In Budget season the emphasis always, and most especially at this juncture with our dependence on external capital being what it is, is on the numbers. Will the subsidy bill be appreciably lower than the 2.6 per cent of GDP at which it was pegged by the Kelkar panel in September 2012, before the first diesel price correction? The removal of the subsidy on bulk users like railways at the start of 2013 comes too late in the current fiscal year to make much of an impact, but it is an excellent move, and will hopefully lead to improvements in use efficiency.
With the external current account deficit running in the second half of this fiscal year at between five and seven per cent of GDP, we cannot ignore the concerns of foreign capital wishing to enter the Indian market. As much as subsidies, they have other expenditure-side worries looking in. Foremost among them is the impending entrenchment of the Indian entitlement blanket with the food security Bill, a virtual certainty given the 2014 general election. Our worry as distinct from theirs is not the fact of the Bill, which merely expands the ambit of the present public distribution system (PDS), but the absence of any plausible mechanism to improve the reach of subsidised grain to targeted beneficiaries.
With one in two children malnourished, and inter-generational transmission of malnourishment through the weak and anaemic bodies of pregnant mothers, the need for a basic entitlement to foodgrain for the poorer two-thirds of the population cannot possibly be a bad thing. The problem is it comes on top of long-standing anti-poverty schemes, targeting both households and vulnerable demographic segments directly, which have had very poor outcomes. At the household level, in addition to the PDS, there is the Mahatma Gandhi National Rural Employment Gurantee Act (MGNREGA). Then there are schemes directly targeting specified demographic groups, such as the Integrated Child Development Scheme (ICDS) for pregnant mothers and children under six. These directly targeted schemes are what we really need, but they are not underwritten in the new Bill, undoubtedly because of the difficult monitoring problems they pose.
The corruption that renders these schemes ineffective is not a fringe phenomenon. What we have is heavy-duty diversion, so entrenched that the diverting channels have come to regard themselves rather than the intended beneficiaries as having the rightful entitlement. Shops in small-town India openly display foodgrain packets for sale prominently marked "ICDS".
For schemes like these, our error lay in providing only for the primary fiscal cost, which is the direct expenditure on the scheme. We do not provide for the secondary cost, which is the expansion of governance capability required to ensure that the transfers reach where they should. Yet we pile more and more hard-won tax revenues onto the primary fiscal cost of food security.
Supporters of the Bill see no fiscal problem at all. They see a tax system marked by low compliance, estimates of vast flight capital parked in foreign banks, and every year Budget papers that report tax revenues foregone from tax concessions of various kinds well in excess of the cost of the food security bill. Right. Bringing home flight capital will help finance both the external and fiscal deficits, but there is no flick of the wrist that will pry it loose at all easily. Even settling domestic tax arrears locked up in disputes, the resolution of which does not involve other countries, cannot happen any time soon. As for tax concessions, the revenue lost from Special Economic Zones (SEZs) and other such provisions is supported by legislation.
Now about tax compliance. Voluntary compliance in an entitlement environment is possible only when every taxpayer who funds the system knows that the entitlement will work for him or her, either because of unpredictable bad luck, or because of predictable dependence, as in old age. Europe ran with cradle-to-grave security, but accordingly ramped up the tax-to-GDP ratio to among the highest levels in the world. And taxpayers complied because they knew they would be beneficiaries at some point. The fiscal problem in Europe today arises because entitlements have been locked in, and are either stable or actually growing (for unemployment compensation), at a time when tax revenues, calibrated to GDP, are stagnant or declining.
The entitlement state in Europe came well after governments had delivered on their core role as providers of public goods. Their roads are paved and lit, they have internal security, and they have sanitation. That is the usual sequence, with taxpayers voluntarily complying initially for the public goods they are getting, and at the next stage, for entitlements that embrace the entire population. In India, we are introducing an entitlement state, imperfectly at that, before any of the core public services have been provided. The sequence is wrong. Even before the brutal reminder in December 2012, no citizen saw government as having played its key role as a provider of essential public goods like internal security, which the government alone can do. So when the taxpayer remains underserved with public goods, and entitlements are not the kind the taxpayer will access, the pillars on which voluntary compliance rests are missing.
The entitlement blanket jostles for fiscal room with other expenditures that are far more meaningful for the poor. The Pradhan Mantri Gram Sadak Yojana (PMGSY), begun in 2000 for last-mile all-weather road connectivity for rural habitats, has led to a structural transformation, enabling the spatial spread of productive livelihood options and access to health and education facilities. Yet, it struggles for fiscal allocations. The 13th Finance Commission ensured that the road maintenance grant given to states covered these roads as well. But that is just a maintenance grant. New links call for capital expenditures by the Centre.
The poor need livelihoods, not charity handouts. We need to protect programmes like PMGSY which deliver poverty eradication, rather than the poverty alleviation we attempt, but deliver only feebly, through leaky channels.