Improve quality of Government expenditures

Dr Bharat Jhunjhunwala
Our growth rate has declined from about 9 percent three years ago to 5-6 percent today. Main problem contributing to this decline is the increase in fiscal deficit. Fiscal deficit is itself not bad. Businesses grow by taking loans and investing; they flounder if they take loan for profligacy. The same holds for Government expenditures. Incurring fiscal deficit for investment in highways and research is good; but not so for financing leakages or for paying unemployment compensation for buying votes. The fiscal deficit has had a hugely negative impact because the quality of Government expenditures is poor. The Government is using the borrowed money for leakages rather than investment.
The Finance Minister could have taken many measures to reduce leakages. One, he could establish an independent auditor with participation of independent citizens to examine the quality of Government expenditures. The present system of audit has totally failed to contain the rot at the bottom. The CAG has been able to expose some big matters but this ‘activism’ is dependent upon the predisposition of the person occupying the seat of CAG. Most CAGs have had a placid tenure. A pro-active auditor  is required. I had once done evaluation of a rural development program implemented by the State Forest Department and financed by a foreign donor. The Forest Department supplied saplings and also paid monies to beneficiaries to dig pit and to provide manure and water for the first two years. The accounts were all fine. But I was told by the beneficiaries that they had only received the saplings and not the money for digging the pits etc. On the face of it the bills for the digging were all prim and proper. But they were forged. It was not possible to find this by looking at the bills alone. I was able to discern this by meeting the beneficiaries. Such ‘audit activism’ is required.
Two, an separate secret service should be established to proactively trap the corrupt. Kautilya writes in Arthasastra that it is as difficult to find the amount embezzled from the state coffers as it is to find how much water the fish has drank while swimming in the tank. Presently the vigilance organizations take note only when there a complaint is made. But most corruption takes place by mutual consent. Therefore, a system is to be devised to proactively look for the corrupt without requiring that a complaint be made. Let us recognize there is no fail safe here. This proactive vigilance organization may also be prone to corruption. But multiplicity of vigilance organizations will help.
Three, a confidential survey about the efficiency and honesty of Government officers can be got done. I had an occasion to undertake evaluation of a Five Star NGO. I sent confidential letters to 500-odd members of the society. It became clear that the NGO was being run as a personal fiefdom with no consultation with the members. Similarly 100-odd consumers of a  Government provider can be sent confidential letters seeking their opinion about the integrity and efficiency of the concerned officer. The consumers of an electricity sub-station can be sent letters seeking their opinion about the Junior Engineer manning the substation. Results of this survey should be given importance in granting promotions or dismissals. An expenditure of mere two thousand rupees will tell the corrupt from the honest.
Four, a public hearing can be organized periodically in all government departments where people have the opportunity of placing their grievances. A comparative analysis of the minutes of these hearings will clearly show which officials are inefficient and corrupt. Five, every officer must be given a complaint book like that carried by the TTE of the railways. An independent outfit which directly reports to the Minister must take action on these complaints. Such measures will help improve quality of government expenditures. I must emphatically add that none of these measures are full proof. But I am confident that implementation of multiple measures will certainly lead to improvement. Reduced leakages will revive the economy without the need of reducing fiscal deficit.
The second line of action to revive the economy is at the level of policy. I accept that objective of the political party in power is to win the elections. But there are many ways of garnering votes. Presently the Government is buying votes by paying unemployment subsidy through MNREGA. This is adding to consumption expenditure and fiscal deficit. The same amount can be given through employment subsidies. For example, the employer’s contribution to Provident Fund can be paid by the Government for Small and Medium Enterprises. This will reduce the burden and encourage industries to employ more numbers and make new investments. Second, units that employ large number of workers can be granted tax exemptions. Say one automobile factory is employing robots while another is employing workers. The man hours of labour per lakh rupee of production can be calculated for each unit and average can be worked out. Units deploying more than average man hours of labour can be given tax breaks while units deploying less man hours can be subjected to higher taxes. This will keep the average level of taxation unchanged while providing incentive to employing more numbers.
Similar incentives can be given at the level of industry. Capital-intensive industries like aluminium and petroleum can be taxed more while labour-intensive industries like garments and leather can be given tax breaks. Once again the average level of tax need not change. This will shift our entire economy in a labour-intensive direction that is more suitable to our resource endowment. A parallel change in foreign trade policy may be made. We may encourage capital intensive imports and labour intensive exports. This will lead to deployment of our capital in labour intensive sectors. In a parallel measure labour laws must be relaxed for industries employing large numbers of workers. The present situation is exactly the opposite. Industries employing larger numbers are subjected to harsher labour laws. Industries abhor employing large numbers of workers for the fear of labour unrest. This must be change if we have to generate more employment in organized sectors.
Certain technologies and machineries like excavators and harvesters are heavily labour displacing. A study must be done about the contribution of these technologies to increase in production. For example, harvesters displace labour but make it possible to cultivate larger areas. On the other hand, it seems to me that excavators do not add to such production. A true cost benefit analysis of various labour displacing technologies should be done from this standpoint. Technologies adding less to production but displacing more labour must be taxed heavily. The Government should move in these directions to revive the economy.

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