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May 5, 2000
BUDGET 2000 |
The Rediff Business Special/Jeffrey D. Sachs, Nirupam BajpaiTen crucial initiatives for a decade of development
Part I: India's Decade of Development To make the first decade of the 21st century a true "Decade of Development" will require a broad-based programme of economic and social actions. These actions will have to be broad based, requiring new approaches and legislative reforms in many areas of public policy. We summarise ten main areas of reform as follows. 1. Universal literacy, based on national goals, backed by coordinated actions of the central government and state governments. Universal literacy could be achieved through creative mobilisation of new information technology approaches, better school attendance, and other policies, all with a clear focus on inclusion of girls and other traditionally disadvantaged groups. The central government could call together the chief ministers of the states to launch a new national commitment in favour of this goal. The economic and social returns from such an initiative would be huge. Evidence from across the world suggests that high levels of literacy have helped raise growth rates and reduced fertility rates over time. 2. Aggressive public health campaign to address major infectious diseases (pneumonia, diarrheal diseases, malaria) and especially the incipient AIDS epidemic, which now threatens India with tens of millions of cases unless properly addressed. 3. Enhanced family planning policies, to limit the growth of India's population to below current projection (e.g. the United Nations' forecast of 1.5 billion population by 2050) 4. Completion of economic reform agenda. There are several remaining priorities of economic reform, including: Reduction of fiscal deficits, mainly through budget cuts and privatisation revenues, in order to reduce the ratio of public debt to national income, thereby to avoid future macro-economic destabilisation; Export promotion through greater emphasis on export processing zones, the elimination of reservations for small-scale industry, the encouragement of the infotech sector, the elimination of administrative barriers to foreign direct investment, and the elimination of tax and tariff structures that are anti-export biased. Improved infrastructure, through liberalisation combined with regulation, especially in telecommunications (where privatisation and competition are crucial), power (where the reform of state electricity boards is crucial), and other sectors 5. Political decentralisation. Efficiency and dynamism will require the transfer of more power to states and local governments, and more democratisation at the local level. Dynamic metropolitan areas (built around major cities) will constitute the main engines of growth for India in the coming decades. These urban areas will need taxation and regulatory powers to be effective in supporting the business and social environment. 6. Enhanced global role for India. India should assert a greater leadership role in various venues, including the G-20, future international summits between developed and developing countries, the International Monetary Fund, World Bank, World Trade Organisation, and the World Health Organisation. Being the world's largest democracy, and a leader of the interests of developing nations, it is essential that India play a significant role in the functioning of, and deliberations at, these international organisations.
8. Strengthening of economic/cultural/financial/investment/scientific ties to overseas Indian communities. The Indian diaspora, in the United States, Europe, Africa and Asia, constitutes a vital economic and cultural treasure for India. The Non Resident Indians or NRIs can play a critical role in trade, finance, technology transfer, business competition and culture. NRIs from the Silicon Valley, for example, should be mobilised to help India to reap the enormous benefits of the ongoing infotech revolution.
10. Major commitment to Indian higher education. India's universities should serve as a core to a knowledge-based development strategy. The Indian Institutes of Technology or IITs are already world class, and must be nurtured further. A dynamic university sector, built on private and public institutions, and much deeper links with US, European and Asian universities outside of India should be fostered. With regard to the international linkages, there can be encouragement of partnership programmes between Indian and foreign universities, as well as student and faculty exchanges, and use of infotech for distance learning (through videoconferencing, for example). Also, the government should foster closer university-business relations, and should create tax incentives for charitable contributions. We now take up some of the key areas of economic reform that we mentioned above in the list of ten crucial initiatives. In general, the policies needed in the economic sphere (such as the budget and infrastructure) are better understood in India, since they have been debated in more detail. The social objectives -- especially literacy, education, health and family planning -- are certainly no less crucial for economic outcomes but there is considerable work ahead in fleshing out realistic and hard-headed proposals for meeting the bold objectives outlined above. We are confident that the enunciated goals can be met, but the needed policies probably can not be lifted right off the shelf at this moment. We therefore focus our detailed comments on some better-tread areas, fiscal reform, export promotion and information technology, leaving the detailed exploration of the social objectives to a later essay. Fiscal consolidation The Decade of Development can not rest on an unstable fiscal base. India has seen too often how bold objectives can be pushed aside through financial crisis. It is extremely important to reduce fiscal deficits mainly through budget cuts and privatisation revenues in order to reduce the ratio of public debt to national income so as to avoid future macroeconomic destabilisation. Unless substantial fiscal consolidation is achieved, in our view, continued fiscal deficits pose India's greatest risk to future destabilisation. In this regard, the big increase of defence expenditures in the current budget must be viewed as having a depressingly high cost for India's development objectives. Successful regional diplomacy may turn out to be the most vital macroeconomic policy of all in the coming years. Despite several years of fiscal consolidation effort, large and persistent fiscal deficits remain. As a matter of fact, except for the first year of fiscal stabilisation, that is, when the fiscal deficit was reduced from 8.3 per cent of GDP in 1990-91 to 5.9 per cent in 1991-92, the performance on the fiscal front has been disappointing. In the year 1999/2000, the net borrowing requirements, that is, the fiscal deficit, is going to be over Rs. 1 trillion (1,000 million = 1 billion; 1,000 billion = 1 trillion). The fiscal deficit is thus likely to increase to 5.6 per cent of GDP from the budget target of 4 per cent. In terms of interest payments next year, this implies an additional outflow of Rs 100 billion.
There are several risks with high fiscal deficits. We believe that deficits should be brought under control mainly by cutting government expenditures relative to GDP rather than by raising revenues relative to GDP. India's overall government spending, currently around 33 per cent of GDP (Centre and states together) will need to be brought down as a proportion of national product in order for India to achieve its reform goals of macroeconomic stability and long-term rapid growth. Moreover, there is probably little room to reduce capital expenditure, which has already been squeezed to a mere 3.3 per cent of GDP in 1998-99 (though much of infrastructure investment in power, telecommunications, and even major roads, can be turned over to the private sector in conjunction with a proper redesign of pricing and regulation). Hence it is the current expenditure which needs to be reduced significantly. Current expenditures at the central level are predominantly made up of interest payments, grants to states, subsidies, and defence expenditure. In all these areas, there is going to be higher levels of spending relative to GDP. Interest payments will go up substantially as we mentioned earlier. Grants to states will go up under the interim award of the Eleventh Finance Commission. Allocation of funds for defense expenditure, of course, has been hiked by Rs 130 billion more than in the Budget estimate for the current year. Without entering into the merits of this issue as a defence issue, from a macroeconomic and budgetary point of view, this is worrisome. Expenditure under food and fertiliser subsidies may go down marginally should the government be able to withstand the pressure from its allies. With respect to internal public debt, privatisation of public enterprises could raise significant funds as a per cent of GDP, which could then be used to buy down the public debt. Not only would the stock of debt itself be reduced, but also the interest costs of servicing the debt would surely decline as the debt stock itself was brought under control. The cash value of these enterprises vastly exceeds the present value of profit flows that the state now collects on these assets. Public sector profits are dissipated in poor productivity, over-manning, excessive public sector salaries, soft budget constraints, and generally poor public sector management. For this reason, sales of the enterprises to private sector buyers, if used to buy down the public debt, would yield annual saving in interest costs that most likely would far exceed the government revenues that are claimed by virtue of state ownership of the assets. (This is especially true in view of the fact that many enterprises with significant positive market value are actually loss-makers in current cash flow, under state management). In this direction, the budget takes a very small step, that is, announces disinvestment to the tune of Rs 100 billion only, of which, a mere Rs 10 billion are to be used for retiring debt. Likewise the central government, the financial condition of the state governments in India has also been a cause for concern. Over the years, the consolidated financial position of the state governments has shown a marked deterioration in some of their major deficit indicators. One of the fundamental weaknesses of state government finances in India can be attributed to the increases in non-developmental expenditure, particularly the revenue component of the non-developmental expenditure, and interest payments as a proportion of revenue receipts. These problems have been aggravated a great deal over the past few years because of a variety of reasons. The resource constraints in state finances have been accentuated by a near stagnant tax-GDP ratio, rising share of non-developmental outlay in the total expenditure, large volumes of hidden or implicit subsidies and increasing financial losses of state enterprises. A growing pressure on state finances has also stemmed from the rising demand for public services. Furthermore, the fiscal situation in the states is likely to come under much greater pressure with the acceptance of the Report of the Fifth Pay Commission by several state governments in India. The slow growth in revenue mobilisation at the state level has posed serious difficulties for the state governments to meet their expenditures. Be that as it may, the critical problem in state finances is not only one of high levels of expenditure, but also one of increasing distortions in the pattern of expenditure. Further progress in the area of tax and expenditure reform is as crucial for the states as it is for the Centre. State governments are required to reduce and eventually do away with subsidies on power, transportation and irrigation so as to reduce the burden on state budgets. Importantly enough, state governments have to find a way to reduce their expenditure on wages of their employees. The state expenditure on administrative services is budgeted to rise by 44.3 per cent on account of the revision of pay scales of government employees following the Fifth Pay Commission awards. A shift of policy focus towards changing the pattern of resource allocation and improving the resource base of states is critical for improving the financial situation of the state governments. On the tax front, sales tax is the single most revenue-earning source for the state governments, and its reform is crucial so as to attain higher levels of revenue mobilisation. While efforts to introduce state level value added tax and other tax reform measures have begun, their implementation across all states is necessary in order to enhance the revenue productivity of the state tax system and to reduce its distortionary implications for the economy. In the final analysis, fiscal control will require an overhaul not just in budgetary patterns, but in the basic functioning of the public sector in the economy. For example, we have noted that privatisation is a key method for reducing the overhang of public debt. Similarly, the privatisation of infrastructure services is a key way to relieve the growing burden on state budgets, which are heavily weighed down by losses of state electricity boards and other para-statal institutions. Greater autonomy for local and state-level governments in infrastructure reform and investment priorities will similarly allow the central government greater freedom in cutting back on transfer payments to the states (which will be in a better position to prioritise and economise on state spending). Until India resolves to push even farther in market reforms, the soft budget constraint of the public sector will continue to spill over into large public deficits and a growing burden of public-sector debt. In discussing the soft-budget constraint at the state level, special mention must be made of the state electricity boards, a situation that is urgent both fiscally and in terms of deteriorating infrastructure. Over the years, the states have been providing large-scale financial assistance to the state electricity boards or SEBs. The SEBs are responsible for generating and distributing power, setting tariffs, and collecting revenues. Almost all of them make losses and some are even unable to pay for the coal or the power they purchase. This is due to the fact that SEBs implement social subsidy policies of state governments, leading to inefficient patterns of energy consumption, and even to non-recovery of their own costs. Also, there is a lot of theft of power from the distribution networks, which is classified, in the official statistics as transmission and distribution losses. The Indian power sector has not been able to match the growing need for more power generating capacity. Over the next five years, it needs to add 35,000 to 50,000 mega-watts of capacity, depending on the growth rate of the economy, whereas it added no more than 20,000 mega-watt over the last five years. The root cause of this inability to expand capacity is the financial sickness of the SEBs. Under these circumstances, the SEBs need to revise their tariff rates in line with the costs they incur in the production and distribution of electricity, in particular for the agricultural sector, and minimise the transmission and distribution losses. This, in turn, would allow the state governments to withdraw financial support to the SEBs, and would enable private investors to enter the electricity market on a much larger scale. More extensive reforms would involve a regulatory overhaul of the entire system, to allow private electricity producers to enter the grid on a competitive market basis. Part III: Export promotion, infotech, the unmet social agenda
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7. Commitment to IT backbone. India should sponsor programmes and reforms to encourage universal telephony and Internet access in all villages in India, as part of the national campaigns in literacy, health and economic development. Physical infrastructure for data transmission within India (e.g. fibre optic cables) remains under-developed in spite of some recent progress.
9. Strengthening science and technology in India's development policies. India can become one of the centres for global science. This is especially important since India faces a range of challenges (in health, environment, agriculture and power) where the technologies of the US, Europe and Japan, are not appropriate, at least not without further R&D. The government of India should, therefore, sponsor high-level science councils, greater attention to university-industry links in technology, and much greater funding for science institutes in public health, environment and agriculture.