Economist DR Pendse’s 7-point plan to cut expenditure and control budget deficit

Revenue generation is not the answer for us. In fact, it aggravates the malady. We must concentrate on curbing expenditure, wrote DR Pendse in 2000.

DR Pendse delivering a lecture on Union Budget 2008-09 organised by the Thane Bharat Cooperative Bank Ltd in March 2008 | Photo: drpendse.com

The root cause of India’s Budget crisis is in impossibly high deficits. Deficits can be controlled only in two ways: (a) by raising revenue, and/or (b) by cutting expenditure. Harsh budgets come in two flavours: Budgets that would unravel either a savage plan for revenue generation or a savage plan for cutting expenditure, or possibly both.

I remain convinced that, for various reasons, revenue generation is not the answer for us; It does not work. In fact, it aggravates the malady. We must concentrate on curbing expenditure, and this is still within our capabilities. Therefore, if the F. M. had produced a budget with a savage revenue generation plan, I would not have liked it at all; but it would have certainly passed the test of being called a harsh budget. If on the other hand, the F. M. had produced in his Budget a plan for savage cuts in expenditure, I would have readily welcomed it. He produced neither.

I therefore, will take the liberty to outline my illustrative seven-point plan to control expenditure. It is not only harsh, it is ‘savage’. Not one single element in it will be politically acceptable. However, if we want to avoid yet more ominous implications in future, there is no escape from it.

1. Total government expenditure should be frozen. If the total expenditure is Rs. 3,03,738 crores in 1999-00, so it shall be Rs. 3,03,738 crores in 2000-01 too. This will apply to every Ministry and Agency. Thus, e.g., if the expenditure of the Ministry of Chemicals and Fertilisers is Rs. 9,147 crores in 1999-00, it should be the same in 2000-01 too. Each Minister concerned should be delegated complete freedom to manage his Ministry’s affairs within the overall ceiling. If he chooses to spend more on a particular activity, he will thus be obliged to first effect equivalent savings on some other activities. Some may wish to start more projects that are new and postpone existing ones; others the other way round. Some, to spend more on cars; others, more on travelling. Some, on employing more people; others on less. Some may want more office space, others may sell away some of the existing space. Etc. 
2. Borrowing and/or lending of resources among the various ministries should be permitted. If Minister A feels that from his allocation he can save say, Rs. 500 crores this year, he is welcome to lend this amount to his colleague Minister B, for say, one or two years, at a mutually agreed rate of interest. Similarly, Ministers can lend and borrow employees, office space and other resources. I visualise that large chunks of funds and employees will be made available under this dispensation. 
3. At present there is a spending spree among ministries and departments in February and March every year. For, if the actual expenditure is less than budget grant, the grant for the next year is almost certain to be reduced proportionately. If it exceeds the grant, the ministry’s hands are stronger in demanding a higher grant for the following year. Not only a carry-forward should be permitted, it should be well rewarded. If a ministry has a budget grant of say Rs 1,000 crores for 2000-01 but manages within Rs. 900 crores, not only should the saved Rs 100 crores be added to its allocation in the following year, but the ministry should be given an extra 15% of the saved amount as a gesture of appreciation. 
4. Ministries should be free to ask surplus staff members to sit at home for say two years or so, with their full salary cheques being sent to them every month. There are at least four good reasons to propose this. First, it is well accepted that the total cost of an employee to the employer is much more than the salary paid. Many prosperous organisations work out these estimates to ensure that the extra return to them from every additional employee is well above this total cost. Secondly, as a necessary result of market-oriented structural reforms, several government activities have become largely superfluous. Thirdly, this not only works but also in fact gives striking results. Recently, a multinational company reportedly asked hundreds of workers in its Sewri factory to thus stay at home. It is also well known that when the employees working at some Octrai nakas in Mumbai went on strike, the octrai collections increased more than two-fold at the hands of substitute college students! Finally, there is evidence from other countries too that most of the workers sitting at home, even on full salary cheques, find other and better jobs, and do not report back after the stipulated period. 
5. When employees retire, the resulting vacancies should not be filled up, particularly when there are several posts of an identical designation. If there is only one single Cabinet Secretary, it is understandable that his post should be filled up when he retires. However, if there are say fifty undersecretaries and five were to retire, the remaining forty-five should have to manage the total workload. Here again the Minister concerned should be given the freedom not to fill up specific posts. 
6. After all these steps are taken on Day-1, a further exercise of zero-based budgeting should be forthwith initiated and implemented. Persons with a radical mind-set who are not bogged down by conventional wisdom should be requested to advise, with an assurance of implementation. There are dozens of government activities that have lost their relevance in the context of reforms. There is duplication all round. I feel often sad to see so many talented and well-qualified Indians rusting in the bureaucracy. Some friends, with a more radical mindset, have argued with me e.g. that there is a strong case for privatising the Planning Commission and turn it into an independent think-tank; or that if Octrai collection can be privatised with conspicuous success, why not the income tax collection? The possibilities of zero base budgeting are immense. That perhaps explains why everybody talks of zero-based budgeting, but none will actually do anything about it. 
7. This much about the existing spread of the Government. Government should not take up any, repeat any, new activities of any size without the express approval of the Prime Minister; and unless they are of a strategic or sensitive nature, details about these should be publicised. The latest Economic Survey has underlined the fact, in the context of the success of the IT industry, (Information technology, not income tax please), that things move far better when the Government keeps itself out of them[6] and that many more success stories will be added if only, government would free those areas from its helping (!) hand.

Lord Keynes reportedly said, “Man will do the rational thing, but only after trying all the irrational alternatives.” Did he foresee the budgets of the Government of India? Are anymore irrational alternatives left?

This essay is part of a series from the Indian Liberals archive, a project of the Centre for Civil Society. This essay is taken from the budget commentary titled “Budget (200-01) Drifting Towards the Cliff” published by the Forum of Free Enterprise in March 2000. The original version can be accessed on this link.