POLL SOPS DERAIL FISCAL CONSOLIDATION

The Government must shun the practice of giving sops through loan-waivers or the country will plunge into a fiscal disaster, inviting miseries for the poor

In elections-after-elections, it has become normal for political parties to promise farm loan-waiver in order to swing votes to their favour. Last year, in Uttar Pradesh, loan waiver to small and marginal farmers promised by the Bharatiya Janata Party (BJP) Government was a major factor in catapulting it to power in the State. It cost the State exchequer around Rs 36,000 crore. In Punjab, the Congress won the election on the promise of waiving all outstanding loans to the farmers. Recently, in Karnataka, the coalition Government led by the Janata Dal (Secular) leader, HD Kumaraswamy, announced a loan waiver (albeit partial) costing the State around Rs 40,000 crore.

The universe of poll-related give-away extends much beyond to cover free education, Wi-Fi, laptop, computer, bicycle, electricity and gas connection, free/subsidised canteen et al. Now, with an eye on upcoming election in Madhya Pradesh, Rajasthan and Chhattisgarh as also the General Election next year, the Congress is contemplating an ‘unemployment allowance’. Parties cannot be unaware of the financial implications of these largesse as the States are wedded to the Fiscal Responsibility and Budget Management (FRBM) Act. Under the Act, States are required to maintain fiscal deficit (excess of total expenditure over total receipts) as a percentage of the State’s Gross Domestic Product (SGDP) within three per cent. But liabilities created as poll promises come in the way of achieving the target. According to a review by the Reserve Bank of India on ‘State Finances: A Study of Budgets’, State Governments did reasonably well for a few years till 2011-12 when their combined fiscal deficit stood at 1.93 per cent of the GDP. Thereafter, there has been a consistent deterioration with the deficit increasing to 2.6 per cent in 2014-15, 3.1 per cent in 2015-16 and further to a high of 3.5 per cent in 2016-17.

The steep jump during 2015-16 and 2016-17 was due to the largesse extended by the States to farmers and households vide State electricity boards and power distribution companies. Under populist schemes, the latter are made to supply power to former at subsidised rate (free in some States) which results in their incurring losses. These losses are funded by borrowing, resulting in the accumulation of huge debt which scaled to Rs 400,000 crore in September, 2015. Under the Ujwal DISCOM Assurance Yojana (UDAY) brokered by the Centre, State Governments took over 75 per cent of this debt. Liabilities arising from this takeover made a big dent on State Budgets.

During 2017-18, when the burden of UDAY somewhat eased, the States decided to bring down their combined deficit to 2.7 per cent, well below the three per cent threshold under Fiscal Responsibility and Budget Management Act. But the actual for 29 States, as per revised estimates, was 3.1 per cent. The States’ combined revenue deficit also turned out to be higher at 0.4 per cent as against the target of ‘zero’. The slippage, despite assured growth in tax revenue under the GST dispensation, was caused primarily by the liabilities arising from farm loan-waiver, besides the impact of revisions in pay/salaries consequent to the Seventh Pay Commission recommendations. For 2018-19, States are aiming at consolidated gross fiscal deficit of 2.6 per cent of GDP — as per Budget estimates which is even lower than the Budget estimates of 2017-18. The target for revenue deficit during 2018-19 is even more ambitious at -0.2 per cent. But the continuing populism, which will be practiced with greater alacrity in building up to impending elections later this year, will cause an increase in revenue expenditure and result in bigger slippage.

The stabilisation of GST — much earlier than initially thought — has emboldened the prospects of substantially increasing tax collections. The Centre hopes to garner at least Rs 100,000 crore a month during the current year up from an average collection of Rs 90,000 crore during July 2017-March 2018. This should give a boost to the revenue of the States thereby helping them absorb the shock of higher revenue expenditure triggered by poll related largesse. The moot point to ponder is whether it would be prudent to fritter away the gains from structural reforms, such as GST, in distributing doles if only to win elections. There is a message for the Centre as well. After remaining steadfast on its fiscal consolidation path for three years in a row, it went soft. As against the fiscal deficit target of 3.2 per cent, the actual was 3.5 per cent as per the revised estimate. However, the actual turned out to be still higher at 3.53 per cent. For 2018-19, it has been budgeted at 3.3 per cent as against three per cent — it should have been as per an earlier FRBM plan. The three per cent norm is now slated to be achieved only in 2019-20.

The Modi Government has vowed not to take recourse to profligacy notwithstanding the impending General Election. But this is not borne out by actions. For instance, the promise of MSP at 1.5 times the cost for 14 crops alone will dent the Budget by about Rs 35,000 crore. The fiscal situation could be catastrophic if next year, a Congress-led Government comes to power having to redeem its bizarre promise of ‘unemployment allowance’ besides continuing with other sops like loan waivers. The Government should aim to shun the practice of giving sops or else the country will be plunged into a fiscal disaster resulting in growth slowdown and aggravated miseries for the poor.

(The writer is a freelance journalist)

 https://www.dailypioneer.com/columnists/oped/poll-sops-derail–fiscal-consolidation.html

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