Growing Government Expenditure is a Cause for Concern

By D. R. Pendse

Summary

D. R. Pendse, then Chief Consulting Economist of the Industrial Development Bank of India, uses this Forum of Free Enterprise pamphlet (based on a United News of India interview note) to sound an alarm about the deteriorating fiscal situation that lay just beneath the noisy debate over the March 1995 Union Budget. Writing in mid-1995, he warns that the underlying Budget arithmetic has been worsening for two or three years and that the Centre’s outstanding debt — projected at over Rs. 6,00,000 crores by the end of 1995-96 — is being used in ways that should disturb taxpayers and policymakers alike.

Using a single table broken into ten numbered observations, Pendse shows how roughly 36 per cent of every rupee borrowed by the Centre is consumed rather than invested, how a large slice of “capital outlay” (notably Rs. 55,500 crore in defence) yields no commercial return, and how the public sector undertakings — sitting on Rs. 1,59,000 crores of capital employed — earn a “measly 2.3 per cent” net return. He notes that the dividends the Centre receives from the RBI alone exceed those from every other public enterprise combined, that loans to state governments earn an average of just 10 per cent against the Centre’s own higher cost of borrowing, and that of Rs. 11,526 crore of fresh external assistance in 1995-96, almost 89 per cent will be pre-empted by interest payments and repayments of past loans.

The core polemic is fiscal-deficit revisionism: against the Finance Minister’s target of Rs. 57,634 crore, Pendse argues the 1995-96 deficit will instead come in close to Rs. 71,000 crore. He points to suspiciously low projected increases in total expenditure, the absence of provision for six new anti-poverty ministries and for Pay Commission burdens, and the political logic of a pre-election year. The pamphlet closes with the explicit warning that a similarly fast-deteriorating fiscal situation “landed us into our economic crisis of 1991”, and is accompanied by a statistical appendix reproducing tables from the Economic Survey 1994-95 on Central government deficits, outstanding liabilities, interest payments and budgetary transactions, framed by signature Forum sidebar quotes from A. D. Shroff and Eugene Black.

Key points

• Pendse argues the Centre’s outstanding debt will exceed Rs. 6,00,000 crore by end-1995-96 — the largest single figure he can find in the budget papers.

• Of every rupee borrowed, roughly 36 per cent is used up in the Centre’s own consumption rather than investment, producing a chronic ‘surplus on capital account’.

• A large share of so-called capital outlay — including Rs. 55,500 crore in defence — earns no commercial return, making it economically akin to consumption.

• Public sector undertakings deploy about Rs. 1,59,000 crore of capital employed but earn only a ‘measly’ 2.3 per cent net return over the last five years.

• Dividends from the Reserve Bank of India (Rs. 1,500 crore) exceed those from all other public enterprises combined (Rs. 1,446 crore), exposing how thin PSU profitability really is.

• Loans to state governments yield the Centre an average of just 10 per cent, well below its own cost of borrowing, so a large part of these loans is effectively rolled over rather than repaid.

• Of Rs. 11,526 crore of fresh external assistance budgeted for 1995-96, only about 11 per cent (Rs. 1,284 crore) will be available for fresh use; the rest is pre-empted by interest and repayments.

• Against the Finance Minister’s budget estimate of Rs. 57,634 crore, Pendse projects the 1995-96 fiscal deficit will reach close to Rs. 71,000 crore, with unbudgeted spending on Pay Commission awards, new poverty ministries and election-year pressures yet to bite.

• A statistical appendix reproduces Economic Survey 1994-95 tables on deficits as a share of GDP, outstanding liabilities, interest on liabilities and central/state budgetary transactions over 1980-81 to 1994-95.

---

Generated by the v1.5 extraction pipeline. Awaiting editorial review.