This budget could be a historical landmark in fiscal management, with the revenue and fiscal deficit hovering close to the targets set in the Fiscal Responsibility and Budget Management Act. An important factor that aided the turnaround was the acceleration in growth and the improvement in the tax GDP ratio by over 2 percentage points over the current decade, almost all of which has come from direct taxes, especially corporate and income taxes. Consequently, the corporate tax — which was ranked third among the major tax receipts, after excise and customs duties, just a decade back, has now emerged as the largest tax source of the Central government, while income tax has moved up its ranking to the third position. This in itself is a major achievement of the fiscal reforms, as a bulk of the tax burden has now been shifted from the common man to the higher income groups — an aspect that is ignored by the Left, who see nothing progressive in the reforms.The gains on the tax front have not only helped cover the slippages in the mobilisation of non-tax revenues but also restrain borrowing requirements. In fact the bank credit to the government has even fallen in the current year for the first time, a major gain considering that government borrowing from the banking sector used to pick up by as much as a quarter and more even more recently. However, despite this, the overall improvement in fiscal management continues to be hobbled by the failure of reform efforts on the expenditure side. A long-term view shows a deceptively rosy picture, with the Central government chopping off the relative size of its total spending by as much as 4 percentage points of the GDP over the last 15 years. But more than three-fourth of it is accounted for by the slashing of capital expenditure that goes to funding investments in physical and social infrastructure. Revenue expenditure, which mainly goes to meeting day-to-day expenditure incurred in running the government, has remained largely stable and even the small gains made here are restricted to a relative fall in the ratio of interest payments on account of the falling rates.The sharp cuts in capital spending has been an important reason for the fall in capital investments in agriculture . In fact capital spending on power, irrigation and flood control in the last year was lower than incurred at the start of the reforms in the early ‘90s, while that in other important areas like crop husbandry, water conservation, and dairy development just about made it to double digit figures. A similar catastrophe in the other economic infrastructure areas has only been averted by the entry of private capital in sectors like power, telecom and roads, to varying degrees of success.More distressing has been the impact of the cut in capital allocations on social sectors like education, health and related areas. The minuscule amounts being invested in important sectors highlight the extent to which the government apathy has sunk. For instance, out of the total budget outlay of Rs 5,14,344 crore in 2005-06 the capital spending was only Rs 103 crore in education, art and culture, Rs 87 crore in medical, public health and water supply, Rs 115 crore in urban development, sums that would have been more in tune with bankrupt governments in sub-Saharan Africa. On the other hand, the government has had no qualms about providing Rs 15,000-Rs 25,000 crore on poorly targeted food and fertiliser subsidies.Another issue is the growing disconnect between larger spending and outcomes. Here the challenge is not just about fixing the pipes but more about fixing the institutions that fix the pipes. Today we have pushed into a scenario where the optimistic prospects of growth are being constrained by marked deterioration in the quality of governance. The outcome budget presented last year seeks to fix the lacunae and ensure more accountability in government spending. But more work has to be done to develop quantifiable output and outcome indicators before one can make any judgement on the real impact of public spending. So it is still important to stress that successful fiscal adjustments call for a major restructuring of recurring revenue expenditures and a cutback in wasteful spending rather than just raising more resources and slashing capital outlays.The writer is senior editor, The Financial Express
