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Education, Agriculture and Subsidies: Long on Words

The opportunity provided by high growth and a comfortable revenue situation to make a serious attempt to boost allocations for education and agriculture has been allowed to slip away. The high priority status accorded to these sectors in the budget speech is not backed by numbers. Instead the numbers have been played around with - such gimmickry only serves to make budgets lose their credibility. Further, the track record of the government fails to inspire confidence that the fiscal targets will be attained. One cannot help but conclude that Budget 2007-08 appears to be long on words alone.

Education, Agriculture and Subsidies: Long on Words


Economic and Political WeeklyApril 7, 20071269politically difficult decisions to curbrevenue expenditures and raise capitalexpenditures. The compulsions of acoalition form of government have be-come the common pretext for justifyingfailures on this front. However, Echiverri-Gent (1998) and Lalvani (2005) have shownthat the coalitions have not necessarilybeen a hindrance in taking politicallyhard decisions.Table 3 reviews the track record of thegovernment by juxtaposing the budgetestimates, revised estimates and actualsover the three years of the UPA tenure.It shows that: (i) The performance of theUPA was good in the first year of its termwhere it succeeded in keeping the shareof revenue expenditure below its budgetedshare. (ii) In the second year 2005-06 thegovernment marginally exceeded the tar-geted share of revenue expenditure and fella little short on the capital expenditurefront by 0.08 percentage point. (iii) In thethird year 2006-07 the revised estimates(RE) of revenue expenditures in totalexpenditures has exceeded the budgetedamount and capital expenditure fallen shortof the budget estimates (BE) by 0.6 per-centage points.Clearly the government has not beenable to maintain fiscal discipline. It hasprogressively slipped and indulged ingreater spending on the revenue expendi-ture front. Budget 2007 targets a lowershare of revenue expenditure than theprevious two years. However, the trackrecord does not give us the confidence thatthis target will be attained.IIExpenditure BudgetThe finance minister announced manyhikes on specific programmes of the socialsector and agriculture. However, with thetotal size of the budget itself having grown,a high priority status could be said to havebeen accorded if and only we see a hikein the share of that sector in the totalexpenditure. We took a close look at theshare of total expenditure allocated tosocialservices (specifically education) andagriculture and allied activities – the twopriority sectors identified by the govern-ment in Budget 2007.Social services: Education:Table 4 re-veals that the share of social services intotal expenditure has gradually risen overthe UPA regime (much too gradual as thenumbers indicate). However, after hearingthe speech of the finance minister andanticipating the “Big Push”, one can’thelpbut feel disappointed when one looksat the share of social sectors in total expendi-ture. As compared to the RE of 2006-07,the BE of 2007-08 budgets for a hike ofmerely 0.7 percentage points in the shareof social services on the revenue accountand a hike of 0.9 percentage points in theshare of social services on the capitalaccount.The disappointment escalates whenwe look at expenditure on education (forwhich a separate education cess wasalready in place and which has now anadditional 1per cent for secondary andhigher education). Table 4 shows that theshare of general education (on revenueaccount) in total expenditure is in factlower at 3.09 per cent vis-à-vis the RE of2006-07 (3.23 per cent). The share oftechnical education, however, is budgetedto rise from 0.29 per cent to 0.57 per cent.We will comment on this when we lookat the track record of the government inthis area.On the capital expenditure side, the statusquo is being maintained in the case ofeducation with the same share of 0.01 percent that the UPA government has set asidesince the beginning of its term in 2004-05.One cannot help but ask where the big thrustis to education that the finance minister sooften repeated in his budget speech.In addition to making statements that arethe not backed by numbers, the financeminister has played around with numberswhen he announced that the allocationto school education had been hiked by35 per cent. A hike computed withoutanyadjustment here would be erroneousas the responsibility of the departmentofschools has undergone a change.Thenumbers for 2006-07 (RE) excludesecondary education (included in thedepartment of higher education). In2007-08(BE),however, secondary edu-cation is included inthedepartment ofschool education. To compute the actualhike in allocation to schools and secondaryeducation we made the definition of thetwo departments comparable over thetwoyears by conforming to the currentdefinition of including secondary educa-tion in the department of schools. Thisrevealed that the hike for the purpose ofelementary and secondary educationcombined works out to 21.4 per cent andnot 35 per cent. Such gimmickry puts thecredibility of the budget at stake.Yet another important fact to take noteof is the revenue from the educationcess.In RE of 2006-07, the education cessfunded 38 per cent of total spending oneducation, i e, 62 per cent was providedby the government from other sources. InBE of 2007-08 the education cess will befunding 49 per cent of the total spendingon education. Thus implying that theotherbudgetary sources would fund only51 per cent of the educational spending.The above figures suggest that the edu-cation cess is being used as a substituteto allocations from the general budget andnot as an additional/supplementary revenuesource to bolster the existing allocationto education.The track record of the incumbent govern-mentas regards expenditure on socialTable 3: Some Key Ratios(In per cent)2004-052004-052004-052005-062005-062005-062006-072006-072007-08(BE)(RE)(Actual)(BE)(RE)(Actual)(BE)(RE)(BE)Revenue expenditure/total expenditure80.6876.3377.1486.8186.5586.8986.5687.1381.98Capital expenditure/total expenditure19.3223.6722.8613.1913.4513.1113.4412.8718.02Source: Expenditure Budget, Vol I, various issues.Table 4: Expenditure on Social Services and Education(As per cent of Total Expenditure)2004-052005-062006-07(RE)2007-08(BE)Social services (on revenue account)6.217.327.467.53(i)General education2.382.773.263.11(ii)Technical education0.290.300.290.57Social services (on capital account), sports, art and culture0. Annual Financial Statement and Expenditure Budget, Vol I, various issues.
Economic and Political WeeklyApril 7, 20071270services would become clear from Table5.It shows while the performance was goodin the first two years, in 2006-07(RE), theshare of general education is seen to belower than the BE of that year. In thediscussion previously we pointed out thatthe share allocated to general educationwas lower than the 2006-07(RE). WhatTable 5 now reveals is that the shareofeducation in total expenditure in2007-08 (BE) is in fact also lower than2006-07(BE). To say that we were sur-prised at this revelation would be puttingit very mildly.As regards technical education, it isobserved that the share of expenditureactually incurred has consistently beenlower than the budgeted amount. Thisclearly suggests that absorptive capacityhere is missing. The focus here must benot only on enhancing allocations as hasbeen done in Budget 2007 but to see toit that this amount gets utilised.We now turn to a similar analysis foreconomic services, specifically agricul-ture, rural development, irrigation and floodcontrol.Economic services: Despite the strongemphasis on agriculture, Table 6 showsthat the share of expenditure budgetedfor agriculture and allied activities in2007-08(7.09 per cent) is seen to be lowerthan the RE of 2006-07 (7.84 per cent). Asimilar pattern of the share in 2007-08(BE)being lower than the 2006-07(RE) is dis-cerned for rural development, irrigationand flood control and transport. Once againthe track record of the government is evidentfrom Table 7.It is disconcerting to note that theshareoftotal expenditure set aside foragricultureand allied activities is merely0.01 percentage points higher than in 2006-07 (BE) and significantly lower than thebudget estimates of 2004-05 and 2005-06.Once again the pride of place accorded toagriculture in the budget speech seems tobe missing in the budgetary allocations.An identical pattern is observed for ruraldevelopment, irrigation and flood controland transport.In the section that follows we probedeeper into the problem of rising subsidies.IIILull before the Storm?Subsidies have always been a nightmarefor every finance minister. Any explicitattempt to prune subsidies results in aninevitable outcry. We discuss some of theissues involved in petroleum and fertilisersubsidies.Petroleum subsidy: Oil pool account to oilbonds:The contribution of the petroleumsector to the central and state exchequercan hardly be over-emphasised. Almost 40per cent of the excise collections and about25 per cent of customs collection comefrom the oil sector. A recent study byInternational Energy Agency (2006) drawsattention to the excessive tax burden onpetroleum companies. In addition to cus-tom and excise duties, the oil sector bearstwo additional levies (cess imposed by theOil Industry Development Board andeducation cess) and a central sales tax. Asif this was not enough, the state govern-ments are also authorised to levy certaintaxes and surcharges on petroleum products– value added tax (VAT) and/or sales tax,entry tax, transit charges and other levies.Also, within the states, local governmentunits can levy extra charges on petroleumproducts. Mumbai for example levies anextra 1 per cent on VAT.Till as recently as 2002 the petroleumsector had to shoulder a heavy tax burdenon the one hand and deal with the admin-istered price mechanism (APM) on theother. The subsidy provided on petroleumproducts came out of the Oil Pool Account,funded by surcharges on petroleum prod-ucts. The Oil Pool Account thus allowedthe government to keep these liabilitiesoff-budget.In 2003-04, the government realised thatthe financial burden on the Oil MarketingCompanies (OMCs) was critical and sincean increase in retail prices were not po-litically feasible, profit making upstreamoil companies were asked to share theburden of under-recovery. When theirproblems escalated, a formula was put intoplace and OMCs could increase prices onthe basis of a rolling average of cif pricefor the last three months within a 10 percent band. When international prices con-tinued to climb, the formula was quietlyabandoned as the OMCs were alwaysrequested by the government to keep pricesconstant for social (and political) reasons.This resulted in mounting losses and“under-recoveries” in this sector: 2004-05:Rs20,146 crore, 2005-06: Rs 40,000 croreand 2006-07 (April-December): Rs 41,248crore (Prov) [Petroleum Planning andAnalysis Cell].The government found an ad hoc solu-tion to the problem in “oil bonds” – theyprovided relief to the ailing OMCs butadded to the government liabilities, onceagain off-budget. The Rangarajan Com-mittee (2006) was forthright in stating thatoil bonds simply meant postponing theTable 5: Track Record of Expenditure on Social Services and Education(As per cent of Total Expenditure)2004-052004-052004-052005-062005-062005-062006-072006-072007-08(BE)(RE)(Actual)(BE)(RE)(Actual)(BE)(RE)(BE)Social services (on revenue account)5.345.706.216.487.107.327.397.467.53(i)General education1.872.102.382.552.622.743.313.233.09(ii)Technical education0.320.280.290.310.270.300.300.290.57Social services (on capital account)0.240.780.190.150.780.190.210.780.19(i)Education, sports, art and culture0. Financial Statements and Expenditure Budget, various issues.Table 6: Expenditure on Economic Services(As per cent of Total Expenditure)2004-052005-062006-07(RE)2007-08(BE)Economic services (on revenue account)30.84236.72941.77232.820(i)Agriculture and allied activities7.647.407.847.09(ii)Rural development1.993.095.452.44(iii)Irrigation and flood control0. services on capital account3.913.964.479.36(i)Agriculture and allied activities0. development0. and flood control0. Annual Financial Statements, various issues.
Economic and Political WeeklyApril 7, 20071271problem and strongly advised against it.Undoubtedly the budget is not the onlyplace where major decisions pertaining tothe petroleum sector can be addressed.However, there was one simple recom-mendation of the Rangarajan Committeewhich could have been easily addressedin the budget, viz, restructuring of theexcise duty structure from the present mixof specific and ad valorem to a purelyspecific levy. It was argued that ad valoremlevies exacerbate the burden on theconsumer and also result in the govern-ment benefiting through higher tax yields.Budget 2007 has chosen to ignore thisrecommendation and merely reduced thead valorem rate from 8 per cent to 6 percent. While this will provide some imme-diate relief to the OMCs if the reductionis not passed on to the consumer, thisreduction fails to solve the structural prob-lem that the Rangarajan Committee reportwas addressing.Recently the ministry of petroleum hasasked for an extension of the subsidy onkerosene and LPG (to expire in April 2007)to 2010 and has asked that the entire subsidybe met from the budget. An ORF PolicyBrief (February 2007) pointed out that ifthis was to happen then budget would needto keep aside Rs 28,600 crore as petroleumsubsidy. The finance minister has chosento keep aside only Rs 2,840 crore. Thesolution of oil bonds would lead to off-budget liabilities and mere postponementof the crisis while the hike in subsidies willjeopardise the FRBM target. The only wayout of this maze is to take tough decisionsof reducing the tax burden on OMCs soas to lower production costs and unleashmarket forces. Policies which have beenkept alive “in the name of the poor” willhave to be abandoned and equity concernswill need to be addressed differently.Fertiliser subsidy: It is by now well ac-cepted that “these subsidies are larger thannecessary as domestic manufacturers ofurea are given a cost plus price under theRetention Price Scheme (RPS). This pro-vides very little incentive to domesticmanufacturers to cut costs” [ExpenditureReforms Commission 2000]. However,these subsidies are also the most politicallysensitive of the lot of subsidies. Formerfinanceminister Yashwant Sinha earnedhimself the reputation of “roll back minis-ter” as all his attempts to prune this subsidyhadtobereverted. Among fertilisers, ureacontinues to be one sector that is still regu-lated. The RPS has been in operation since1977-78. The scheme has come in forsharp criticism on account of the fact thatit encouraged inflating (more popularlyknown as gold plating) of capital costs byfertiliser plants.One aspect that has been often discussedin literature is the share of the subsidythat goes to the farmer vis-à-vis thatwhichgoes to the industry. The share ofthe farmer could be computed as thedifference between import parity pricethatwould have prevailed under free tradeand the domestic prices [Gulati 1990]. Asthe gap between the two increases, thesubsidy share of the farmer increases. Itis true that in recent years the cif price ofurea has increased significantly and so hasthe subsidy share of the farmer. Table 8computes the average share of the farmerin the fertiliser subsidy for the period2000-01 to2005-06 and compares it withthe share in the 1990s in Gulati andNarayanan (2003).Table 8 shows that the share of thefarmerhas risen from 53 per cent in the1990s to 88 per cent in the period 2000-01to 2005-06. However, these numbers alonetell only part of the story and cannot beused to justify the persistence of fertilisersubsidy. Gulati and Narayanan (2003) carryout an in-depth analysis of urea plants anddraw attention to the inefficiency preva-lent urea industry. Based on their resourcecost estimates of urea plants they observethat unless costs of production were re-duced, 32 per cent of urea production wouldbecome economically unviable if importparity price were to prevail.2 The findingsof their study lead them to conclude thatwith the dismantling of the administeredprice mechanism in the petroleum sectorand removal of concession on feedstock(i e, naptha and furnace oil/low suphurheavy stock), the subsidy bill would mountunless farmgate prices were raised or capitalcosts cut.Conforming to expectations, the fertilisersubsidy for 2006-07(RE) exceeded thebudgeted amount by Rs 5,199 crore. Theexplanation provided for this is the risingcost of naptha. According to the industry,the amount provided falls short of require-ment thus necessitating a carry forward ofalmost Rs 12,000 crore into the financialyear 2007-08. This would naturally meanthat the budgeted fertiliser subsidy atTable 7: Track Record of Expenditure on Economic Services(As per cent of Total Expenditure)2004-052004-052004-052005-062005-062005-062006-072006-072007-08(BE)(RE)(Actual)(BE)(RE)(Actual)(BE)(RE)(BE)Economic services on revenue account31.10 30.1130.8432.99337.66136.7334.48241.7732.82(i)Agriculture and allied activities7.587.187.647.647.227.407.087.847.09(ii)Rural development1.451.691.992.212.773.092.755.452.44(iii)Irrigation and flood control0. services on capital account4.833.963.914.614.143.964.294.479.36(i)Agriculture and allied activities0. development0. and flood control0. Annual Financial Statements, various issues.Table 8: Fertiliser Subsidy1990-91 to 1999-20002000-01 to 2005-06Average cif price of urea (Rs/tonne)4712.188844.41Average domestic price of urea (Rs/tonne)2908.604831.67Average subsidy to farmer (Rs/tonne) (Gulati method)2720.984012.74Average consumption (000 tonnes)17313.4020054.50Total subsidy to farmer (Rs crore)4710.948047.35Average budget subsidy (crore)8846.69089.33Farmer’s share of the subsidy ( per cent)53.2588.54Source:The data for 1990s is based on Gulati and Narayanan (2003) and computation for 2000-2006from data in fertiliser statistics, 2005-06.

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