining productive employment and economic growth,
but also for making every individual a full participant in the democratic life of the
nation. The provision of public goods and basic amenities like water, sewage and
sanitation must extend not just to the middle class but also to the poorest of the poor.
Research & monitoring and control of contagious diseases and epidemics may not be
glamourous activities but often have far reaching effect on the poor. Similarly,
strengthening of the norms of civil society and elimination of violence and corruption
will bring substantial benefits for the poor. It is critically important to refocus
government priorities to those areas which are the basic responsibility of government and
to withdraw from areas where private initiatives can often achieve the goals more
efficiently. |
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