Fiscal Consolidation

76. As I have already stated the most serious problem confronting the economy is the poor state of the fiscal health of both the Central and State Governments. The combined fiscal deficit of the two together is in the region of 10 per cent of GDP. I have often been described as a fiscal fundamentalist. Some have gone to the extent of calling me a fiscal terrorist. Why am I so concerned about the fiscal deficit? Let me try to explain. The total receipts of the Central Government in the current year according to BE are about Rs 281,000 crore. Of this amount, Rs 72,000 crore is States’ share of the Central taxes and grants. The Central Government is, therefore, left with Rs 209,000 crore. On the expenditure side, about Rs 101,000 crore was to be spent on interest,
Rs 59,000 crore on defence, Rs 23,000 crore on major subsidies and Rs 16,000 crore on pensions. The net amount left for meeting all other Government expenditure totalling Rs 123,000 crore was, therefore, only Rs 12,000 crore. I have, therefore, to borrow Rs 111,000 crore in the current year to make both ends meet. The most worrisome aspect is that over 70 per cent of my borrowing, i.e., Rs 77,000 crore was for financing unproductive revenue expenditure. This will add to my interest burden next year forcing me to borrow more and ultimately fall into a debt trap. I am deeply conscious of the burden which is being placed on future generations, by our extravagance. I cannot allow this situation to continue.

77. As promised in my earlier Budget Speeches, I appointed the Expenditure Reforms Commission last year and introduced the Fiscal Responsibility Bill in this House in the last session. The bill seeks to reduce the fiscal deficit to 2 per cent and completely eliminate the revenue deficit over the next five years.

78. A number of initiatives have already been taken to contain, in particular, the growth of non-plan expenditure. I have not allowed any increase in non-plan expenditure this year. Consequently, for the first time in many years, the fiscal deficit target fixed in the budget has indeed been achieved, and remains at 5.1 per cent in the RE of the current year. The target of 3.6 per cent revenue deficit has also been achieved.

Expenditure Management

79. I intend to carry forward the process of bringing about structural changes in the composition of Central Government expenditure and effect economy in non-plan revenue expenditure with greater vigour while improving the quality of plan expenditure. For this, I propose to take the following initiatives:

l User charges for services provided by government and its agencies will be revised keeping in view the increased cost of these services. A portion of this increase will be provided to enhance the maintenance and quality of these services.

l Similarly, postal rates will be revised moderately to contain the rising postal deficit.

l All requirements of recruitment will be scrutinized to ensure that fresh recruitment is limited to 1 per cent of total civilian staff strength. As about 3 per cent of staff retire every year, this will reduce the manpower by 2 per cent per annum, achieving a reduction of10 per cent in five years as announced by the Prime Minister.

l The Surplus Pool under the Department of Personnel will be streamlined and equipped to redeploy and retrain surplus staff. Employees in the Surplus Pool will also be offered an attractive VRS package.

l Standard licence fee (rent) on government accommodation will be enhanced by 50 per cent for Group A, 25 per cent for Group B and 15 per cent for other categories of staff with effect from April 1, 2001.

l Facility of LTC to Central Government employees will be suspended for 2 years for the remaining part of the four-year block period except for employees who are entitled to last LTC before retirement.

l Use of Information Technology in government activities with large public interface will be maximized to promote efficiency. For this purpose, operations like GPF, pension, pay and accounts offices, passports, income tax, customs, central excise, will be fully computerized by March 31, 2002. Public sector banks and insurance companies are also being asked to complete computerization of their operations within this period.

80. The Expenditure Reforms Commission, which was set up last year, has presented reports concerning downsizing in 6 Ministries and Departments. These include Department of Economic Affairs, Ministry of Information & Broadcasting, Ministry of Coal, Department of Heavy Industry, Department of Public Enterprises and Ministry of Small Scale Industries. Reports of the Commission concerning other Departments will also be received within the next six months. These recommendations will be implemented by July 31, 2001 and identified surplus staff transferred to the Surplus Pool.

81. Charity, it is said, must begin at home. I believe austerity, too, must begin at home. To lead by example, based on the recommendations of the Expenditure Reforms Commission, I propose to abolish three secretary/special secretary level and two joint secretary level posts in the Department of Economic Affairs. This will be done in stages by 31, July. In addition, another 44 posts of directors and below will be abolished, as against 31 recommended by the ERC. 1675 posts are being abolished in the Currency and Coinage Division which will be restructured and corporatised. The National Savings Organisation is to be downsized from a level of 1191 staff to about 25. I have asked ERC to provide their recommendations in respect of the Departments of Revenue and Expenditure also. I am confident that this will expedite the process of right sizing the establishments in all the Ministries/Departments of Government.

82. The Planning Commission has commenced the task of preparing the Tenth Plan. Given the severity of resource constraints, improvement in the quality of government spending is of the essence. It has therefore been decided to subject all existing schemes, both at the Central and State levels, to zero based budgeting and to retain only those that are demonstrably efficient and essential. Furthermore, all schemes that are similar in nature will be converged to eliminate duplication. Centrally sponsored schemes that can be transferred to States will be identified. Resource flows will be linked to performance. Necessary procedural changes will also be made to speed up the decision making process for approval of schemes. Utmost importance will be given to decentralized planning.

Pension Reforms

83. The Central Government pension liability has reached unsustainable proportions: as a percentage of GDP, it has risen from about 0.5 per cent in 1993-94 to 1 per cent in 2000-2001. As such it is envisaged that those who enter central government services after October 1, 2001 would receive pension through a new pension programme based on defined contributions. In order to review the existing pension system and to provide a roadmap for the next steps to be taken by the Government, I propose to constitute a High Level Expert Group, which would give its recommendations within 3 months.

Interest Rates

84. I have drawn your attention to the increasing share of debt service burden in the expenditure budget caused by rising government debt and exacerbated by the prevalence of high real interest rates. Most interest rates in the economy are now market determined. But, their movement downward is constrained by the rigidities inherent in the administered interest rates governing the contractual saving sphere i.e. Provident Fund and Small Savings Schemes. I have examined this issue very carefully. I find that the interest rates provided in all these schemes seldom exceeded consumer price inflation by more than
3 per cent between 1980 and 1998. Since then, this difference has risen to 6 to 8 per cent. Not only are such high real interest rates putting an unsustainable burden on both Central and State Governments but the resulting high cost of capital is also inhibiting economic growth all round. I am therefore reducing most administered rates by 1.5 per cent as of March 1, 2001. Government guarantee and tax incentives for these schemes will continue. For the future, I propose to explore a better system for the determination of these rates. I propose to appoint an Expert Committee to provide recommendations on this issue.

85. The benefit of reduction in interest rates on Small Savings Deposits will be fully passed on to the States. This will reduce their borrowing cost from Small Savings by 100 to 150 basis points. In addition, I am also reducing the interest rate on loans portion of Central assistance to State Plans by 50 basis points. Alignment of interest rates on GPF by the State Governments along with the reduced provident funds interest rates at the Centre will further reduce the interest burden of State Governments. Moreover, because of the anticipated increase in gross tax collection of the Centre, devolution of central taxes to States is expected to increase by over Rs 9000 crore in 2001-02 over the current year. All these measures will help in reducing the debt burden of the States and improve their fiscal position.

State Fiscal Reforms

86. Along with fiscal consolidation at the Centre, it will be our endeavour to work jointly with the States to reform their finances. Pursuant to the recommendations of the Eleventh Finance Commission, an Incentive Fund of Rs 10,607 crore has been earmarked for the next 5 years to encourage States to implement monitorable fiscal reforms. These reforms will essentially be the States’ own programmes and considerable flexibility has been provided for individual States to design their programmes. In the fiscal year 2001-02, I have provided an amount of Rs 4243 crore towards this Incentive Fund.