While
the tax revenues are increasing, they are not enough to
match the expenditure growth, forcing governments to borrow
more money to bridge the revenue gap. Investments in public
sector are yielding negligible returns. As finance ministers
no longer have the luxury of resorting to uncontrolled deficit
financing or compulsory borrowings from banks at artificially
low rates, borrowings had to be made at the market rates
of interest.
To
make matters worse, Inder Kumar Gujral's cabinet took the
populist decision to implement the 5th pay commission's
recommendation to significantly enhance the wages of government
employees but put proposals to improve productivity and
reduce work force on the back burner. The increase in wages
of the Union's employees had a cascading effect on the wages
in the States and public sector resulting in mounting fiscal
deficits and borrowings. Today, the combined fiscal deficit
of the Union and States is of the order of 10% of the GDP
or over Rs.200, 000 crores per year! Alarmingly much of
this borrowing is going to meet the revenue deficit!
The
government introduced in parliament recently The Fiscal
Responsibility and Budget Management Bill 2000, by which
the governments at the Union and States would be compelled
to reduce deficits and borrowings every year by 10% or more.
But
is Fiscal Responsibility Act the magic wand we had been
waiting for? Can it wave away the fiscal deficit? Over 50%
of the tax revenues of the Union now go towards debt servicing.
Interest payments, defense expenditure, employees' wages
and pension all put together exceed the total revenues.
Apart from this we have other obligations of plan expenditure,
transfer of resources to States (over 40% tax revenues),
administrative costs, subsidies and contingencies. Now look
at the States. In almost all States the wage and pension
bills range from 80% to 160% of the total tax revenues!
The States have their own obligations - interest payments,
states' share of plan budget, administrative costs, subsidies
and contingencies like natural disasters etc.
How
can the fiscal deficit be reduced if everything else is
to remain unchanged? The proper way would be increased revenue
mobilization through a high, sustained economic growth of
8 - 10% per annum. But unlike China, we haven't created
the required base to sustain such a growth rate. Low levels
of literacy, poor health care, infrastructure bottlenecks,
inadequate development of natural resources, and high level
of corruption and extortion have inhibited investment and
reduced productivity. We are left with the more painful
options of further increasing taxes, reducing subsidies,
decreasing wage and pension bills and selling the public
sector units. Selling public sector units is a one-time
option but we have shown no skill to quickly sell these
assets and retire national debt.
But
the people are not going to accept higher taxes unless they
think they can get something in return. Lower subsidies
are not politically feasible, unless the poor are compensated
in some other form. Reducing the number of employees or
the wage bill is a pipe dream in a country with exceptional
job security and low level of political legitimacy. All
these are not merely fiscal problems; they are fundamental
governance problems. Fiscal deficit cannot be addressed
by budgets and laws; it requires political will and skill
to restructure governance. There are no short cuts. Time
is running out. Further delay and dithering will deepen
the fiscal crisis, and lead to a possible fiscal collapse
with runaway inflation, resulting in breakdown of public
order and severe political and social strife. A decade ago
the erstwhile USSR collapsed precisely because the crisis
was not addressed squarely and in time, and the results
were horrendous! Now is the time for the governments to
pursue the long overdue fundamental governance reforms and
for the people to seek the link between taxes and public
services and authority and accountability.
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