The state of public finances in India

THERE IS no doubt that India has achieved many successes over the years (including sustained economic growth) despite the fact that we have had many coalition governments over the years. There is also infighting amongst the various political parties, but everything gets sorted out within the country, and no foreign intervention is required. Occasionally we don’t have political stability and there are many scams, and upheavals. The basic shortcoming lies in managing the public finances of the country.
As we know, public finance is concerned with the identification and appraisal of the effects of government financial policies. It attempts to analyse the effects of government taxation and expenditure on the economic situation of individuals and institutions, and to examine their impact on the economy as a whole. It is also concerned with examining the effectiveness of policy measures directed at certain objectives and with developing techniques and procedures by which that effectiveness can be increased. In terms of our economy, half of our infrastructure problems have been solved.

Communication is no longer a problem. India had one million telephones in 1980; five million in 1990; and now we have more about 60 million telephones and one million is added every month. Our road’s programme is world class and is one of the biggest in the world. The same is true of the railway system. Productivity has also gone up. There also has been a housing revolution, especially in big cities. This is one side of the story. The other part includes power generation and distribution, which remain big a bottleneck. But we will surely get away with this barrier too.

The most serious problem is the disgraceful state of our public finances. The combined fiscal deficit of the states and the centre is much beyond the limit. This prevents our economy to grow faster than what it is now. High fiscal deficit is anti-growth, and anti-investment. This leads to a serious vicious circle that traps the economy in a bad way. The investment either comes from domestic savings or foreign investment. The private sector in India saves more than 30 per cent of gross domestic product (GDP), but our government eats away about one third of this savings especially in non-plan expenditure.

This also explains why our investment rate is around 25 per cent or so. For achieving a much higher rate of growth, the investment level has to grow beyond 30 to 40 per cent of the GDP. As we have said the major role player in this context is the private sector, and major barrier is the role of the government in terms of its nefarious spending. I must add that our nation’s worst enemy is subsidies. In order to realise our bright future, we must eliminate them.

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