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Firstpost Economy Scorched earth: How Cong is screwing the economy further
by R Jagannathan Nov 25, 2013 With every passing day, it is becoming clear that the Congress party does not expect to, or even want to, win the 2014 elections. Its electoral goals are about three things: ensuring that the winner scores a low win rather than a big one (which means a BJP with less than 180 seats); making sure it get enough seats to be a robust opposition party (which means a Congress with 130-plus seats; and, most important, ruining the economy so badly that whoever comes to power will be seen as an economic incompetent and presumably create conditions that are ripe for the Congress to return to power in 2016 or 2017. This is the logic of enacting so many major economic laws in its lameduck year the Food Security Bill and the Land Acquisition Bill, for example. All political parties find it difficult to oppose these bad laws in an election year. These bills wont deliver any electoral returns for the Congress in 2014, but th ey will spike the guns of whoever wins. And that seems to be their main purpose. But we already know that. What is not so well known is that the Congress is steadily destroying whats left of a slowing economy by executive actions actions that will lob time-bombs in the next governments lap even before it has a chance to settle down. Four stories in the pink press today (25 November) tell us how this is a continuing effort. A story in The Economic Times informs us that the rural development ministry under Jairam Ramesh is planning to hike NREGA wages even more than what was previously planned. The ministry has scrapped a panel headed by National Statistical Commission Chairman Pronab Sen and set up a new one to prepare a fresh index that would lead to more generous wage revisions under the Mahatma Gandhi National Rural Employment Guarantee Act. Now, mind you, NREGA wages are already indexed to inflation. What the ministry is now trying to do is buy rural votes by making wage increases even higher. And this at a time when consumer inflation is above 10 percent. Anybody who wants to make inflation worse could not have thought of a better way to achieve this objective. A PTI report in Mint newspaper shows that Ramesh is planning more damage. He has apparently sought increases in pensions paid under social welfare schemes, especially under the National Social Assistance Programme (NSAP). Once again, it seems election time is appropriate for the use of depleted taxpayer funds to bribe voters with more money. A story in Business Standard tells us that your income-tax refunds are going to be delayed further because tax revenues are not growing at the rate at which P Chidambaram indicated they would in his budget. The smaller refunds amounts of a few hundred or a few thousand are not being held up, but the big refunds are being put off. Now why would a government do this? Refunds have to be refunded, today or tomorrow. Unless you dont plan to be around tomorrow, it makes no sense. When you delay big refunds to high net worth taxpayers and corporations, the accounts for 2013-14 will reflect a lower fiscal deficit. But the refunds would still have to be made and that could happen in the next year, when, surprise, surprise, a new

government will face huge bills. This is nothing but a scorched earth policy. Now, consider oil subsidies. Everyone knows that subsidies are not being paid in time. Despite nearly a year of price hikes in diesel, the subsidy remains at Rs 9.69 a litre as of mid-November. Total subsidies payable in the first half were Rs 60,907 crore, and another like amount will take the total subsidy to Rs 1,20,000 crore unless international oil prices suddenly crash. The government even at the start of the fiscal year had just about Rs 20,000 crore in its kitty for oil subsidies. And even if oil and gas production companies (ONGC , GAIL, etc) pay up another Rs 40,000 crore, Rs 60,000 crore of oil subsidies will spill over to the next year to be paid by the next government. The fourth exhibit of scorched earth is the governments commitment to retain the fiscal deficit at 4.8 percent in 2013-14. This red line on the fiscal deficit makes Chidambaram look like the paragon of rectitude, and he will surely manage to somehow tweak the numbers to achieve this number. But the point is: at whose cost? A sharp cut in plan and capital expenditure just to achieve the fiscal deficit will worsen the growth slowdown next year when Chidambaram wont be the finance minister. In short, Chidambaram is lobbing not only a lot of his bills to the next government, but also making the slowdown worse. A slowing economy will not generate enough revenues for the exchequer, and this means the next government will face an immediate ratings downgrade and a multitude of economic crises. It could be worse than 1991. Everything the Congress is doing is to somehow manage the short-term and window-dress the national accounts so that the next government is sure to trip and fail. In terms of fiscal management, UPA-2, headed by a so-called economist and a so-called reformer, has been the most irresponsible government India has ever seen. An article in Business Standard by Rajiv Shastri, Director at Pramerica Asset Managers, tells us how irresponsible they have been. Comparing formal budget subsidy numbers and the more detailed accounts provided by the ministry of statistics and programme implementation (Mospi) tells us the margin by which Congress has been more imprudent than the NDA. According to Shastri, the real subsidy numbers are much higher than what the budget documents show. During the NDAs six years, the budget numbers showed major subsidies at an average of 1.49 percent of GDP. During the last five years (2008-09 to 2012-13), the budgeted subsidy average worsened to 2.43 percent. Thats bad enough. But the Mospi estimates of subsidies look even worse. As against the NDA average of 2.79 percent, under UPA the average for the last five years has been a massive 4.71 percent of GDP. If we assume that all governments are cavalier about freebies and subsidies, it is also clear that under UPA, and especially UPA-2, economic irresponsibility has hit a new low. One wonders if Manmohan Singh should call himself an economist anymore or P Chidambaram a reformer. It is easy to blame Pranab Mukherjee for the damage, but the political responsibility for the economic damage done rests with the PM and Sonia Gandhi. Despite some fast footwork after August 2012, Chidambaram has not done much to redeem himself either. The UPA under Sonia Gandhi will hand over a poisoned fruit to the next government. Possibly enough to call the UPAs economic actions anti-national.

http://economictimes.indiatimes.com/news/economy/policy/nrega-wages-to-shoot-up-ahead-ofpolls-upa-looks-to-reap-rich-gains/articleshow/26328703.cms

NREGA wages to shoot up ahead of polls; UPA looks to reap rich gains
By Yogima Seth Sharma, ET Bureau | 25 Nov, 2013, 07.00AM IST NEW DELHI: The government is looking to make a substantial hike in wages under its flagship employment generation programme, seen as a vote winner that helped UPA return to power in 2009, ahead of general elections next year. The rural development ministry has scrapped a panel headed by National Statistical Commission Chairman Pronab Sen and set up a new one to prepare a fresh index that would lead to more generous wage revisions under the Mahatma Gandhi National Rural Employment Guarantee Act (Nrega). "The new committee has been asked to suggest a proper index that would revise the wages under Nrega in a manner they are protected against inflation," a senior government official told ET. "Besides, it has been asked to suggest the mode of resetting the baseline in 2014 and thereafter every five years." The Sen committee's view that the index should be based on the consumer price index-rural (CPI-rural) measure isn't acceptable to the government as it believes this would only allow for a moderate increase below the current annual hike, and would be potentially unpopular in an election year. Nrega, launched by the UPA government in 2006, is regarded by the ruling coalition as a successful welfare programme that led to its re-election three years later. UPA clearly would not want a formula that could risk its chances in the upcoming general elections. The new committee chaired by S Mahendra Dev, vice-chancellor of the Indira Gandhi Institute of Development Research, will submit its report in three months, just in time for implementation ahead of the elections. Wages under the flagship scheme are based on the CPI-agriculture labourers (CPI-AL) measure, which has a base year of 1986-87 and is, therefore, considered outdated. CPI-AL indexed wage rates were revised upward by nearly 12% with effect from April, with a maximum wage of 214 in Haryana and a minimum of 135 in the north-eastern states. Economists, however, said linking the wages to CPI-rural was the best option. "The current inflation is largely because of higher food inflation is largely because of higher food

inflation. Going forward, it would be ideal to determine wages based on CPI-rural, which determines the cost of living in rural areas even if it means lower annual increase per annum," said DK Joshi, principal economist at Crisil. The government has earmarked Rs 33,000 crore under Nrega in 2013-14.

http://www.business-standard.com/article/opinion/rajiv-shastri-the-subsidy-devil-is-in-the-detail113112400681_1.html

Rajiv Shastri November 24, 2013 Last Updated at 21:44 IST

Rajiv Shastri: The subsidy devil is in the detail

Expenses such as employment guarantees and loan waivers are, in effect, subsidies that are classified differently in government accounts
Over the last few years, the government announced many policy initiatives that purportedly help the weaker sections of our society. Schemes initiated under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) or the distribution of free and affordable food items under the National Food Security Act (NFSA) are examples of these. While it is logical to assume that these initiatives will be accompanied by a sharp increase in the subsidy bill, this is not evident in our budgeted subsidy numbers. The dissonance between the expenses projected under the requirements of these laws and the expenses provided in the Budget seems to be growing, causing sharp differences in opinions on their economic consequences. The Indian government quantifies subsidies in two sets of documents. The first are, of course, Budget documents that include a summary of the cost of "major subsidies" in the expenditure section of Budget at a Glance. There is a significant degree of discretion on the constituents of this amount since there are many possible interpretations of both words, "major" and "subsidy". This amount has been growing, relative to nominal gross domestic product (GDP), through the years, moving from 1.12 per cent of GDP in FY96 to 2.72 per cent of GDP in FY13. While this is worrying in itself, as mentioned earlier, it seems to understate the impact of recent policy decisions. In fact, the proportion of subsidy is projected to drop to 2.03 per cent in FY14, which seems to be at a variance with any logical estimate of additional subsidies on account of the NFSA. In defining "subsidies", the devil is actually in the detail. Do we include only expenses explicitly classified as subsidies by the government? Or do we include all expenditure from which the national exchequer doesn't benefit? Internationally accepted definitions veer towards the latter and seem to be logically consistent since they encompass all "uneconomic" expenses of the government. In reality as well, expenses such as employment guarantees and loan waivers are, in effect, subsidies. They are just named and classified differently. (THE REAL NUMBERS) The other set of data that quantifies subsidies is the National Account Statistics maintained by the Ministry of Statistics and Programme Implementation (MoSPI). This data set uses total subsidies as part of the adjustment required to convert GDP at factor cost to GDP at market prices. Since this information

is shared with many international bodies such as the World Bank and the Organisation of Economic Cooperation and Development, it has to comply with internationally accepted classification norms. This provides considerably less discretion in the constituents of each line item. As a result of all these differences, this amount is considerably higher than that in the Budget documents. For example, in FY96, total subsidies based on National Account Statistics account for 2.47 per cent of nominal GDP against the 1.12 per cent based on the Budget documents. Looking at these numbers in the context of the initiatives mentioned earlier, it is quickly apparent that the MoSPI numbers seem far more pragmatic. For example, in the three years following MGNREGA enactment in FY06, budgeted subsidies remained steady at 1.42 per cent compared to a long-term average of 1.41 per cent. However, total subsidies based on MoSPI data jumped to 3.86 per cent from the long-term average of 2.80 per cent. Another example is available in FY09, when despite a large loan waiver and emergency measures in response to the global financial crisis, actual subsidies as per budget documents increased by about Rs 60,000 crore, from 1.52 per cent of GDP to 2.45 per cent of GDP. According to MoSPI numbers, subsidies in FY09 increased by Rs 1,00,000 crore, from 3.80 per cent of GDP to a stunning 5.17 per cent of GDP. And if these numbers are cause for alarm, recent statistics are certainly a cause for panic. MoSPI data for FY13 puts total subsidies at a whopping Rs 5,75,000 crore, or 6.08 per cent of nominal GDP when compared to a revised Budget estimate of Rs 2,57,654 crore, or 2.72 per cent of GDP. Also, while budgeted "major subsidies" increased by Rs 39,713 crore compared to the previous year, total subsidies based on the MoSPI data increased by an unprecedented Rs 2,26,371 crore. To put things in perspective, total subsidies in FY13 accounted for 40 per cent of total government expenditure. One needs to keep two important facts in mind when looking at these numbers. First, these pertain to a year in which no global or domestic crisis has struck. As such, these numbers indicate an evolution in the "normal". Secondly, these numbers do not contain any part of the NFSA impact. Subsidies on account of this colloquial "Right to Food" legislation kick in only from this financial year. It is only logical to assume that our total subsidy bill will increase substantially in the current financial year, and not reduce as indicated by the Budget numbers. And while these may include small parts of the outlay towards education, women empowerment and so on, these cannot be the cause of such a massive increase. The economic impact of an increasing proportion of GDP and government expenses being directed towards uneconomic expenses is now increasingly apparent. Uneconomic activities crowd out economic and productive activities by outpricing them. To be fair, such initiatives do provide economic succour over brief periods in difficult times but they can cause serious damage to the economic structure when undertaken as part of long-term policy. And while the consequences are visible in the state of our economy currently, what is worse is the absence of any signs of change. The total subsidies statistics for the first quarter of the current financial year indicate where we may be headed. In Q1 FY14, total subsidies account for an eye-watering 7.16 per cent of GDP or 46 per cent of government expenditure. More, based on historical trends, the relative subsidy burden in the first

quarter is typically significantly lower than that of the full year. While the trend is crystal clear, the opacity of government accounts makes it impossible to estimate what the full year's number will look like. One thing is certain, though. It won't be the budgeted 2.03 per cent.