Time to overhaul the economy starts now
May 26 2014 , New Delhi
Officials dust up reform blueprint, subsidy cut likely
Finance ministry officials have already worked out the broad contours of the budget that is likely to be presented in the first week of July, and are only awaiting political direction from the new finance minister. They believe that should the new government dither on big bang reforms now, by heavily pruning the subsidy bill and pushing big-ticket disinvestments, it could lose the initiative to vested interests and spawn widespread corruption in subsequent budgets, as has been the case with previous regimes.
Policy planners say subsidy reforms must preoccupy the government’s attention. There is need to drastically prune the subsidy bill and ensure that the doles reach targeted citizens, preventing the siphoning off of huge amounts of cash. Expenses so saved could be put to better use for economic development and inclusive growth, officials preparing policy blueprints for the new administration told Financial Chronicle. None of them wanted to be identified by name.
Finance ministry officials argue that the government can easily save up to Rs 1.5 lakh crore in food, fertiliser and petroleum subsidy if it overhauls the official handout infrastructure by switching over to cash transfer to target recipients. The budget could provide the right opportunity to do exactly that.
Up to Rs 50,000 crore may be saved by lowering subsidies on diesel, kerosene and cooking gas and by transferring cash subsidy to intended beneficiaries.
Official estimates suggest that only 15 per cent of the almost Rs 70,000 crore petroleum subsidy reaches the needy and the rest is diverted for adulteration, running diesel gensets by traders and big industrialists, and for driving around in SUVs. All these not only add to the high level of pollution, but also lead to a high cost economy.
Food subsidy too needs drastic overhaul, with the government spending Rs 70,000 crore to deliver Rs 20,000 crore of subsidised foodgrain. Up to 40 per cent of the grain supplies are diverted from the leaky public distribution system run by the highly inefficient Food Corporation of India (FCI).
Besides, farmers do not have an incentive to switch to pulses and other cash crops and vegetables because of the high MSP on wheat, rice and sugarcane, much of which are left to rot in government godowns. Shortage of pulses and other proteins, besides fruit and vegetables have contributed significantly to food inflation.
Pruning the subsidy bill would facilitate higher private sector borrowings that are crowded out by government borrowings right now. In turn, larger private sector investments would boost investor confidence and possibly help in easing interest rates, the officials said.
Officials believe that should the government fail to dismantle FCI right away, the very politicians who seem agreeable to reforms right now, might subsequently alter their positions, as these institutions and public enterprises are used as milch cows to siphon off government funds for private gains.
Officials also dispute that dismantling the FCI infrastructure would lead to unemployment, as staff can be easily redeployed and the physical infrastructure sold to private traders or put to other use.
As finance minister in the Narasimha Rao, Manmohan Singh put in place major structural reforms in 1991, as India was left at the mercy of the World Bank and IMF for a bailout in the face of a severe balance of payments crisis. But those reforms sputtered in a couple of years, as they did not sink well with politicians and vested interests once the economy picked up momentum.
Rao subsequently lost the elections in 1996 because vested interests felt threatened.
More lately, officials say that while the economy grew on its past momentum during the UPA-I regime, failure to reform labour laws and privatise public enterprises pushed the economy to the brink of collapse under UPA-II.