Modi deserves accolades for unlocking stalled projects, expediting approvals, making the state policy driven, bringing-in transparency and accountability in governance and increasing ease of doing business. All of this is yielding good dividends by way of spurt in investment [including foreign], boost to growth and a drastic improvement in India’s image globally earning it the distinction of being the only ‘bright spot’ amongst emerging economies.
Alas! action is missing in some of the vital areas which were long crying for big bang reforms. Normally, the first 2 years of any new government are considered to be a golden period and that is the time when, it can really risk some unpalatable steps. Unfortunately, Modi – dispensation has wasted both these years. Arun Jaitely has presented two budgets and both have ended up in a whimper.
4 major areas immediately come to mind viz., fertilizers, food, power and kerosene. These are sectors where inefficiency, cost padding/gold plating, pilferage/leakages and corruption are rampant. In turn, these impose monumental burden on the exchequer due to high subsidies and impair government’s ability to stick to fiscal discipline. Therefore, one would have expected a major surgical operation but we see none.
An Expenditure Management Commission [EMC] under Dr Bimal Jalan, ex-governor, RBI had recommended rationalizing and plugging of leakages in subsidies. One major recommendation was to switch over from extant cash-based accounting [under it, income/receipt is accounted when cheque/cash is received and expenses recorded when actually paid] to accrual-based accounting [here, transactions are recorded when they happen irrespective of when money is received or paid]. This was to rein in the pernicious practice of ‘window dressing’ to camouflage real expenses and revenue inflows.
Successive governments in the past were using this for deferring payments to succeeding year in a bid to show healthy balance sheet in the relevant year [in fact, actual payments in relevant year were dovetailed to meet pre-fixed fiscal deficit target]. Whereas, in the 90s, subsidy amount deferred used to be in hundreds of crores, during the current century, these run in to several thousand crores [for instance, during 2013-14, these were Rs 38,000 crores fertilizers; Rs 43,500 crores oil and Rs 40,000 crores food].
The implementation of Dr Jalan recommendation would have put an end to this fudging and forced the government in to a discipline mode to take credible action on “real factors” which contribute to increase in subsidy. By not acting on this recommendation, Modi – government has let this opportunity to slip. This in turn, has led to continued complacency and callous attitude towards addressing the real factors.
Thus, on May 13, 2015, the cabinet decided to freeze maximum retail price [MRP] of urea at its existing ridiculously low of level of Rs 5360 per ton for 4 years. A 10% hike can yield saving of Rs 1600 crores annually without any adverse effect on farmers; yet this potential has been frittered away. Likewise, direct benefit transfer [DBT] of subsidy needed for better targeting and plugging leakages remains on paper. With these two steps shunned, black marketing will continue unabated despite Modi’s bravado that neem coating of urea will stem diversion to chemical factories.
The National Food Security Act [NFSA] guarantees supply of food to 67% of India’s population [75% in rural and 50% in urban areas] at throwaway price of Rs 1/2/3 per kg for coarse cereal, wheat and rice respectively. This together with monumental inefficiency and splurging expenses in handling and distribution [for instance, loaders working for FCI get away with more than Rs 1 lakh per month] is the surest invitation to mammoth subsidy [Rs 125,000 crores for 2015-16].
Modi – government has done little if any, to tackle any of 3 factors viz., price, coverage and inefficiency. Even as price remains at existing near zero level, it has also put in the backyard recommendation of Shanta Kumar committee to reduce coverage under NFSA from 67% to 40% [that would have yielded savings of over Rs 50,000 crores]. As regards DBT which has the potential to curb leakages, only a pilot project is being run in Puducherry. At this pace, it will take several years for DBT to take off on a nation-wide scale.
The government wants to bring kerosene subsidy too under DBT. However, considering that almost all of subsidized kerosene is siphoned off [for mixing with diesel] and benefit any way is not going to the poor, should it not consider scrapping subsidy altogether? On the other hand, there is a much stronger case for dispensing with subsidy on LPG which is all cornered by better-off [Modi need not ask beneficiaries to voluntarily surrender their entitlement and spend money on ads].
In the power sector, state electricity boards [SEBs] have an outstanding debt of over Rs 300,000 crores most of which is because of their accumulated losses. These in turn, are caused by throwaway tariff [nil in some states], large-scale power theft and inefficiency/splurging costs. Recently, when union power minister, Piyush Goyal rejected states demand for a bail-out package third time [2 such packages were given in 2002 and 2012], one got an impression that the central government was really acting tough
But, now it seems, Modi – dispensation is keen to allow concerned states [these include a couple of BJP – ruled states viz., Rajasthan, Maharashtra, Haryana etc] to issue “sovereign” bonds against the debt they take over from SEBs on their books. This will tantamount to giving them an easy option of funding the loss at low rates [an alternative course of deducting funds from their additional share under 14th Finance Commission award would have put some pressure on them]. With this, even if centre tells them to deal sternly with aforementioned maladies, they won’t oblige [as in the past].
In all crucial areas, Modi has thus far shunned playing hard ball. Failure to do so even now could apply brakes on growth and negate gains made from good governance and investment push. Luckily, at present subsidy pressure is easing somewhat due to plummeting prices of crude oil and gas. But, the situation could turn ugly as and when, these prices start moving up. Modi need to act in time action before it gets too late.