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Insights into Editorial: Govt must urgently reform subsidies to create fiscal space

 

 

Introduction:

India’s growth forecasts are now 1-2 percentage points lower owing to the second wave of coronavirus.

Economic uncertainty has escalated sky high as result. Because of the pandemic’s harsher incidence this year and no clarity of exit from its miseries anytime soon, income support is now imperative. The government can no longer remain on the side lines.

With its sorry financial state, it now has to think structurally and start creating space for income assistance, whose magnitude and duration is as uncertain as the pandemic.

Vaccine shortage means the post-lockdown reopening will plant seeds of another round of infections, uncertain prospects of mass rapid vaccination suggest Covid-19 will remain ensconced without surety as to how it will pan out.

It must brace up for fiscal action by structural reforms in revenue expenditures. No longer can these be delayed.

 

Government measures for effective Public expenditure management (PEM):

  1. Establishment of Public Debt Management Agency, the proposed agency to manage entire internal and external debts of the government.
  2. Government has targeted to reduce the fiscal deficit gradually and stabilize it by 2023 to 2.5%.
  3. Removing Plan/Non-plan distinction and instead adopting the revenue-capital classification of public expenditure will help in the allocation of more resources for creation of capital assets.
  4. Creation of Monetary Policy Committee for better inflation targeting.
  5. Deepening of Fiscal Federalism: More tax revenue has been devolved to states from the divisible tax pool.
  6. Public Fund Management System: is an online platform to monitor the progress of government schemes

 

Supply-side stress appears building up too:

There are ample hints the economic toll may be higher, consumption demand may remain subdued longer than currently foreseen.

  1. MSMEs are affected by shutdowns hurting sales and raw material procurements, through supply chain linkages, and inability to withstand prolonged pressures.
  2. Large firms are impacted by labour shortages due to migration, infections or fear besides oxygen usage ban, lowered sales and future demand uncertainties.
  3. Feeble demand for credit and loan restructuring is the financial counterpart of this.
  4. March quarter’s resounding corporate profits suggest K-shape recovery is getting pronounced, compounding inequality.
  5. It is evident there’s no wedge in infection and mobility; it was misleading to have believed that India succeeded in breaking the infection-mobility link as some did last year.
  6. A stretching pandemic of unknown duration and spread means worsening employment-income situation for the susceptible population segments.
  7. The economic conditions of vulnerable households are such that income support is absolutely essential.
  8. Enlarged uncertainties also make it difficult to assess the extent and duration of such assistance. But a beginning has to be made.

 

Need to overcome revenue shortfalls:

With general government debt touching 90% of GDP, debt sustainability and macroeconomic stability are a binding restriction and concerns.

The government also neglected sharing its views nor revise fiscal rules (the FRBM Act) or present a detailed medium-term fiscal adjustment plan since the budget presentation.

Action on these lines may have helped impart strength and confidence to overcome revenue shortfalls, exceed expenditure limits without sparking debt sustainability concerns.

Bimal Jalan Committee on expenditure management has recommended steps such as rationalizing subsidies, sticking to a fiscal path, and strategic divestment.

Prudent public finance management would be key to unlocking the growth potential of the Indian economy.

 

Solution: Bringing subsidy arrears on transparency: Budgeted expenditures must be reoriented:

  1. Most have advocated that budgeted expenditures be reoriented to meet the emergency health and income requirements.
  2. But this is unlikely to be enough; the fact that government is unwilling to even commit the measly amount required for vaccine procurement is proof.
  3. It is time for the government to think along structural lines, and start preparing fiscal space for this emergency of unknown magnitude and longevity.
  4. Just like it responded to Covid-19 with structural reforms last year, it must now follow with further deepening of revenue-expenditure reforms.
  5. The reforms to agriculture marketing and institutional structures, accounting transparency by bringing subsidy arrears (food, fertilisers) on the balance sheet, raising LPG prices, have all been commendable efforts in this direction.
  6. But more recently, there has been regression with the increase in fertiliser subsidies instead of revising issue prices.
  7. This derails the reform momentum and diminishes credibility of effort and commitment to improve finances.
  8. There are other welfare and often populist expenditures, at both state and central levels, which have risen unabated for far too long and become unsustainable.
  9. General finances have eroded, productive expenditures lost out, and it is shameful there is no latitude to support its people in a devastation of this nature and scale.

 

Conclusion:

In the light of its precarious debt position but pressing need for income support, the government now needs to prepare a roadmap to restore order through a believable redemption plan.

This must aim to reduce subsidies over the medium-term, starting now howsoever modestly in order to display commitment and restore credibility.

For example, it can choose between different pathways to moderation of the food subsidy, i.e. streamline beneficiary eligibility and numbers, revise issue prices, or a mix.

It is clear that fundamental changes cannot be delayed any more. This is the time for reckoning, difficult as it may be.