Financing Social Sectors

On 2^nd December this year over 15000 people from over 150 movements and organizations from across the country descended on Jantar Mantar near the Parliament in Delhi under the banner of Abki Baar Hamara Adhikar (ABHA). They were all demanding the protection of their various constitutional and legal rights, many of which are being threatened by Modi sarkar’s new policies and amendments to existing entitlements and provisions – land and forests, health and education, water and food security, NREGA and worker rights, social security and welfare. ABHA discussed each of these rights in a People’s Assembly over 2 days prior to the rally with experts/activists working on these issues and grassroots activists from each of these movements. At one level the discussions revolved around strategies of how to protect what exists but also on how we can strengthen each of these entitlements. Invariably one of the issues which emerges in such discussions is where will the money come from given that India has one of the lowest Tax:GDP ratios of only 17% amongst group of countries at the same level of development.

Social sector investments like health, education, food security and old age and disability pensions create basic equity amongst citizens and help reduce misery and poverty. With adequate public investments in these sectors and universal access to services and benefits therein the poverty line would be history.  At the minimum for such social security for health we need 3% of GDP, for education 6% of GDP, for Food and Nutrition security 2% of GDP and for pensions 2% of GDP. Thus at today’s prices we need close to Rs. 15 lakh crores for these social sectors. We already spend about Rs. 7 lakh crores by National and subnational governments and the deficit is about Rs. 8 lakh crores. Where will this money come from?

Raising resources or budgets for social sectors and social security is not as difficult a task as it may appear to be given the low level of allocation and spending. What is needed is a small doze of political commitment and will to increase the tax:GDP ratio from the present 17% to atleast 25% so that adequate budgets can be allocated for social sectors. The Modi government seems to be compressing public spending as we see that compared to 2013-14 budget estimates which was 15.7% of GDP, the first budget of Modi sarkar for 2014-15 saw public spending by the national government drop down to a low of 13.9% of GDP. The first casualty of this is the social sector expenditures like health, education and food security where we have already seen some compression in spending.  Jaitley in his first budget speech implied that a lot was being invested in social sectors and these investments were populist and wasteful, harking back to what Modi’s reference to MGNREGA in his election campaign as a dole and a humiliating experience for such beneficiaries. Jaitley pointed out that social sector spending needs to be made more efficient and further increases should happen via the PPP route. The problem in the social sectors is not so much about efficiency as it is about deficiency. It is in fact a shame that in India public resources committed to healthcare amount to only 1.2 per cent of GDP, for education 3.5 per cent of GDP. Social security of the unorganised sector that constitutes over 90 per cent of the workforce accounts for a mere 0.15 per cent of GDP, and the share of the Union government in that being between one-fourth and one-fifth. The global benchmarks are three to five times higher. No wonder India, the third largest economy in the world (in purchasing power parity GDP terms) has a low HDI rank of 136. But this can be changed mostly by mining resources from within the existing kitty, though ultimately new resources will also have to be generated. So here’s where the money can come from:

·         The national government gives  subsidies to the corporate sector of over Rs. 6 lakh crores and atleast  Rs. 4 lakh crores is contestable for any social benefits being accrued.

·         Uncollected taxes because of disputes is Rs. 4 lakh crores and there is no reason why this cannot be first collected and disputes settled later.

·         The daily turnover in speculative markets (shares, commodities, currencies, securities etc) is Rs 5 to 6 lakh crores . This is pure circulation of money and does not create new wealth or value addition and what is worse it is not taxed in any significant way. Even imposing a 0.5% turnover or transaction tax on this would mean Rs. 3000 crores daily as revenues or Rs. 9 lakh crores annually, the precise deficit that exists for social sector budgets

·         Apart from the above there are many other possibilities of raising resources. For instance a small amount like Rs.5 each month as social security cess on mobile connections can raise about Rs. 5000 crores annually; a 2% health  cess on sales turnover of tobacco and alcohol, and personal vehicles can raise Rs. 10000 to 15000 crores; a tax similar to profession tax  from all those working or doing business and not covered by any social security like ESIS or CGHS etc.  could generate substantial contributions etc…

·         Universalizing the ESIS to all employees by removing the salary upper ceiling of Rs. 15000 so that all employees earning higher incomes will also contribute compulsorily and this will raise ESIS revenues manifold. For instance a person like Mukesh Ambani who gets a total remuneration of Rs. 36 crores per year would contribute against his such income Rs.2.34 crores (@6.5% wages)  to the ESIS fund. Today ESIS has reserves of Rs.30000 crores and it is using workers money to start 18 medical colleges, 9 dental colleges and 12 PG medical institutes.  ESIS’s mandate is social security and not medical education. The latter would further destroy the already ailing ESIS health system. ESIS should be merged with general public health services and workers benefits from the scheme should be protected and further strengthened. Also the effort should be to extend the ESIS to as many uncovered or unorganised sector workers who can be federated into occupational groups like beedi workers, miners , plantation workers, headload workers etc. so that there is only a single scheme for social security. It would be very easy to cover even NREGA workers under ESIS where all jobcard holders should automatically be registered with ESIS and the NREGA program should contribute say 1% of the wages as social security on behalf of workers.

·         States could raise the VAT by 2.5% and earmark this for social sectors. Ghana for example does this to raise resources for its National Health Fund. There are many other possibilities provided there is a political commitment to seriously support increased budgets for social sectors.

For social sector services human resource availability for frontline service delivery is a huge problem, especially for health and education. The government invests heavily in professional and higher education, nearly Rs. 2 lakh crore each year, but outturns coming into the public system is very small. Compulsory public service for 3 to 5 years by all professionals like those graduating from medical and nursing schools, management and technology schools (IIMs, IITs, IIIT etc..), agriculture,  education, humanities, sciences and social sciences etc. is the only solution.  All those graduating must serve public systems for 3 to 5 years and only if they do so they would be allowed to do PG (say after 2 years of public service) and get their degree after 3 to 5 years. The rationale is that huge public resources are invested in higher education, which is almost free for the recipients and the people of the country have a right to a social return from such investments.  For instance, to train one MBBS doctor the government spends more than Rs. 20 lakhs. Such compulsory service will solve the problem of availability of doctors and nurses in health institutions, of teachers in schools and colleges, of engineers in infrastructure projects, of managers for public programs etc..

Those working in government get huge pensions and family pensions linked to inflation index which secures their old age for a comfortable living. All those crossing age 60 (55 for women) and not receiving any other pension should be entitled for a social pension which should be atleast equal to the minimum wage – why I am saying minimum wage and not 50% is because the minimum wage definition in India is a survival wage.

Often in public services like health and education or in delivery of welfare benefits the issue of efficiency and absorptive capacity is raised.  This is not correct. The issue is not of efficiency but one of gross deficiencies. Investments in public services are very inadequate (health 1.2% of GDP, education about 3.5% of GDP). As a consequence the approach to these services use targeting and/or  para professionals like para teachers or non-allopathic doctors and this distorts the access to these services. Because of inadequate budgetary allocations there are huge vacancies in frontline positions where services are delivered, shortages in critical supplies and consumables and poor maintenance of infrastructure. This impacts the quality of the service and discredits it in the eyes of the user creating a scenario for users to migrate to private provision. The other issue that is raised by the top bureaucracy is lack of absorptive capacity when they are confronted to raise budgetary allocations.

Absorptive capacity is a myth. The problem is of underfunded budgets, that lead to loss of credibility, poor quality, frustration, sanctioned posts not filled up leading to underspending. This underfunding and underspending viciousness is the root cause of poor service delivery and this can certainly not be termed as lack of absorptive capacity at the service delivery level. The problem therefore is not the absorption capacity but the bureaucracy itself which does not have the capacity to plan and budget in a way that service delivery is appropriately structured and financed so it can meet the demands of the people.

To conclude the question of absorptive capacity is a convenient tool which the bureaucracy uses to circumvent real issues that are a cause of the underfinancing and underspending of social sector budgets. The lack of bottom up planning and budgeting that is based on expressed needs and demands of the community for which services are being provided, and the lack of decision-making power and autonomy to govern and manage the provider institutions are the main causes for poor service delivery. This needs to be remedied immediately if resources invested in public services have to realize the policy goals.

Revenues Forgone and Social Sector Budgets

In undertaking budget analysis somehow the larger focus has been on looking at expenditures while the revenue side of the budget is often ignored, except perhaps oil and gas or other mineral/natural resource based revenues when the particular economy is driven by such resources. However, often taxes do receive some attention in budget analysis within a macro-economic analysis with a focus most often on reducing or increasing tax rates or the tax base. The composition, character, nature and depth of the revenues have received very scant attention. Thus revenues not collected, revenues forgone, equity impact of revenues, etc. are often overlooked in mainstream budget analysis. It is time to shift gears and give greater weight to the revenue side of the budget because expenditure can only happen when there are adequate revenues.  

Across OECD countries, as well as in a number of emerging economies, where tax:gdp ratios range between 30-50 percent, we see more responsible and accountable governance as well higher expenditures on social and welfare sectors. This is possible because adequate revenues, especially through taxes are raised but also because there is a large tax base, better tax compliance and minimal tax expenditures or forgone revenues. In most developing countries the contrary is true – lower tax:gdp ratios, smaller and skewed tax base, poor tax compliance, large scale evasion, large tax expenditures and incentives – and hence social sector spending is small and inadequate. For instance, in 2005 the average tax revenue to GDP ratio in the developed world was approximately 35%. In the developing countries, it was equal to 15%, and in the poorest of these countries, the group of low income countries, tax revenue was just 12% of GDP. The cocktail of tax avoidance, tax expenditures and tax evasion are widely believed to be important factors limiting revenue mobilization in the developing world. Further in developing countries in addition there is the international dimension of tax evasion via price distortions or transfer pricing, that is  sending of overpriced imports into developing countries and underpriced exports from developing countries. This shifts incomes to the host countries of MNCs and results in revenue losses within the developing countries. And finally there are the tax haven countries and the “Swiss banks” which attract tax evaded incomes and shadow economy incomes from both developing and developed countries and this also leads to revenue losses for the state.

India, despite being a rapidly growing economy has revenue characteristics of developing country economies. The present tax:gdp ratio is a meager 17% and this is certainly not adequate to finance social sector budgets if we accept the ESCR commitments to realize universal access to all social and economic rights like education, health, housing and social security. So why does the Indian government fail to realize adequate tax revenues. There are many reasons but some of the important ones are:

1. Lax tax collection: Adequate efforts are not put in to maximize tax collections. Small businesses, large volumes of unregistered or even illegal economic activities, evade taxes completely. It is estimated that in India the parallel economy is atleast 60% (conservative) to 150% of the legal/registered economy. If revenues were realized from this through efficient tax administration at least 50% more tax revenues would be generated.

2. Corrupt Practices: Revenue officials like income tax officers, excise inspectors, customs collectors often are in league with businesses and individuals to facilitate tax evasion, including transfer pricing and transfers to tax havens ( it is estimated that the equivalent of India’s GDP is parked in “swiss banks” and this is mainly money belonging to the business elite and politicians from India). This results in huge losses to the state exchequer.

3.  Tax Expenditures: Fiscal policies and decision making lead to concessions in taxes for selected individuals and businesses. The latest budget 2010-11 estimates that for the Central government alone these tax expenditures account for 85% of Tax revenues during 2009-10 and the trend is increasing (see Table below) – so a clear potential for doubling tax collections if most of these tax expenditures, especially for businesses are taken away.

4. Subsidies that are not declared as tax expenditures: Organisations registered as Trusts under the Public Trusts Act are exempt from tax payments. A large number of private educational institutions, hospitals, religious institutions etc operate as Trusts and accumulate huge surpluses. Such institutions are supposed to engage in charity and provide social benefits but the reality is that most of them do not and neither do the concerned government agencies monitor their financial transactions. So these are again clear losses of revenues for the state exchequer.

Table: Revenues Forgone (Tax Expenditures) during 2008-09 and 2009-10 Central Government, India – figures are INR crores (1 crore = 10 million)

Source: Govt. of India Budget 2010-11

To conclude, if the tax administration becomes more efficient, disciplined, and ethical at one level and most of the tax expenditures, especially the non-personal income tax, and other subsidies which do not provide effective social returns are done away with there is clear plausibility that India’s tax:gdp ratios should reach the level of over 35% (without increasing tax rates) and this would provide the “maximum available resources” to meet the ESCR commitments, especially universal school and college education, universal access to healthcare and universal access to housing.

Ravi Duggal

rduggal57@gmail.com

Social Security and the SENSEX et.al.

In India those who can afford to buy healthcare from the market generally get free healthcare and those who do not have resources are left to the mercy of the market. This happens because the public health system in India is grossly inadequate to meet the healthcare demands of the population and hence those in poverty or living on subsistence (less than $2 per day, about 80% of the population) are forced to buy healthcare from the market and often this is done by selling assets or borrowing money. Most of those above subsistence are in the organized sector and have reasonable protection for healthcare through various social security provisions. For education, housing, pension and other welfare the same is true.

For example if you work or have worked in the armed forces, the social security package is indeed very liberal. Both during active service as well as a pensioner you get free comprehensive healthcare, quotas and fee waivers for children’s education, free rations, tax free commodities through canteen services, free housing while in service and subsidies for purchase of house at retirement, travel concessions etc.. Most other government employees also get a more or less similar range of benefits. Many in the organized private sector are also covered by various social security legislations and receive various benefits. But such social security in India covers only an estimated 15% of the population and another 2% – 3% use their own surplus resources to arrange for their social security. The remaining 82% of the population has to fend for itself because social security initiatives for the general population are very fragmented. From time to time the Central and State governments come up with social security schemes, especially for those below the poverty line or select vulnerable groups below the poverty line like widows, elderly or for scheduled castes and tribes etc.. But these schemes are only populist measures usually implemented during an election year and then forgotten, or even if some of them are sustained getting access to the benefits is a tardy and bureaucratic one.

The question here is whether universal social security is possible in India? Not an easy question to answer. With a tax:GDP ratio of less than 15% this is indeed difficult because countries which have universal or near universal social security have tax:GDP ratios of over 30%. Over the last two decades India has averaged a growth rate of around 8% with huge increases in its GDP but the governments have been unable to rake in the resources from this windfall because of massive reductions in tax rates. One has however seen some significant changes in the last decade. Realizing that the GDP growth comes largely from the service sector, including the financial sector, the introduction of service tax and the security transaction tax was an important maneuver which has largely contributed to the 2% - 3% of additional GDP being netted through public revenues over the last decade. But this is not adequate if the Indian State has to become a strong welfare state. We have to virtually double the tax:GDP ratio if any significant social security has to be provided to the entire population. This is the great challenge for the Indian State.

Let us illustrate this with an example for the health sector. The present government at the Centre had committed to spending upto 3% of GDP on healthcare in its Common Minimum Program Declaration but in their previous 5 years of governance the public health spending stagnated below 1% of GDP whereas private health expenditure zoomed from 4% of GDP to 5.5% of GDP. Now that they are back in power they have another opportunity to pursue this (as well as the other flagship programs of employment, education, rural infrastructure etc..) To achieve these alternative sources will have to be tapped in order to generate more resources. Employers and employees of the organised sector are an important source (ESIS, CGHS and other such health schemes should be merged with general health services) for payroll deductions towards social insurance payments. There should be no income ceilings for membership – any one who is employed in a registered establishment, whether private or public must be compulsorily a member and the employer and employee should contribute. There could also be a proviso to register self-employed persons who want to become members of such a social health insurance scheme. The agricultural sector is the largest sector in terms of employment and population and at least one-fourth to one-third of this population has the means to contribute to a health scheme. Some mechanism, either linked to land revenue or land ownership, will have to be evolved to facilitate receiving their contributions. Similarly self-employed persons like professionals, traders, shopkeepers, etc. who can afford to contribute can pay out in a similar manner to the payment of profession tax in some states. Further, resources could be generated through other innovative methods - health cess collected by local governments as part of the municipal/house taxes, proportion of sales turnover and/or excise duties of health degrading products like alcohol, cigarettes, paan-masalas, guthkas etc.. should be earmarked for the health sector, voluntary collection through collection boxes at hospitals or health centres or through community collections by panchayats, municipalities etc... Given the increasing domination of the service sector economy, especially financial services, Tobin tax or the STT kind of taxes must be used more extensively to generate revenues from all financial transactions in trade, stock markets, commodity markets, futures and options, foreign currency exchange, banking, credit card etc.

It is not very difficult to raise additional resources if the government has some commitment to the social sectors. For instance a health cess of 2% on sales turnover of health degrading products like alcohol, tobacco products like cigarettes, guthka, beedis, pan masalas etc. which together have a turnover estimated at Rs.2000 billion would itself generate Rs. 40 billion which would contribute a 10% addition to the existing health budgets of central and state governments combined. Similarly, the financial transaction tax (STT) introduced in the 2004-05 budget needs to be expanded and earmarked for social sector expenditures only (this should be an additional allocation and should not entail reductions from existing allocations out of present tax revenues). India is a rapidly growing financial sector economy and daily transactions in securities (Government and stock market, commodities, forex, including futures and options) alone are estimated at over Rs. 1000 billion per day and other cheque and financial instruments another Rs. 300 billion daily and as per the present STT rate of 0.15% this would generate over Rs. 500 billion annually and if the rate is doubled to 0.3% with the proviso that the increased rate would fund social sector budgets like health and education then we are looking at over Rs.1000 billion (3% of GDP) of additional taxes. And this would not hurt those transacting as it would be merely Re. 3 per Rs. 1000 transacted and there would be a return on this contribution in the form of improved health and education services. Apart from this there are other transactions like credit card transactions, commodities trading etc. which can contribute substantially. There are also other avenues for raising resources for the health sector, for example a health tax similar to profession tax, a health cess on land revenues and agricultural trade so that the rural economy can also contribute to revenues for public health, health cess on personal vehicles using fossil fuels, on luxury goods like air conditioners, on house rents and property taxes above a certain value or size etc. The bottom line is that these additional resources should be strictly earmarked for the health and other social sectors and should not find their way into the general pool – with this caveat and evidence of its use for strengthening social sectors like health and education people will not protest against such levies.

All these methods are used in different countries to enhance health and social sector finances. Many more methods appropriate to the local situation can be evolved for raising resources. The effort should be directed at assuring that at least 50% of the families are covered under some statutory contribution scheme. Since there will be no user-charges on services rendered people will be willing to contribute as per their capacity to social security funding pools and because they are making a dedicated contribution (similar to an insurance premium) they will also demand accountability in the use of those funds and the services provided. For the remaining 50% of the population which cannot contribute the government would provide the resources through the general tax pool.

The grapevine says that the Finance Ministry is likely to review or scrap the STT and look at alternate means for netting resources from the stock markets. This may not be such a good idea because if you remember the STT in the first place was a replacement for capital gains tax. Its implementation scrapped the long terms capital gains tax and reduced the short term capital gains to 10% from 33%. Infact the Finance Ministry needs to extend the application of the STT as a broader financial transaction tax covering all kinds of speculative financial transactions as well as other high end financial transactions. In the last 5 years the STT has averaged about Rs.6000 crores per year but has the potential even with the present rate if extended to all financial transactions to net in over Rs. 50,000 crores annually. Also as suggested above a doubling of the rate to 0.3% would help the government improve its tax:GDP ratio substantially. So the SENSEX, NIFTY et.al. has a great untapped potential in contributing to India’s social security. Given the fact that the market capitalization of just the BSE listed shares is equal to or more than the GDP of India the potential of the stock market transaction contributing to social security of the country is enormous. In a booming stock market such contributions would also boom, and when it is known that a booming SENSEX or NIFTY will contribute to peoples health and education there will be a vested interest to assure that the stock market is also healthy and robust.
Ravi Duggal