Beefing up the nation's finances

The Public Expenditure Round Table (PERT), a non-political think tank based in Chennai, devoted to promoting efficient management of the nation's finances by the central and state governments, recently took the laudable initiative of arranging a colloquium on the state of the nation's economy based on a review of the existing policies and their outcome.

It was attended by eminent economists, former directors of the International Monetary Fund and the World Bank, former high officials in the central and state governments, local heads of reputed consultancy firms, and experts in public finance.

As a participant, I found the combined stock-taking of the economic and financial situation to be of great use in beefing up the nation's finances and determining the future course of action by the central and state governments.

Tax-related issues

According to the latest reports, total tax collected in 2007-08 is expected to cross Rs 600,000 crore (Rs 6 trillion), against the Budget estimate of Rs 548,122 (Rs 5.481 trillion), pushing up the gross tax to GDP ratio to 13 per cent as against the Budget estimate of 11.8 per cent.

Direct taxes will constitute 50 per cent of the total, with the actuals in terms of indirect taxes more or less keeping to the Budget estimate of Rs 278,013 (Rs 2.780 trillion). Although there may be a shortfall in excise duty collection, it may be made good by customs and service taxes.

The welcome prospect may well be the combined effect of better compliance, more effective tax administration, phenomenal earnings in the services sector and the high economic growth.

The public perception, however, is that all is not well at the lower echelons of tax administration and the growth in collections is by and large due to growth in GDP and increase in the levy of indirect taxes rather than improvement in the collection machinery.

In any case most of the collections of direct taxes is by TDS and tax officials have little to do except carrying out assessment of those cases where there has been evasion or avoidance. It will be useful to check how much of additional tax collection accrues by way of final assessment by officers.

The buoyancy in revenues will also have to be viewed against the threats posed by a possible surge in oil prices and the US recession, as also by the enormous burden on the exchequer resulting from the recommendations of the Sixth Pay Commission.

At the same time, some readjustment of taxes and duties and allowances for depreciation will be called for in order to give a fillip to growth in the manufacturing sector which, at 26 per cent, is way behind China's 40 per cent.

In order to encourage employment oriented industrial growth exemption limit for SSIs for payment of CENVAT may be raised from the present limit of Rs 1.5 crore (Rs 15 million) to Rs 2.5 crore (Rs 25 million).

The finance ministry might study the trend in the growth of employment in the organized sectors which we understand have not grown in consonance with the growth in GDP. What fiscal incentives could promote growth in organized sector employment is a matter that merits serious consideration.

Revenue collection can get a tremendous boost in the coming years if attention is paid to the streamlining and simplification of tax laws, broadening the base of tax assessees and better targeting of subsidies.

There is need to have a close and critical look at exemptions (now amounting to Rs 2,35,191 crore -- Rs 2.351 trillion) in terms of revenue forgone) so as to do away with those which have outlived their purpose.

Giving highest priority to agriculture

All indications are that India will face a grave risk on the food and agricultural fronts unless immediate steps are taken to step up investments to increase agricultural production and productivity. Production figures have begun to show a decline even in states which had formerly a good record of performance.

Even in a state like Tamil Nadu which had been doing well in the past, there has been a fall in rice production from 9 to 6 million tonne.

Agriculture apparently is not proving profitable. This calls for a thoroughgoing and intensive reappraisal of the working of the entire range of policies and mechanisms bearing on the availability of fertilisers, seeds and credit, and computation of remunerative prices for farmers based on a realistic cost structure.

The Agricultural Extension Service and Lab-to-Land transfer of best practices by means of demonstration plots had been as good as wound up since 1989 and need to be urgently revived.

It is necessary to revise upwards the targets laid down by the National Food Mission (2007) for raising production of rice, wheat, pulses and other commodities.

Agro-processing is an area which can pay rich dividends, giving a powerful boost to economic growth. The International Commission on Peace and Development whose Prosperity 2000 Strategy had already been included in the Budget proposals of 1992-93 had estimated that exploiting the potential for agro-processing will result in the creation of 100 million jobs and double the export receipts.

A country which had attained self-sufficiency in food, with more than adequate buffer stocks to run its public distribution system and act as an insurance against emergencies and was also exporting foodgrains is now inexplicably backsliding with two farmers committing suicide every hour in 2007.

No amount of efforts and resources would be too much to ward off food insecurity which has often been a precursor to violence and upheavals.

Inflation

The latest monetary policy announced by the Reserve Bank of India aims to keep inflation pegged at between 4 and 4.5 per cent. It must be borne in mind that the calculation of inflation on the basis of wholesale prices gives no real indication of its impact on the average householder.

Arriving at a realistic picture calls for a review of the methodology taking account of factors that ought to go into the calculation but are at present either excluded or underplayed.

The RBI may consider evolving a transparent paradigm for scientific inflation targeting (such as exists in a number of industrialised countries) and put it in place after having it approved by state governments at a specially convened meeting of the Inter-State Council.

The expectation about maintenance of inflation within a predictable range as a concomitant of price stability will come to naught unless the state governments are restrained from squandering funds on freebies which do not contribute to public weal and unless the central and state governments ensure that the huge amounts spent on subsidies are properly channeled towards the poor and vulnerable sections of the population.

There have been pronouncements to this effect from time to time but to little avail. It must be remembered that populist aberrations like keeping passenger rail fares disproportionately low and raising freight to make up for the deficit also contribute to inflation.

Sixth Pay Commission

The nation's finances confront the danger of being thrown into disarray by the commission's recommendations, especially because state governments, without justification, are also treating their employees on par with those of the Centre.

The harm likely to be done to the economy by implementing the Commission's recommendations can be somewhat mitigated if the following pre-conditions laid down by the Fifth Pay Commission for giving effect to its proposals are strictly observed at least this time:

• The process of right sizing the personnel in consonance with the actual requirement should be undertaken and completed.
• Excess personnel should be phased out within a stated period.
• Norms of performance and productivity for each category of staff should be prescribed and enforced.
• Instead of creating new jobs entailing permanent liability, assignments should be given on contract (subject to renewal, if necessary, on satisfactory performance). Outsourcing some of the existing functions should also be considered.
• The number of higher category of posts should be kept to the barest minimum by combining those with similar responsibilities. The posts of Secretaries of Shipping, Tourism and Civil Aviation can be combined and be under one Secretary as all these three have very high level heads of technical directorates who, in the case of shipping and civil aviation, are statutory authorities.

Foreign Exchange Reserves

At least a third of India's foreign exchange reserves of close to $300 billion can be put to use in sectors like infrastructure vital to faster economic growth without sacrificing the three cardinal safeguards of liquidity, adequacy and safety.

There are lessons from the experiences of forex reserves management by China, Singapore and South Korea which can be borrowed and improved upon. China, for example, has transferred funds from its international reserves, held with the People's Bank of China, to a new company, Central Huijin Investment Company, set up in December 2003 and jointly managed by the government and PBC.

CHIC has used the reserves to recapitalise three large banks. It should not be difficult to put in place a modus operandi in India also that will balance risks with benefits.

Economic reforms

They are proceeding in a fitful fashion, with much residual work (disinvestment, financial and insurance sector reforms, labour reforms, retail distribution) still waiting to be accomplished. The country has to aim at a growth rate of at least 12-15 per cent to keep pace with growth in population and the revolution in rising expectations that it will trigger. This can be brought about only by freeing the economy from the remaining shackles.

Watch over implementation

Budget management and fiscal responsibility is a function of timely and effective implementation. Without it, even well-conceived schemes can lead to allocated funds going down the drain.

The National Rural Employment Guarantee Scheme is a good example of a well-meant social ameliorative measure falling a prey to malpractices, misuse of funds, bogus rosters, embezzlement and non-creation of productive assets.

The CAG has had to comment adversely on the mode of implementing the scheme in some states, although in the overall it can be said to be fulfilling the purpose it was meant to serve. There is a whole host of similar schemes which will benefit from cost-effective implementation and mid-course corrections.

The outcome-outlay statements and the report cards of ministries/departments should be put to the maximum use to guard against slippages in implementation and consequent wastage of funds.