Addressing the issue of banks' bad loans
Precise numbers on bad loans of banks are not available, given the bank managements' self-interest in not recognising bad loans. But there is reason to believe that bad loans of public sector banks currently add up to over 13 per cent of their total advances. This is not banking, but a welfare system for the rich, who agree to share part of the loot with politicians and senior bank managers, the resulting bank losses being made up through infusions of public money.
The finance minister must recognise the severity of the situation and do whatever he can to speed up the enactment and implementation of the bankruptcy law.
Boosting growth
With exports declining for 13 months in a row, with the situation not expected to improve in the near future and with private domestic investors not keen to invest in a big way, we will have to rely on foreign direct investment (FDI) and public investment to boost growth. Of course, the implementation of the Seventh Central Pay Commission's recommendations will push aggregate demand to some extent, but this is not a viable route for boosting growth. FDI can certainly help but public investment will have to play the major role. The finance minister must keep two things in mind while proposing major increases in public investment.
First, the allocations must be used efficiently. Our incremental capital-output ratio is already very high and we cannot afford a business-as-usual approach. An example of this approach is the case of building toilets by a major public entity: 29,000 toilets at a cost of Rs 300 crore, at an average cost of over Rs 1.03 lakh per toilet, with a strong reason to believe that the figure of Rs 300 crore does not capture all the costs. What's worse, the public entity in question has no idea how these toilets are maintained and used.
Second, while allocating public money, the finance minister must be clear in his mind about what public money is supposed to be spent on. In principle, public money should be spent for (a) the provision of public goods or goods with positive externalities, that is, goods and services, which the private sector will not provide (for example, national defence, control of pollution and elimination of open defecation); (b) the provision of private goods and services to certain people on equity grounds.
Nurturing a broadly equitable distribution of economic capabilities among our people
Reserve Bank of India Governor Raghuram Rajan argues that we must endeavour "to nurture the broadly equitable distribution of economic capabilities among our people". India has failed to meet this challenge, with the finance minister himself providing the evidence of this failure. This is what he said on February 28, 2015: "Our young people have to be both educated and employable for the jobs of the 21st century… Yet today less than five per cent of our potential workforce gets formal skill training to be employable and to stay employable." How can a country have a broadly equitable distribution of economic capabilities among its people if less than five per cent of its potential workforce gets formal skill training to be employable and to stay employable?
We need to empower people through education, skill development and better health, and create gainful employment/self-employment opportunities for them. This demands substantial increases in the budgetary allocations for education, skill development and health, and efficient and effective utilisation of these allocations.
The endeavours to meet this challenge will put many demands on public money. And public money must be allocated to meet these demands. But do we have that kind of money?
Ideally, such endeavours must be financed by resources raised through taxes. But our tax system doesn't raise enough resources. Take, for example, the government of India's tax collections. These are budgeted at Rs 14,49,490 crore, or 10.17 per cent of gross domestic product (GDP) for 2015-16. Minus the states' share, the government of India's net tax revenue budgeted for 2015-16 amounts to Rs 9,19,842 crore, or 6.46 per cent of GDP. This is not much - it must be at least five percentage points higher. The finance minister must mull over this.
Honouring the commitment to fiscal consolidation
The finance minister shouldn't worry about honouring the commitment to fiscal consolidation. Why? Because sticking to a fiscal deficit target and at the same time allowing central public enterprises to raise money through extra-budgetary resources is no way of honouring the commitment to fiscal consolidation. While presenting the 2015-16 Budget, the finance minister announced the fiscal deficit target of 3.9 per cent of GDP for 2015-16 and at the same time allowed central public enterprises to raise Rs 199,917 crore (1.4 per cent of GDP) through extra-budgetary resources, including bonds/debentures and external commercial borrowings/suppliers' credit. Given the fact that the macroeconomic effect of a borrowing by the government is the same as that of a borrowing by a central public enterprise, the fiscal deficit budgeted for 2015-16 is 5.3 per cent of GDP, not 3.9 per cent. Fiscal 2015-16 is not the first year when this has happened - this has been going on for years. To improve transparency, the finance minister could include the central public enterprises' extra-budgetary resources in the revised estimate of fiscal deficit for 2015-16 and in the Budget estimate of fiscal deficit for 2016-17.
Deficit is not necessarily a bad thing. What really matters is that the money is used efficiently and effectively and is spent on public goods and services.
The writer is a former professor of economics at Indian Institute of Management, Ahmedabad