Government gets an opportunity to make corrections in the financial planning exercise every year. What can it do next year?
As we move towards the annual Budget for 2016-17, there is a need for a prudent 'Asset Liability Management' (ALM) approach in handling government finances. The 'Take as it comes' approach to revenue and 'Pay as you go' approach to expenditure, which is a legacy of the pre-independence governments needs to be changed. Though government finances cannot be compared to accounts of banks or companies, if the arrogance of ownership settles down in the mind as a 'right to do anything, come what may', we may not need an astrologer to predict doom.
Escape routes are many to compensate for the dwindling savings rates. If trust is restored, the accumulated wealth in the form of gold and jewellery as also hidden savings in the form of unaccounted money and 'undervalued' assets will surface, which will be available for investment. The short-term measures like dipping into the reserves of central bank and selling 'family jewels' for meeting fancy targets of modern economic planning (showing a lower fiscal deficit), without ensuring corresponding reduction in debt, or increase in productive assets can be suicidal, in the long term.
The earlier example was when Government of India (GOI) discontinued pension facilities for future employees in 2004, to avoid funding of pension liabilities, which were being met (and are even now being met) on a "Pay As You Go" basis. Such camouflaging may not work always.
Our approach to the whole exercise of financial planning and budget need to undergo a change, if our resource mobilisation and deployment of scarce resources have to create faster economic growth. Poverty alleviation (now poverty elimination) has been an avowed objective of Government of India's financial planning since the 1950's. Planning and budgeting have a significant role in taking the benefits of economic growth to the needy. As history of several nations has shown, economic development alone cannot sustain long-term social security for the people. Government gets an opportunity to make corrections in the financial planning exercise every year, if only there is a will to use annual budget as an instrument for the purpose.
Generally, economists and analysts give their suggestions for subsequent year's Budget in January-February, by which time finance ministry would have almost finalised the broad contours of Budget to be presented during the last week of February. While proper deals with receipts and expenditure, the annual Budget speech is a document one looks forward to, for the government's approach to various policy measures affecting economy and financial sector in particular. Here we rush through some areas, which can, in the long run, stimulate economic growth.
Map the resources
Every year, the Economic Survey, which is presented just before the Budget, gives an overview of developments affecting the basic features of economic growth and therefore, having implications on subsequent financial management.
This year, government could consider presenting a paper giving indicative information on the resources that can be tapped for mobilisation of resources for promoting growth and government's priorities about their deployment over time. The sectors could include:
- Areas including agricultural income, now enjoying tax concessions.
- Tax waivers, including those extended to corporates, provided during the last five or 10 years and the benefits derived. An attempt should be made to make beneficiaries plough back to the exchequer, a portion of the benefits they derive out of such concessions. Though this may be happening in different ways (like employment generation, and reduction in exports), there is no transparent and meaningful analyses.
- Real estate is another grey area. States and Local Self Government authorities may create an inventory of unutilised built-up areas, both residential and commercial and take appropriate policy action.
Government should come out of the temptation to use public funds (deposits) with banks and profits and income of public sector units (PSUs) and statutory bodies, as 'own funds', which can be diverted in any direction. Also, slowly, government should align its own borrowing with market realities. There is nothing wrong in the dependence on statutory liquidity ratio (SLR) requirement of banks and funds with organisations like Life Insurance Corporation of India (LIC), Employees Provident Fund Organisation (EPFO) and now National Pension System (NPS) for funding GOI or State Government investments. But managers of such funds should not be bullied to invest in Government securities (G-Secs) or to create artificial surpluses and transfer funds to GOI. Every rupee coming from savers should fetch a reasonable positive return, if savings have to remain in the mainstream accounts available for social benefits.
Sooner the government looks at its financial planning with a prudent ALM approach, it would be better for the country.
is former General Manager, RBI, Mumbai and author of the 2014 book "Banking, Reforms & Corruption: Development Issues in 21st Century India")