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Manmohan Singh flays open-ended subsidies, says NDC must debate govt expenses

Former Union finance minister Manmohan Singh today said the National Development Council should debate and reach a consensus on restructuring public expenditure and measures to cut back non-merit subsidies other than those for food and fertiliser to tackle the mounting fiscal crisis.

Referring to the recent hike in the prices of foodgrains and cooking gas and the subsequent protests, he said since 1991, subsidies granted to food and fertiliser had come down from 2.2 per cent of the gross domestic product to 1.4 per cent.

"We can't wish away food subsidies but we can't have a system of open-ended subsidies which would only result in bad budgeting," he added.

Singh made these comments after inaugurating a national seminar on public expenditure management and efficiency in Madras, organised by the Institute of Public Enterprises and Public Administration.

He said non-merit subsidies in various sectors amounted to ten per cent of the GDP. Power subsidies in various states had resulted in losses up to Rs 120 billion for the state electricity boards, crippling much-needed investment to augment power production.

It was necessary to channelise public expenditure for investment in physical and social infrastructure. The present level of investment in infrastructure was a poor 5.5 per cent of the GDP which should be hiked to 7.5 per cent in the next few years.

Singh said funds generated from the cutback on subsidies could be utilised for long-term empowerment of the people through investment in vital sectors. The present level of expenditure on education was only 3.7 per cent of the GDP and should go up to six per cent, he added.

He said the composition of public investment in agriculture, which was 28 per cent of the GDP, had shifted towards subsidies resulting in a financial crunch.

Lamenting that the fiscal front was no longer stable, he said attempts being made since 1991 to bring the fiscal deficit down had not yielded the desired results. Inability to bring down the fiscal deficit would pose a grave threat to the planned development process and the commitment to poverty eradication, he added.

The combined revenue deficits of the Union and state governments amounted to 4.5 per cent, which meant that the governments were borrowing to finance their current level of consumption. This would lead to unsustainable levels of public debt. The interest burden on public debt amounted to Rs 750 billion, equivalent to 60 per cent of the tax revenue, he added.

Singh said the process of augmenting direct taxes initiated in 1991 when he was finance minister had borne fruit. It was necessary to increase the tax-to-GDP ratio from the present level of 16 per cent to 20 per cent in the next few years.

He, however, said the tax administration had not moved at the desired pace in augmenting indirect tax revenue on the customs and excise fronts. ''The department officials have been pre-occupied with the amnesty schemes announced by my successor governments like VDIS and Samadhan,'' he pointed out.

He said it was necessary to mobilise public opinion to contain public expenditure since our parliamentary system is functioning with a sense of patronage in which everyone is clamouring for more expenditure. Interest rates had to be brought down and public borrowings limited to ensure stronger control of fiscal deficit.

Earlier, former president R Venkatraman, who presided over the seminar, wanted a constitutional limit to be imposed on the Union government's power to borrow from the market to finance deficits.

UNI

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