[4:50 PM, 8/10/2022] Gaurav Hatwal: A cess is also imposed on the highest slab of 28 per cent on luxury, demerit and sin goods. This was used to compensate the states till June 30 this year and would now be used to pay back the debt raised for meeting the shortfall in revenues for the states during the Covid-19 pandemic. This cess will now be imposed till March 30, 2026.
Expenditure reforms
Successive governments tried to reform the expenditure system of the country by setting up panels, but much success did not come in their initial attempts. The then finance minister P Chidambaram tried in 1996 to set up a commission, but it remained a dream after his predecessor Jaswant Singh declined the offer to chair it. He later came out with a discussion paper on subsidies classified as merit and non-merit. Subsequently,
[4:50 PM, 8/10/2022] Gaurav Hatwal: Yashwant Sinha, P Chidambaram, this time as finance minister of the UPA government and Arun Jaitley set up commissions to reform expenditure. Emphasis later was made on reforming expenditure through direct benefit transfer (DBT) to prune subsidy leakage.
The initiative did yield results. As much as Rs 1.64 trillion has been transferred through DBT in 2022-23 in 314 schemes. The government says there were estimated gains of Rs 2.23 trillion through this. However, DBT on food is yet to materialise. The government made attempts by trying it in Chandigarh and Puducherry, but the move did not make progress from there.
Similarly, the proposed DBT in fertilisers remained on a wish list as farmers have to give a total amount for fertilisers upfront and then claim subsidies.
Food subsidies, which ballooned to Rs 5.41 trillion during the Covid-struck year of 2020-21, came down to Rs 2.89 trillion a year later. It is pegged at Rs 2.07 trillion for the current financial year. However, the free food scheme for 800 million people was extended till September this year, which may increase the subsidy burden. It would be offset by savings from lower wheat procurement as the crop was damaged. Going forward, the government has to withdraw or rationalise food subsidies as Covid-induced lockdowns are no longer there.
According to some estimates, the fertiliser subsidy, pegged at Rs 1.05 trillion for FY23, may increase to Rs 2.5 trillion as the ongoing Russia-Ukraine war made imports costlier.
The government did not give petrol subsidies which are now confined to LPG and kerosene.
Over the years, the government did rationalise centrally sponsored schemes too. These have been reduced by half for the last two years -- 130 such schemes have been pruned to 65. Many experts say there is still scope for rationalising these schemes.
Fiscal Consolidation
Successive governments made remarkable achievements after the FRBM Act was enacted in 2003. However, its target of reducing the Centre's fiscal deficit to three per cent of GDP, initially by 2007-18 and then by the following year, was never achieved. The deficit doubled to over six per cent of GDP in 2008-09 when the collapse of Lehman Brothers had a ripple effect on India's economy. The target of three per cent was prescribed later as well as by Chidamabaram in line with the Vijay Kelkar panel's recommendation. Chidambaram prescribed it to achieve by 2016-17. Later the N K Singh committee prescribed it to be achieved by 2019-20 and then slowly cut it to 2.5 per cent by 2022-23. The government, however,pegged the deficit at 3.3 per cent for 2019-20 and then revised it to 3.8 per cent using an escape clause suggested by the panel. The following year, the deficit was pegged at 3.5 per cent, but it was revised to 9.5 per cent as the government brought various below-the-line expenditures to the forefront and spent much more than budgeted to lessen the burden of Covid-induced lockdown on the poor and put the economy on the path of recovery.
This year, the target is still 6.4 per cent of GDP against the NK Singh panel's suggestion of 2.5 per cent. Even this seems difficult to meet, even as the government is collecting much more tax than pegged in the Budget. It imposed a windfall tax on fuel production and exports of fuel, as expenditure on food and fertiliser is expected to exceed the budget estimates.
The International Monetary Fund (IMF) suggested that India should withdraw fiscal stimulus given during Covid times. It would be a challenge for the government to do so. Here it should be interesting to know whether the states would agree if the Centre also withdrew their stimulus. They were allowed to breach the fiscal deficit of 3 per cent of their respective gross state domestic product (GSDP) to go up to 4 per cent in FY23. While 3.5 per cent is unconditional, 0.5 percentage point is conditional on various reforms that the states need to undertake. This seems difficult as the states, particularly those run by the opposition parties, charge the Centre with not paying their dues when facing a resource crunch..