Given how finance minister P Chidambaram is cutting down on Plan expenditure in a big way, and how this could be the target of further cuts in FY14, the usual critics have come out protesting. Cutting Plan expenditure, the argument goes, robs the country of vital investments—or of expenditure in critical areas like education or infrastructure—and therefore slows down the overall growth potential of the economy.
Cutting any expenditure, including digging a ditch and then filling it up, let’s be clear, has a contractionary impact on the economy in the first round. What matters, however, is what happens finally. If the contraction in government spending leads to a significant cut in the fiscal deficit—and assuming, as is the case, that the bulk of expenditure is for consumption and not investment—that’s beneficial since it lowers overall borrowing costs in the economy.
In general, the distinction between Plan and non-Plan expenditure is an arbitrary one and, for many years now, there has been talk of abolishing the distinction but nothing has ever happened. So, every year, the budget documents happily make this distinction and the lay reader assumes Plan expenditure is sacrosanct, of the nation-building variety, while non-Plan is less so. Nothing could be farther from the truth. Indeed, in FY13, the budget has a Plan expenditure of R5,21,025 crore of which R1,00,512 crore is on account of capital expenses and a non-Plan expenditure of R9,69,900 crore of which R1,04,304 crore is on account of capital expenses. Essentially, Plan expenditure includes expenditures vetted by the Planning Commission after discussion between the finance ministry and various line ministries.
While capital versus revenue expenditure is an important distinction, even this is a bit overblown. Setting aside money for building a new school is important capital expenditure, but surely this cannot be more important than providing for teacher salaries that are revenue expenditure?
But even in the case of capital expenditure, it has to be pointed out, this is very different from Plan expenditure. In FY13 (see table), while Plan expenditure is budgeted to be R5,21,025 crore or 5% of GDP, the central government’s expenditure that can really be classified as investment is much smaller. Every year, the government comes out with an Economic and Functional Classification of the Budget that does this. According to this document, for FY13, the central government’s total capital formation in FY13 is budgeted at just R94,906 crore, or less than 1% of GDP and a fifth of the planned Plan expenditure.
Things get a bit better when you consider the loans and grants given from the budget to state governments or PSUs since part of this is also used for capital formation. According to the Economic and Functional Classification, the total capital formation that will emerge from the FY13 budget is R3,34,978 crore or 3.3% of GDP. Even this number will get reduced next year—FY12’s R2,72,456 crore of capital formation was reckoned at R2,87,316 crore in the FY12 Economic and Functional Classification. But no matter what the final number, it’s clear there is a huge difference between Plan expenditure and capital formation—assuming capital expenditure is sacrosanct, that’s a big scope for expenditure cuts.
This is not to say the finance minister can simply cut Plan expenditure by 30-40% without affecting investment, but that there is so much waste, the finance minister needs to look carefully at all expenditure, whether Plan or non-Plan, whether capital or revenue, it makes little difference.
A few examples should suffice to make this clear:
The government spent R34,511 crore on primary education in FY13, though there is increasing evidence that the learning abilities of children in schools is falling by the day. Pratham’s ASER data shows, for example, that in 2010 nationally, 46.3% of all children in Standard V could not read a Standard II level text. This proportion increased to 51.8% in 2011 and further to 53.2% in 2012. In 2010, of all children enrolled in Standard V, 29.1% could not solve simple two-digit subtraction problems. This proportion increased to 39% in 2011 and further to 46.5% in 2012. So, instead of trying to shut down unrecognised private schools—this is what the Right to Education Act is ending up doing—why not encourage more private schools which provide better education and which parents increasingly seem to prefer?
The government, Centre and states, spend R1 lakh per student in college each year—that’s a whopping R90,000 crore a year. But if private colleges were encouraged instead of being discouraged, surely this expenditure could be reduced? Not only is it difficult for private colleges to get accredited, the government is making it difficult for even distance-education players to survive.
Such are the size of leakages in government subsidy programmes, according to analysis by Surjit Bhalla (http://goo.gl/WHLfE), while the government needs to spend just 0.5% of GDP to fully remove poverty, it ends up spending six times as much—and we still have 22% of the population that’s below the poverty line.
According to Commission for Agriculture Costs and Prices (CACP) chief Ashok Gulati, the extra buffer stocks held by FCI—around three times the levels required—alone costs the government around 1% of GDP.
Oil under-recoveries, to cite one specific subsidy, are likely to add up to around R1,67,300 crore in FY13. Apart from what it does to the exchequer and to boost oil consumption—firms use diesel in furnaces instead of inferior furnace oil since it is cheaper—this is important from the point of view of capital formation. Of the 9% of GDP that is invested by the “public sector” which includes government, around 45% comes from PSUs—so, to the extent the oil under-recoveries have to be funded by PSUs, there’s that much less for them to invest.
The most important thing to keep in mind, of course, is that under a fourth of total investment in India comes from the “public sector”. Around a third comes from the corporate sector today, but this proportion was as high as 45% in FY08 when corporate investments were 17.3% of GDP as compared to the overall investment level of 38% of GDP by all types of investors in the country—government, households and the private corporate sector. It is this fall in India Inc’s investment that is responsible for the slow 5% GDP growth today. This is what the finance minister needs to fix. Apart from what it does to the deficit, trying to bump up government investments a bit is neither here nor there.