Jeffrey D. Sachs, Nirupam Bajpai

NEW DELHI has proclaimed the new decade as a Decade of Development, during which India will meet bold targets for economic growth and social development. What are the challenges in meeting these goals? We suggest that the 2001-02 Budget should be the operational policy document for the Decade of Development:

The fiscal strategy

The Centre must undertake a fundamental review and reorientation of fiscal policies to support the Decade of Development. There are three goals. First, the overall fiscal deficit must be reduced sharply. Second, the expenditure should be shifted from eco- nomic sectors (infrastructure), where the private sector can carry the investment burden, to social sec- tors (health and education) where increased public spending is vital. Third, social programme should be redesigned to make maximal impact per rupee spent. This can best be accomplished by replacing ge- neralised subsidies (such as the Public Distribution System or free electricity for farmers) with targeted programmes (such as school meal programmes).

The Centre’s fiscal deficit is around 5 per cent of GDP, and this should be reduced significantly to ensure macroeconomic stability, and to prevent an unmanageable buildup of public debt. At the same time, social spending should rise, including on health and education. Most of this should come

from cuts in current expenditure rather than from increases in taxation as a per cent of GDP. Current government spending (of the Centre and the States) is already around one-third of GDP, which is quite high compared with other developing countries in India’s income range. If India were to increase expenditure further as a per cent of GDP, it would have a very difficult time raising the internal tax revenues to cover the spending programme.

We can identify the following prime areas of poten- tial expenditure reduction over a three-year period, beginning with the upcoming Budget:

Central expenditure:

1) Disinvestment of PSUs (with revenues used to reduce the public debt): The net worth of Central PSUs is estimated to be Rs 1,32,400 crore, a little over 13 per cent of GDP. The capital employed is placed at around Rs 2,23,000 crore. (Estimated savings 1.5 per cent of GDP.)

2) Closure of loss-making PSUs: Of the 236 Central PSUs, 104 are loss-making that account for roughly Rs 4000 crore in annual losses to the Central exche- quer. (Estimated savings 0.4 per cent of GDP.)

3) Reduced bureaucracy: A freeze on new employ- ment matched by normal attrition through retire- ment and death. On an average, about 1.25 lakh Central employees are taken off government payroll each year due to these reasons. Implementation of such an approach over four years could result in a reduction in the Central government employment by 12.3 per cent, or a reduction of around half-a- million employees from the present total of about four million. On an average, the Government could …

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