UPA sleeps at the wheel and Pranab gets insomnia

There is a rhythm about some confessions. The echoes linger longer. Earlier this week, Finance Minister Pranab Mukherjee confessed that the burgeoning size of the subsidy gives him sleepless nights. The finance minister  is no spring chicken in politics and clearly it was not an unintended crackle. It was meant to spark the optics of reforms in the budget season. It succeeded. It has also unintentionally re-opened the debate on persisting policy paralysis and poor governance in the UPA regime.

Let’s get the facts upfront. It isn’t as if the subsidies have spiralled unknown to the Government, least of all to the finance ministry. Subsidies have shot up in seven years from Rs 47,000 crore in 2004-05 to an estimated Rs 2 lakh crore (as estimated for current financial year). It is also not a secret that the rise is largely funded by borrowings. Subsidies and interest costs—which account for over Rs 3 lakh crore or one-fourth of the total government expenditure—are the two largest items on the expenditure bill.

And the cause is well known. The UPA has since 2004 slept at the wheel and allowed profligacy to prevail. What are the big tags in the subsidy bill? They are subsidy on fuel, fertiliser and food. All three elements come under the oversight of the Cabinet Committee of Economic Affairs where majority membership is with the Congress. Indeed, 13 of the 15 are from the Congress. It would be instructive for the people to know and understand the initiatives considered by the hallowed group to bring down subsidies, if at all.

Look at fuel subsidy, the most discussed item in the public domain, thanks to the inadequacy of public transport and the dependence of general public on personal transport. As early as in July 2007, the Cabinet accepted in principle the Integrated Energy Policy authored by the Planning Commission. The committee advised targeting of subsidies to ensure that “only lifeline-level consumption is subsidised and subsidy is enjoyed by only those who cannot afford to pay for such lifeline consumption”. The committee also emphasised that unless the subsidy raj is fixed, India could endanger its energy security.

Five years later, nearly two-thirds of the subsidy on diesel is consumed by telecom companies, power back-up users and diesel car owners. The committee which drew on the expertise of 20 specialists from different domains also said free power should be paid for by states and in fertiliser consumption, farmers and not companies should be compensated directly through cash/coupon transfers. A GoM which looked at fertiliser subsidy delivered incrementalism at its worst. Even so nobody knows the benefits of—if any—the nutrient-based subsidy formula. Worse, we are now subsidising foreign companies as a major chunk of fertilisers is imported. Add to this the food subsidy bill which threatens to bulge further, thanks to the promise of food security without any attempt to fix targets.

Rational economics demands that pricing ensures the extraction of fair value from the users so that the system is sustainable. Electoral politics dictates that governments cover the costs of lifeline goods to those who cannot afford to pay. That is how the political economy is balanced, in theory. In practice, the UPA has failed to target beneficiaries and succumbed to the decibel power of the vocal classes. It has given the concept of pass-thru-pricing a complete go by and created a mammoth superstructure of entitlements by shirking its obligation to take hard decisions.

On the eve of the budget, the Government is faced with the challenge of balancing the budget and presenting some semblance of fiscal responsibility. It has few ideas on how to restructure the balance sheet. At current levels, it is unlikely that GDP growth will exceed 6.5 per cent—thanks to the fact that industry has grown by barely 3.6 per cent between April and December. The slowdown in the economy threatens to impact revenue growth which has thus far enabled profligacy. So in an abject display of intellectual laziness, babudom has zeroed in on subsidies.

The question that begs to be asked is why isn’t the Government losing sleep over the aggravated levels of tax exemptions to corporates which have shot up from Rs 2 lakh crore to over Rs 4.60 lakh crore in 2010-2011? Why is there no debate on pruning exemptions? Just as subsidies need to be targeted for maximising benefits, so must exemptions to achieve the objectives of growth and employment. Can a country which boasts of over 50 dollar billionaires on the Forbes list collect only Rs 500 crore as wealth tax? But these issues don’t seem to be on the table of discussions. The UPA might preach that it focuses on the needs of the silent majority while its fiscal prescriptions have a clear bias for the vocal minority.

The cause of sleeplessness that afflicts the finance minister is not just bad economics but also poor politics. Rising borrowings and debt threaten to curtail the ability of the Government to load the cost of the party’s ambitions on the public exchequer. The very business model of politics is under threat. Like any CFO, the FM has to manage the tussle in the tent, balance the interests of the venture capitalists and shareholders without losing political market share. As his colleagues thrive on flyover politics, Mukherjee must keep Robin Hood economics alive.

(The opinions expressed in this column are the author’s own. Shankkar Aiyar is a senior journalist who specialises in the politics of economics)