It’s time to reform how India spends borrowed money

Live Mint, February 11, 2021

By Pradeep S. Mehta 

  • India’s big expenditure plans are laudable but resources must be used efficiently. Our interest payments exceed productive spending, which often falls short of its target. This must change.
  • A debt burden is worthwhile only if it works well for our economy. We should diversify funding sources, improve tax administration, and set up a fiscal council to guide governments.

The Union Budget 2021-22 has rightly been lauded for its bold measures. The way the government acknowledged India’s need to diverge from its fiscal consolidation path, and its transparency on this, was quite impressive. Yet, ensuring that resources are used efficiently is as important as acknowledging that additional resources are required, if not more.

Interest payments on debt are among the key disbursements from the revenue account of the Consolidated Fund of India (CFI). Estimated at 8.40 trillion in 2021-22, these exceed the disbursements budgeted for grants-in-aid to states ( 5.57 trillion), agriculture and allied activities ( 3.82 trillion), transport ( 2.29 trillion), defence ( 2.21 trillion), social services ( 1.96 trillion), and rural development ( 76,000 crore).

By the way, India’s interest bill on debt has consistently risen over the years. It is estimated to increase by 78,000 crore in the current fiscal and by 1.14 trillion in the next. However, productive expenditures from the CFI’s revenue account have either reduced or have been witnessing less than budgeted spending. For instance, the allocation for agriculture and allied services has been reduced by 2.01 trillion (compared with this year’s revised estimates), on account of a substantial expenditure reduction on food storage and warehousing. So too rural development, wherein the allocation for rural employment has been reduced by 39,000 crore. The budgeted outlay for transport (primarily railways) in the current year was 2.38 trillion, but actual expenses are placed at only 1.59 trillion.

The story of disbursements from the CFI’s capital account is no different. As much as 70,000 crore was to be spent on the Indian Railways this year, but the actual figure is likely to be close to just 29,000 crore. For police reforms, 9,268 crore was budgeted, but has been reduced to 4,926 crore in the revised estimates. Similarly, 3,416 crore was initially allocated for urban development, which has now been pruned to 1,721 crore for the current year.

In almost all these areas, the budgeted expenditure for 2021-22 is closer to the amount budgeted in the current and previous years. However, the government’s performance does not inspire confidence and raises doubts on whether such funds, predominantly raised through debt, will actually be used for productive purposes or not.

An inability to spend as planned despite increasing debt is not a good sign. India’s Economic Survey has argued that debt- fuelled growth assures debt sustainability over time if growth rates remain higher than the interest rates on debt. For this to happen, it has made an emphatic case for debt-financed public expenditure, especially during economic recessions. However, as indicated, we have witnessed worrying trends of public expenditure, and the only figure that seems to show consistent growth over time is India’s interest burden.

The 15th Finance Commission, whose report was recently presented to Parliament, has also noted that additional expenditure must be invested well in strengthening the fundamentals of the Indian economy and society. It has therefore recommended additional grants to specific states for the key sectors of health, education, agriculture, roads, districts and blocks, the judiciary, and statistics. The government has not yet accepted these proposals. It has only expressed an assurance that they will be given due consideration while formulating and implementing centrally-sponsored and central-sector schemes, keeping in view the untied-up resources of state governments and fiscal commitments of the Union government. This is unfortunate. One hopes better sense will prevail.

For the CFI’s capital account, market loans and 14-day treasury bills are key sources of receipts. In fact, the amount expected to be raised through treasury bills has consistently been significantly higher than the CFI’s revenue receipts in the form of tax and non-tax inflows. In the coming fiscal year, the government intends to raise 36.04 trillion through 14-day treasury bills and has estimated 21.06 trillion as revenue receipts, of which 10.96 trillion is projected to come from tax revenues. The government intends to raise around 12.06 trillion through market loans in 2021-22.

 The Finance Commission, while acknowledging the need to raise finances from a number of sources, has emphasized the importance of improving our tax-to-gross domestic product ratio, which is low relative to comparable countries. In other words, our ability to raise debt should not be an excuse for continuing with sub-optimal tax administration.

In this regard, it has recommended the constitution of an independent fiscal council to provide fiscal forecasts, evaluate fiscal performance, and set and monitor compliance with fiscal targets. It has also recommended independent public debt management cells created by states for them to borrow efficiently. Debt management at the central level should similarly be dispassionately reviewed. We need to examine the need for an independent office.

These are some long-pending reforms, the adoption of which will aid in reforming the manner in which debt funds are spent. Adopting these requires no explanation beyond than the times we live in.

Amol Kulkarni and Apoorva Lalwani of CUTS contributed to the article.

Pradeep S. Mehta is secretary general of CUTS International


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