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On the fine-print of the Budget
March, 12th 2007
Going into the details of the Budget, S. VENKITARAMANAN discusses the conflict of interest in the RBI's financing the Government's acquisition of its own shares in SBI, the healthy finances of PSUs and the myth that the Government is frittering away all its resources on its babus.

Few have been the bouquets that came the way of the Finance Minister after he presented his Budget for 2007-08. He must be a tad disappointed. After all, he had genuflected to all the gods of fiscal discretion and inflation management as well as the pressures of the planners for growth. He has kept his fiscal deficit-GDP ratio almost within the target. He has not raised tax rates overmuch, except for a token tinkering with education cess and dividend distribution tax and an egregious modification of concessions related to software computers.

Mr Chidambaram must have been surprised at his own moderation, given the pressures to raise taxes He must be feeling that the general public, especially the chattering classes, were a bit ungrateful. Particularly, the stock market, instead of soaring after the Budget, slumped, partly or mainly aided by global factors. After all, we are in a "flat" world. Whatever the reason, it is the Finance Minister's lot to bear the cross. Even the failure of Congress in the State Assembly polls is sought to be attributed to his sins of omission and commission.

Here are a few comments on the fine-print of the Budget. First, the question of acquisition of the RBI's shares by the Central Government. The transaction is intended to meet the RBI's apprehensions regarding conflict of interests arising from its supervisory jurisdiction over a Bank in which it has a shareholding. The central bank has been hammering away at the idea of divesting its shareholding in SBI to the Government.

Conflict of interest

The RBI's point about conflict of interests is a formal one. Many central banks, including Bank of England, started out as commercial banks of a kind and ended up mainly lending to Government. Be that as it may, the Centre has seen it fit to accept the RBI's view and acquire the shares from it at a cost of Rs 40,000 crore. It is not clear from my reading of the Budget documents whether the acquisition is at market price or at face value.

The Budget provides for an item under "miscellaneous capital receipts" of Rs 40,000 crore, mentioned as being the amount attributable to the RBI's shareholding. The Budget blandly states that a corresponding expenditure provision has been made under the demands for capital expenditure, for investment in shares of SBI, without any impact on fiscal deficit.

This raises two technical issues. First, the proceeds of disinvestment of the RBI's share in SBI belong to the RBI and not to Government of India. When the Government accounts for receipts of Rs 40,000 crore as miscellaneous capital receipts, it can only be by the RBI passing on the amount to the Government, either as surplus profits or as a loan. There is no other way this can be done under the current accounting procedure, as far as I know.

The Government has been party to a self-denying regulation against taking loans from the RBI. This means the latter has to make a direct transfer of this magnitude to the Government, but not as loans. I wish the Budget documents were more specific about this. Strictly speaking, the expenditure of Rs 40,000 crore by the Government cannot be matched without any fiscal impact unless there is a corresponding revenue receipt from the RBI or whatever other source.

Miscellaneous capital receipts are not in the nature of privatisation receipts of the Government. These amounts belong to a different entity the RBI. The Government taking over the central bank's divestment proceeds and investing the same in SBI is a fiscal fudge. Not that it matters to the substance of the transaction.

Perhaps, Mr Chidambaram is living up to his notion that the RBI is, after all, a subordinate formation of Government. What is intriguing is that the RBI is itself financing the Government's acquisition of its own shares in SBI. Perhaps, the Finance Minister's belief is that what belongs to the RBI belongs to the Government and there is no need to bother about accounting niceties. The problem should worry advocates of central bank independence and purists concerned about fiscal deficit.

Financing PSUs

I now turn to another interesting feature of the Budget, the financing of the plan of public sector units. The expenditure Budget has a Table showing internal resources, contribution from bonds and debentures, ECB and other sources to the plans of various public sector enterprises. This shows an overall picture of robust public sector finances.

Of a total plan of Rs 165,000 crore for public sector enterprises, including the Railways, for 2007-08, the internal resources amount to Rs 95,874 crore, an improvement in internal generation from Rs 73,000 crore in 2006-07. Bonds and debentures account for only Rs 28,000 crore in 2007-08.

What is interesting is that the capital expenditure of India's public sector enterprises does not depend much on bank borrowings. It is met essentially out of internal generation. While this is a creditable indication of the robust working of the PSUs, the structure of financing does seem sub-optimal, inasmuch as this may lead to underinvestment on capital expenditure by public enterprises as a whole.


I turn now to an interesting aspect of the Budget, establishment. It has been customary on the part of Budget analysts to mourn the lack of control over establishment expenditure. I must point out that the conservative approach to growth of Government establishments per se should mean parsimony of an undesirable kind, reflecting efficiency improvements. More often, it reflects a nay saying approach of Finance Ministries trying, Canute-like, to stave off the growth of establishment, however desirable the purpose. If this is at the cost of efficiency, such parsimony may be totally misplaced.

Let us look at figures of expansion of staff and staff emoluments in the Budget. The Budget documents show that the number of employees on the rolls of the Government has remained almost stationary between the 2005-06 and 2006-07 estimates. Excluding the Ministry of Railways, the number of employees on the Government rolls were 1.8 million in 2005-06. In 2006-07, it rose marginally to 1.9 million. In 2007-08, it is expected to increase to 1.91 million.

Consider, further, that a large part of this establishment is accounted for by essential services, such as the Department of Posts, Police under the Ministry of Home Affairs, revenue-collecting agencies Ministry of Finance, Department of Revenue, and so on.

The penny-pinchers of the Ministry of Finance should be gratified at their success in keeping the numbers in check in spite of political pressures for Government jobs.

Turning to the outlay on establishment, the total expenditure on emoluments (pay + allowances), excluding Railways, was around Rs 21,000 crore in 2005-06, increasing in BE 2007-08 to Rs 24,000 crore. As a proportion of the total expenditure of the Government in 2007-08 of Rs 680,000 crore (3.5 per cent), this is not too large.

As a proportion of total revenue of Rs 500,000 crore, it is still around only 5 per cent. So much for the allegations of the Government using all its resources on babudom!

One must acknowledge that Government servants are needed to run even a minimalist government. Economising of expenditure on essential services can give rise to a breakdown of governance, law and order and social justice.

By all means, ensure efficiency of performance and productivity of service by engaging in systems improvement and IT-enabled government. But, blind pursuit of economy for economy's sake can be self-destructive.

S. Venkitaramanan

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