The chief economic adviser [CEA] to Government of India [GOI], Dr Arvind Subramanian has lambasted international rating agencies for their continuing to give low sovereign rating to India despite surging growth, substantial improvement in its macro-economic fundamentals and reforms gathering momentum.
At the same time, they continue to give high ratings to countries such as China despite deceleration in growth, deteriorating macro-economic fundamentals and fiscal situation [for instance, debt to GDP ratio in China is 250% as against 69% in India]. Even in developed countries viz. USA, France, Spain, UK etc debt to GDP ratio is well above 90% and yet, they enjoy high rating.
The rating assigned by these agencies not merely reflects on relative standing of India vis-à-vis other countries but also has a substantial material effect on the economic situation. Low sovereign rating results in higher cost of borrowing in the international market and severely impacts the balance sheets of corporate as also budgets of central government and the states.
Even as Modi – government impresses upon rating agencies to improve their rating commensurate with India’s distinctly better economic fundamentals, in its own interest, it needs to make trans-formative changes in areas that have hitherto remained untouched by reforms. These are also segments which have potential to destabilize the fiscal situation if timely attention is not paid.
First and foremost is the highly convoluted system of food procurement at minimum support price [MSP], its distribution at heavily subsidized price and resultant galloping food subsidy [Rs 145,000 crores being budget allocation for 2017-18]. The subsidy outgo is mammoth because of (i) vast coverage i.e. 2/3rd of population or over 800 million, (ii) ridiculously low selling price viz. Rs 1/2/3 per kg of coarse cereals, wheat and rice and (iii) reimbursements to state agencies for handling and distribution cost on actual basis.
In all the three areas, drastic reforms are required to substantially reduce the number of persons covered under food security scheme, keep low prices only for the very poor, make better-off/rich households pay higher price and replace the current system of reimbursement on actual by payments to agencies on normative basis. The government is well aware of the dire need for these changes [these were recommended by a high level committee under Shanta Kumar in 2015] but is unable to muster courage to implement.
Second, is the no less fallacious system of fertilizer pricing and subsidy under which manufacturers are ordered to sell urea at heavily subsidized price [1/3rd – 1/4th of cost of supply] and get reimbursement for excess of cost over this as subsidy – that too on unit specific basis. This creates a perverted incentive structure whereby good performers are not rewarded and bad performers are not penalized, which is out of sync with standard business philosophy.
On the other hand, all manufacturers of complex fertilizers were getting subsidy on ‘uniform’ basis under nutrient based scheme [NBS] when the scheme was launched in 2010. Overtime, even this turned perverse when in the garb of preventing alleged misuse, the government started paying less than the uniform rate to those manufacturers/importers who were able to reduce cost through better management and improvement in efficiency of operations.
These deficiencies together with low MRP has led to an unsustainable high fertilizer subsidy bill [Rs 70,000 crores: budget allocation for 2017-18]. Luckily, at present, the price of various feedstock viz. imported LNG [liquefied natural gas] besides domestic gas and raw materials/finished product viz. phosphoric acid, ammonia, MOP, DAP etc are low – courtesy excess supply in global market. The day, these prices zoom, subsidy bill will further shoot up.
Crucial reforms in fertilizer such as NBS [albeit uniform subsidy] for urea, freeing up urea imports [currently, these can be made only by government authorized agencies such as MMTC, STC, Indian Potash Limited] and direct benefit transfer of subsidy using JAM [Jan Dhan Yojna – Aadhaar – Mobile] platform have been in the air for over 5 years now. But, neither erstwhile UPA nor Modi – government have had the guts to take these on board.
A third area of concern is brazen display of populism by ruling establishments in states to grant farm loan waivers; the most recent instance being Uttar Pradesh [UP] where the waiver has cost state government Rs 36,000 crores. Other states viz. Karnataka, Maharashtra, Punjab, Tamil Nadu [herein, even the High Court has jumped in to the fray directing state government to extend loan waiver to all farmers] are seriously considering to grant loan waivers.
Even as the Reserve Bank of India [RBI] has refused to provide any support from public sector banks [PSBs] – rightly so – such indiscriminate extinguishment of farmers loan liabilities will make a deep hole in the balance sheet of states. This will increase their fiscal deficit to level even beyond the threshold fixed under Fiscal Responsibility and Budget Management [FRBM] Act.
Fourth, the states have granted a huge bail out to power distribution companies [PDCs] by taking over their outstanding debt of close to Rs 400,000 crores under Ujjawal Discom Assurance Yojna [UDAY]. Under a financial restructuring package [FRP] mooted by union government, while the state takes over 75% of their debt, for the balance 25%, PDCs can raise borrowings by issuing bonds at concessional rate – backed by state guarantee. The impact of this too on state’s fiscal deficit can be mind-boggling.
Worse still, PDCs have done little to improve their efficiency in operations, reduce technical and commercial losses [T&C] or power theft in plain words. In this backdrop, their losses will continue forcing more bail out by the states in future. Consequently, their fiscal position will remain vulnerable for all time to come.
Fifth, reforms are yet to embrace LPG and kerosene in any meaningful way [petrol and diesel had already been decontrolled in 2010 and 2014 respectively]. In LPG, a major portion of subsidy continues to be cornered by better-off/rich even as DBT in kerosene is on trial run. Even so, retailing of all fuels – diesel and petrol included – continues to remain shackled.
Finally, both centre and states have reserved their right to give any other subsidy of their choice in the name of ameliorating the conditions of poor. For instance, under GST that kicks off from July 1, 2017 even as all area/region based exemptions will have to go, the states have plans to continue with them under some other form.
In a nutshell, Indian economy continues to be bedeviled with several weak spots which have potential of destabilizing the fiscal apple-cart and other fundamentals. It is better to address them now – in our own interest – irrespective of the stance taken by rating agencies.