The Union Finance Ministry has proposed sizeable cuts to not only gross budgetary support to high-spending Ministries but also the United Progressive Alliance’s flagship schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme.

Senior officials in the Expenditure Department of the Ministry proposed the cuts during a series of meetings with officials of the Ministries of Rural Development, Health and Human Resource Development. The Ministries are protesting the cuts.

Ministry of Finance officials told The Hindu the decision is being taken to keep the fiscal deficit within the target of 4.8 per cent of Gross Domestic Product that Finance Minister P. Chidambaram had set in Union Budget 2013-14. A fiscal deficit, or the excess of a government’s spending over its revenues, higher than the target could trigger a sovereign rating downgrade. Mr. Chidambaram is seeking to avoid this, in order to avert higher interest rates for India’s massive public debt. The Central government reached 74.6 per cent of this target during the first five months of 2013-14 (April–August), according to official data.

“The probability is very high of a sovereign rating downgrade if the fiscal deficit target isn’t adhered to as it essentially means the country is living beyond its means and its fiscal health is fragile. This makes it vulnerable to the slightest shocks,” a senior government official told The Hindu.

On Tuesday, Union Minister for Rural Development Jairam Ramesh sent a letter to Prime Minister Manmohan Singh protesting the proposed “savage” cuts, saying they will prove to be counterproductive and destroy the credibility of the UPA government, Mr. Ramesh told The Hindu. A copy of the letter was not immediately available.

“The issue is at the official level right now,” Mr. Ramesh told The Hindu. It will be escalated to the political level. The Finance Minister must explain at the political level what is so sacrosanct about keeping the fiscal deficit below 4.8 per cent, and why there can be no flexibility on the target fiscal deficit number in an election year.

Mr. Ramesh argued that the cuts would undermine key government objectives. “Spending in rural development schemes picks up only in the second half every year and a cut at this stage will be disastrous,” he said. “Expenditure should not just be an accounting entry on paper but a development activity on the ground.”

'Fund cuts will undermine our aam aadmi election platform'

The Finance Ministry’s proposal to slash budgetary support for social sector schemes managed by the Ministry of Rural Development by up to Rs.15,000 crore, have provoked sharp resistance from senior UPA politicians. They say such action will undermine its core aam aadmi election platform.

Six of the 10 flagship programmes of the UPA are targeted at rural areas, focussing on employment, health, development, water, housing and electrification. The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the National Rural Livelihoods Mission (NRLM) and the Indira Awas Yojana (IAY) face proposed allocation cuts of Rs. 2,000 crore each. Budgetary allocation for the rural roads programme Pradhan Mantri Gram Sadak Yojana’s is proposed to be reduced by Rs. 9,000 crores.

The proposed cut in the gross budgetary support to the Department of Elementary Education in the Ministry of Human Resource Development is Rs. 2,500 crore. The proposed purse-tightening for the Ministry’s Department of Higher Education is to the tune of Rs 3,000 crore.

Rural Development Minister Jairam Ramesh argues that the cuts will undermine key government objectives. “Spending in rural development schemes picks up only in the second half every year and a cut at this stage will be disastrous”, he told The Hindu on Wednesday. “Expenditure should not just be an accounting entry on paper but a development activity on the ground.”

“Fiscal discipline is good but should it be done the way it is being done, without a review or analysis of our schemes,” an official at the Ministry of Human Resource Development asked. “The Department of Expenditure has proposed a blanket uninformed cut without any consultation or going into our efficiency or ability of spending, looking merely at the unspent balances under one head,” she said.

However, a senior Finance Ministry official argued that there was no choice; the government had no much ways to reduce other heads of expenditure, like subsidies and interest payments on public debt. “At the moment, about two-thirds of India’s tax revenues are going towards funding subsidies and interest repayments so there really is no fiscal space for the Finance Minister to manoeuvre,” a senior official said.

The income side can also not offer solutions: In a slowing economy the government’s tax revenues have all but dried up. According to figures released by the government last week, direct tax collections during April-October grew at 11.58 per cent. This is much less than the target of 19 per cent it had set itself in the budget for this fiscal. With hardly any disinvestment proceeds so far this year there is little non-tax revenue to bank on.

Credit Agency Standards & Poor’s cut its outlook on India to “negative” in April 2012. Last week it said it will review India’s rating once a new government, due to be elected next year, lays out its policy agenda. The prospect of a destabilising downgrade to below investment grade ahead of the polls was thus put off. Fitch Ratings revised its outlook to ‘stable’ in June, on the back of steps taken by the government to contain the budget deficit.

The Quarterly Economic Review released by the Ministry of Finance in September, said that controlling the fiscal deficit within the target of 4.8 per cent of GDP by reining in expenditures was a priority.

“The performance of the Central Government in the first quarter of the current fiscal may not sound optimistic, but, overshooting of government expenditure and underperformance of revenue receipts in the first quarter is a reflection of the current macroeconomic environment,” the review said. Receipts of the Central government in April-June were only sufficient to cover 31.2 per cent of total expenditure, leaving a deficit of Rs. 262,823 crore, which is at 48.4 per cent of the Budget Estimates, according to the review.

The Congress returned to power in 2004 riding on an aam admi slogan and MGNREGA was seen to have played a role in its re-election in 2009. Interestingly, though Mr. Chidambaram had said in his budget in February that the aam admi budget will not be slashed, Parliament did not adequately quiz him on it. The Rajya Sabha passed the budget this year without debating it at all.

Replying to the debate in the Lok Sabha, Mr. Chidambaram said the government was committed to gradually lowering the fiscal deficit from the current 5.2 per cent to 4.8 per cent next year, then 4.2 per cent and ultimately to about 3 per cent by 2016-17. The current level was “very high” and not sustainable, he said.

Stressing the UPA’s mantra of “inclusive growth,” however, Mr. Chidambaram had added that he had provided Rs. 16.65 lakh crore which was enough to stimulate growth and that “no ministry or department has been given less than what they were given in the beginning of 2012-13.”

In the budget, the allocation for the Ministry of Rural Development, which implements a number of flagship programmes, witnessed a quantum jump of 46 per cent. It was allocated Rs. 80,194 crore for 2013-14, as against Rs. 55,000 crore in 2012-13. While the Mahatma Gandhi National Rural Employment Guarantee Scheme was to get Rs. 33,000 crore, the Pradhan Mantri Gram Sadak Yojana was given Rs. 21,700 crore, and the Indira Awas Yojana was allocated Rs. 15,184 crore.

Similarly, the Ministry of Drinking Water and Sanitation was to get a budget allocation of Rs. 15,260 crore as against the Revised Estimate for spending of Rs. 13,000 crore in the previous year. “The emphasis is on quality of expenditure, and that will be endured by re-prioritisation of expenditure for developmental purposes and cautiously curtailing the growth in non-developmental expenditure without harming the planned growth path,” the quarterly review says.

A recent research report by Sajjid Z. Chinoy, India Chief Economist of the Wall Street brokerage house JP Morgan, said: “Slashing expenditures and running up arrears can be a strategy for a year or two. But it is not sustainable in the medium term. Instead, sustainable fiscal correction would need to be predicated on a Goods and Services Tax (GST) on the revenue side, as well as bringing major subsidies (food, fuel) under the unique identification gambit, so that substantial de-duplication gains can be realised”