The red line for the fiscal deficit/GDP ratio was 4.8% in 2013-14. Ostensibly, FM will adhere to this. Expenditure will be postponed to 2014-15. Expenditure incurred in Q4 of 2013-14 will be booked in Q1 of 2014-15. Plan/capital expenditure will be slashed. Had it not been for this, the fiscal deficit/GDP ratio would probably have been 5.4%. This is using the definition of fiscal deficit as it stands.

There is an entirely valid argument that other liabilities and off-budget items should also be included. If one does that, there are IMF estimates that the fiscal deficit/GDP ratio in 2013-14 will be more like 8.5%. On the face of it, most people will agree on the following. Return to FRBM. Reduce fiscal deficit and revenue deficitsby about 0.5% of GDP every year. Increase Plan/capital expenditure. One must be careful though. There are artificial distinctions between Plan and non-Plan. There may be grants to States and UT-s which are revenue expenditure, even though they are used for creating capital assets there. Is it desirable to slash these? However, let’s accept the general point. The problem is that this isn’t much of a consensus. How can there be a consensus unless we agree on how to slash revenue expenditure and reduce deficits?

Most items of revenue expenditure (interest payments, pensions, salaries) are frozen in the short-turn for FM. No FM can do much about it. Consequently, post-1991, whenever FMs have reduced deficits, one of two things has happened. FM has slashed Plan/capital expenditure. Or, GDP has increased, thereby increasing the denominator (deficits are typically expressed as ratios) and also increasing tax revenue. You might point to subsidies. For the Union government, these primarily means food and petroleum products. Subsidies need proper targeting.

No scope for debate on that. Income transfers are more efficient, provided we agree on identifying BPL. However, efficiency is one thing, the fiscal implications are another. If every BPL household actually gets a subsidy, the fiscal cost may well increase. This is apart from governments, Union and State, refusing to reduce subsidies or target them better. But the simple point is that it isn’t that easy to reduce fiscal costs of subsidies either. We haven’t talked about defence. Under UPA-II, more in the last three years, budgetary allocations to defence amounted to over 2% of GDP. But actual allocations, evident in the revised figures, were closer to 1%. Presumably, we do want to increase allocations on defence and police.

Hence, I think there are only two ways for any FM to sensibly reduce deficits. First, privatization. There are 64 loss-making Central PSEs (public sector enterprises). There is no reason why the government should spend Rs 30,000 crores on these loss-making enterprises, restructuring or otherwise. These resources have opportunity costs and the government can spend them elsewhere. The arguments that restructuring will leadto better values eventually and that market conditions are not right now are also of dubious value. The profits of the 161 profit-making Central PSEs are also misleading. Profits in sectors with administrative pricing (coal, power, petroleum products) are no more than notional. Privatization, not creeping disinvestments, can bring in Rs 100,000 crores in 2014-15.

PSEs that remain should survive on competitive and commercial considerations. These temples of modern India should have idols of Lakshmi also installed in them. This requires an empowering of their boards, corporatizing them, granting them financial autonomy and making them independent of Ministerial interference. One should begin the process by completely revamping the Public Enterprises Selection Board (PESB).

There can be valid criticism that receipts from asset sales should not be used to finance revenue expenditure. This is valid. However, without privatization, I don’t think any FM can reduce deficits. I said, there are two methods. The first is privatization. The second is removal of tax exemptions and I will save that for the next piece.
(The writer is a Consulting Editor with Economic Times)