Part 2-Where can the government cut down on
spending?
A fiscally constrained
government that is using up most of its resources for paying interest and
subsidies and spending on defence and social schemes will find it difficult to
earmark funds for much needed infrastructure building. It remains to be seen if
the government can give a thrust to infrastructure in this budget.
Interest payments
constitute the highest single expenditure for the government in any given year.
The government pays interest on its debt, which includes government securities,
treasury bills, small savings, deposits and provident funds and on other
securities such as fertilizer bonds and oil bonds that were issued a few year
back in lieu of subsidy payments (a practice that has since been discontinued).
The interest payment at an absolute level keep growing as the government
consistently runs a fiscal deficit, which is financed by market borrowings.
The interest payment
for fiscal 2011-12 was budgeted at Rs 267,986 crores against Rs 240,757 crores
seen in the fiscal year 2010-11, an increase of 11% year on year. Interest
payment will be higher for fiscal 2011-12, as the government has issued bonds
for around Rs 430,000 crores in fiscal 2011-12, for which interest has to be
paid. The total stock of government securities outstanding was Rs 24,25,000
crores as of fiscal 2010-11 and adding Rs 430,000 crores to the total
securities outstanding will result in the outstanding government securities
moving up to Rs 28,55,000 crores as of fiscal 2011-12. The average cost of
borrowing for the government was over 8.25% in 2011-12 and interest payments on
account of higher debt outstanding will move up by a minimum of Rs 35,000
crores.
On a relative basis
interest payment as a percentage of GDP was budgeted at 2.98% for 2011-12
against 3.06% seen in the fiscal year 2010-11. The fact that GDP growth figures
have been revised downwards by 1.5% from 9% to 7.5% will push up interest
payment to GDP ratio higher. Rising interest payments prevent the government
from spending on growth drivers such as infrastructure.
Subsidy payments are
the second single largest expenditure for the government. The government pays
out subsidies on food, fuel and fertilizer and had budgeted for a subsidy bill
of Rs 143,570 crores in 2011-12 against a subsidy bill of Rs 164,153 crores for
the fiscal 2010-11. The government was being ambitious is showing a lower
subsidy bill for fiscal 2011-12 against fiscal 2010-11, as the subsidy bill is
likely to overshoot budget estimates by a minimum of Rs 100,000 crores taking
the total subsidy for fiscal 2011-12 to around Rs 250,000 crores. The
sharp rise in oil prices, which have gone by 18% year on year, has upset the
budget forecasts.
The government has
been unable to control its subsidy payments, which have been trending higher
over the years. Subsidy bill has gone up from levels of Rs 57,000 crores in
2006-07 to levels of Rs 250,000 crores estimated for 2011-12, a five fold
increase. There is an urgent need to bring down subsidy payments through policy
reforms. On a relative basis, subsidy as a percentage of GDP has been running
at over 2% of GDP over the last three years and is likely to be over 2% of GDP
for 2011-12 given the rise in the subsidy bill.
The government, if it
wants to show a lower subsidy bill in 2012-13 will have to carry out serious
reforms on subsidies as oil prices are trending at close to three year highs
and in all likelihood will trend higher on the back of economic growth across
emerging countries. Brent crude at USD 125/bbl will be the base for arriving at
a subsidy figure in the budget against last year’s levels of around USD
100/bbl.
Defense is the third
major expenditure item of the government. Defence spending accounts for around
1.8% of GDP as per budget estimates of 2011-12. The government had projected an
increase of 12% in defence expenditure for fiscal 2011-12 over fiscal 2010-11
and may show the same increase this year.
The government goes by
the projections of the planning commission for its outlay on infrastructure.
The capital outlay that goes into creation of assets is pegged at around 1.6%
of GDP for fiscal 2011-12. The country follows a series of five year plans for
spending on infrastructure and the eleventh five year plan will end this year.
The government had earmarked Rs 40,000 crores for rural employment for fiscal
2011-12, and is likely to maintain the same figure for 2012-13. Spending on
rural employment takes away much needed resources for building infrastructure.
Similarly any loan waiver program will eat into capital spending on
infrastructure.
No comments:
Post a Comment