Photo: PTI
Photo: PTI

Opinion | India on the cusp of another dalliance with fiscal imprudence

Cash doles serve as a weapon for political parties during election campaigns, but at what cost?

With voting for the 2019 general elections barely two weeks away, we are entering a dangerous period where politicians will promise the voter anything to get elected.

We saw it on 25 March, when Rahul Gandhi promised a minimum annual income of 72,000 to each of India’s 50 million poorest households. While the criteria for determining who is eligible for this largesse remain hazy, back-of-the-envelope calculations show that the government will require 3.6 trillion annually to make good on this promise. On 2019-20’s projected gross domestic product (GDP) of 210 trillion, this works out to 1.7%.

Since existing subsidies under just three heads—food, fertilizer and fuel— add up to another 1.4% of GDP, already we are breaching the 3% mark even after excluding other “minor" subsidies (subventions for short-term farm loans and crop insurance, loans for affordable homes, old age pensions, and so on). If, God forbid, we get more such schemes from the National Democratic Alliance (NDA) government in order to counter the Rahul Gandhi scheme, we would be looking at a truly frightening fiscal mess over the next two years. The single biggest achievement of the NDA government, low inflation, will be sacrificed at the altar of competitive electoral lunacy.

India has had a long history of political parties launching bigger and bigger welfare schemes, but without withdrawing or curtailing overlapping schemes of the past. Thus, the Narendra Modi welfare schemes have complemented rather than cut into costly United Progressive Alliance (UPA)-era schemes like food security and MGNREGA, and one can be sure that post 23 May, the next government will have to take tough calls on which schemes to truncate and which ones to keep.

New governments are said to have a three-to-six-month honeymoon period, but the real window of opportunity is less than two months, for the next budget will have to be presented by July. This means political parties with hopes of forming the next government must have their plans ready by now. After getting elected would be too late.

What is clear is that almost all parties are now promising more cash in the hands of the poor, and this is the new reality. They must, therefore, work out how they can do this in a fiscally sensible way. Some suggestions follow.

One, for the Congress, if the intention is to pay 72,000 to the poorest 20%, the best way to do it may well be an expansion of MGNREGA rather than a direct dole. Or a mixture of the two. Currently, the scheme operates for 100 days a year, and if its ambit is extended to nine months—leaving out only the peak agricultural season when jobs are anyway easy to find—the cost incurred would be far less. There could even be some material gain in terms of the assets that get created. A tripling of MGNREGA spends would mean an annual cost of 1.8 trillion, just half of what Gandhi has promised. It would limit the fiscal damage even while providing support to the real needy, who will not need to be identified quite so arbitrarily.

Two, and this is for the Bharatiya Janata Party. If the idea is to take a 6,000 annual dole to segments beyond the farm sector in order to counter the Rahul pitch for a minimum income, a good way to do it would be to offer one- or two-year salary subventions under the apprentices scheme or social security payment relief to entities in the small and medium sector. This way, new jobs will be created, which will then generate their own consumption and investment demand, setting off a virtuous cycle. What both the Congress and BJP should avoid is giving out doles that merely reward non-work.

Three, some subsidies are ripe for elimination, especially those for fertilizers. The Congress and BJP could promise 6,000 annually to every farmer, or an equivalent amount of cheap fertilizer, but not both. Once it is posed as a choice, most farmers may choose cash subsidies over kind, and thus nearly 75,000 crore can be shaved off the 3.6 trillion cost of an income scheme. It will also revive the fertilizer market and force producers to seek real efficiencies.

Four, similar choices can be offered to urban consumers, who can be told they can either take food subsidies in kind or cash. If a majority opt for cash, politicians can then take a bolder decision to abolish the food subsidy and convert up to 1 trillion of food subsidies (out of 1.84 trillion) to cash grants, thus making the food market vibrant.

Another easy way out of endless subsidies is to state the amount of support to be given in fixed rupee terms, so that while market prices float according to demand and supply, the subsidy bill per kilo of rice or wheat or even cooking gas remains constant. Over time, as the economy grows, the subsidy element will shrink.

India is on the cusp of another dalliance with fiscal imprudence, and it is incumbent upon all political parties, those in government and those who hope to be in government, to think beyond the general elections.

The time to work out sensible policies is now, and not after 23 May 2019.

R. Jagannathan is editorial director, ‘Swarajya’ magazine.

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