Modi 2.0: Time for frugal good governance

Nirmala Sitharaman 2

It’s a terrible time to be a minister in the Union government. The economy is tanking under the weight of debt funded public expenditure and low private investment due to the lacklustre consumer demand. Private corporate headline growth is low on the back of low capacity utilisation, which hits government tax revenues adversely and casts a gloom over the financial markets.

Unemployment woes

“Statistical” unemployment (as per the government’s PLFS 2017-18) was at an all-time high of 8.7 per cent (prior week recall basis). Some of this could be data noise since every regular worker added equals several temporary workers lost in terms of the same quantum of work performed. The share of casual rural workers in total employment reduced sharply between 2011-12 (NSSO) and 2017-18 from 35 to 25 per cent. The share of regular employees increased from 10 to 13 per cent as did self-employment from 50 to 52 per cent.

A jobless future

The shortage of “good” jobs can only increase. As early as 2015 a government survey found that 35 per cent of aspirational under-graduates were unemployed, as against just six per cent of those who had passed primary school, who were also possibly less choosy. The estimates of job losses over the next 20 years, from automation among other factors, range from two to eight per cent (World Bank) to 69 per cent in India (OECD).

Reality calls

These twin challenges — supporting those without jobs and creating new private sector jobs — require a major overhaul of public resources allocation.  The government must bite the bullet and recognise the disjuncture between the Budget data and reality. The fiscal deficit for 2018-19 was reported in the Interim Budget as 3.4 per cent of GDP. In reality, it is at least 4.1 per cent of GDP — itself revised marginally to Rs 190 trillion from Rs 188 trillion earlier. Embarrassingly, this brings the FD back to the level where the UPA-2 government had left it in FY 2015, wiping off claims of enhanced fiscal stability.

End the chronic revenue deficit

The government must redeem its earlier commitment to reduce the FD to 2.5 per cent of GDP over five years. A hard Budget constraint must be put on revenue expenditure, which must never exceed revenue receipts. No sensible housekeeper would borrow to put food on the table. The revenue deficit (RD) in 2017-18 (actuals) was 1.5 per cent of GDP. It reduced a bit thereafter. But the practice of kicking the can down the road, by accumulating unpaid bills (current liabilities) makes the subsequent RD data dodgy.

Uninspiring tax collection

Tax revenue comprises 86 per cent of total revenue receipts. Unrealistic tax targets were set in the FY 2020 Interim Budget. The performance in the base year (FY 2019) itself is now known to be short by Rs 1.7 trillion (0.9 per cent of GDP). This is unsurprising. GDP growth declined from a high of eight per cent in the first quarter to 5.8 per cent in the last quarter of that year with an uninspiring average of 6.8 per cent as against an average of seven per cent for the last 25 years.

Learning from Amit Shah

Realism must prevail in the budget exercise. Amit Shah, now India’s home minister, when asked about challenges he faced as BJP president, remarked that he was not one to count challenges and focused more on the opportunities. The finance minister faces enormous challenges –some of them kicked down the road into her lap by the UPA government and Modi 1.0. Two opportunities must not be lost since both provide political and economic benefits.

Amit Shah 2

Support the poor & jobless low income earners

First is to target income support directly to the poor in rural areas while enhancing the health budget significantly for a rapid rollout of the flagship Ayushman Bharat programme. The hard part will be to do so and sticking to the mantra of zero revenue deficits. The nature of cutbacks in revenue expenditure is a “plumbing” job. If left to the outstanding bureaucrats in the finance ministry, they can deliver sensible, politically sensitive, equitable cutbacks to fund the new revenue requirements.

Expenditure cell MOF

Double capital investment for growth & jobs

Second, the BJP manifesto for the 2019 elections called for a capital expenditure (CAPEX) of  `100 trillion — of which `25 trillion is only for agriculture — over the next five years till FY 2024.  Meeting this goal requires an initial allocation of `16 trillion in FY 2020 growing at 11.5 per cent, at par with annual growth to keep debt levels in check, to cumulatively account for `100 trillion by the end of FY 2024.

Kashmir Tunnel

The actual allocation for CAPEX in the Interim Budget is just Rs 9.5 trillion, of which two-thirds is from extra-budgetary sources — off-Budget CAPEX by publicly owned companies via loans raised against their balance sheet, including dangerously circular loans from government savings and pension funds. The resultant gap between the manifesto estimates and the actual allocation for CAPEX is Rs 6.5 trillion, or 3.3 per cent of GDP. This is unbridgeable by public finance alone. But reviving the stalled Public-Private Partnership dialogue on an enlarged format, including Foreign Direct Investment funding, can help. Vacating business space occupied today by government companies — particularly the oil companies — can bring in the capital required over the next five years.

Target CAPEX increase in quick returns projects

Till then CAPEX on defence procurements should be moderated; the hard diplomatic stances — a muscular security strategy including the rejection of China’s Belt and Road Initiative and opening up the space business ecosystem to the private sector — can reduce the pressure on capital outlays.

Initiate long post-postponed structural public finance reforms

Modi 1.0 functioned in perpetual election mode with good political outcomes. It is high time that Modi 2.0 focuses on stalled structural reforms. One such is public financial management reforms (PFMR) and downstream project management reforms. Inefficiency in the allocation and use of public finances must be tackled headlong.  No government has attempted PMFR beyond scratching the surface during the UPA years, when shallow appraisal management systems were instituted.

Finance Ministry India

Reducing the opportunities for misallocation of public resources under political pressure and monitoring their use in real time can reduce the debt burden and stem the drain from interest payments (nearly Rs 7 trillion, or 3.5 per cent of GDP); avoid crowding out of the private sector and reduce their cost of accessing debt markets. This reform is overdue. Starting it in this government’s early days can deliver results well before the next elections in 2024.

Adapted from the authors Opinion Piece in The Asian Age, June 7, 2019 https://www.asianage.com/opinion/columnists/070619/modi-20-governance-to-need-a-frugal-touch.html

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