Modi's first fiscal challenge



Vivek Kaul

N Chandrababu Naidu, the chief minister of new Andhra Pradesh (what remains of the state after the creation of Telangana), wants to waive off bank loans to farmers and women’s self-help groups amounting to a whopping Rs 54,000 crore. Naidu promised this freebie during the course of the election campaign and now wants to fulfil it.
The trouble of course is that the banks which made these loans will have to be adequately compensated. And for that the newly elected state government will need money, which it does not have. It is estimated that the revenue deficit of Andhra Pradesh will amount to Rs 13,579 crore during the course of this financial year(April 1, 2014 to March 31, 2015). Revenue deficit is the difference between the revenue expenditure and the revenue income of a government.
Hence, the question is where will the government get this money from? Naidu is hoping that the Narendra Modi led government at the centre (BJP fought elections along with Naidu’s Telgu Desam Party both at the state and the national level) will help him fulfil his electoral promises.
But the central government is already stretched on the finance front. In the interim budget presented in February 2014, the fiscal deficit for this financial year was projected to be at Rs 5,28,631 crore or 4.1% of GDP. Even this projection was primarily achieved by cutting down on the asset creating planned expenditure and by not recognising’certain’expenses which in total amounted to more than Rs 1,00,000 crore. Hence, the actual fiscal deficit would have been significantly higher. Fiscal deficit is the difference between what a government spends and what it earns.
If the central government chooses to assist the new Andhra Pradesh government with the entire Rs 54,000 crore that is needed, then it will end up adding to its already high fiscal deficit. In fact, the amount that the new Andhra Pradesh government needs to waive off loans is more or less equal to the assistance that the old Andhra Pradesh received from the central government over the last 10 years(between 2004-2005 and 2013-2014). This assistance amounted to a total of Rs 54,613.4 crore. This comparison clearly tells us the astonishing amount of money that is needed to write off these loans.
One reason that the Modi government might choose to entertain Naidu is the fact that it does not have enough numbers in the Rajya Sabha. But if it entertains Naidu, then it will also have to entertain the likes of Naveen Patnaik and J Jayalalitha, who have been demanding special packages for their states, in return for their support in the Rajya Sabha. And where is all that money going to come from?
Also, it will go against the Modi’s entire electoral pitch of the government creating an enabling environment that allows people to progress, instead of giving out doles to them. It is worth remembering here that the new Andhra Pradesh has around 5% of India’s population. Given that, the question is that whether the central government should be spending such a huge amount of money in a single year on one single state? And the answer is no.
The other option for the new Andhra Pradesh government is to borrow this money by issuing bonds. The trouble is that a state cannot borrow an unlimited amount of money. The borrowing limit for old Andhra Pradesh had been set at Rs 29,000 crore, at the beginning of this financial year. Hence, the borrowing limit for the new Andhra Pradesh will clearly be less than that. Also, as pointed out earlier the state is already expected to run a revenue deficit of Rs 13,579 crore during this financial year.
The moral of the story is that the math for waiving off loans made to farmers and self help groups, does not really work out. News reports suggest that the bankers have requested the ministry of finance to try and convince the new Andhra Pradesh government, not to go ahead with this plan. Other than the math not working out, there are other reasons why the new Andhra Pradesh government shouldn’t be going ahead trying to waive off loans.
First and foremost, it is not fair on the people who have honestly repaid their loans in the past. Also, it will reward those who have defaulted on their loans.
Second, it brings the issue of moral hazard to the core. Economist Alan Blinder in his book After the Music Stopped writes that the “central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains(and incur costs) to avoid it.”
What it means in this context is that after the loans are waived off this time around, people of the state of new Andhra Pradesh, will think twice before repaying their loans, in the days to come. If the government can waive off loans once, why can’t it do it all over again, is a question that the people of Andhra Pradesh will be asking themselves?
Third, in the next election the Telgu Desam and the other parties, will compete to promise even bigger freebies.
Fourth, loans being waived off benefits those people who are in a position to take a bank loan, in the first place. Typically, farmers with large landholdings tend to fall in this category. The small farmer is not in a position to fulfil the requirements that need to fulfilled in order to take a bank loan. Hence, the question is do the large farmers really need to be subsidised?
Fifth, the government of Andhra Pradesh needs to build a new capital over the next years. It will need a lot of money in order to do that. Hence, it makes sense for it to be fiscally responsible during its initial years.
All these reasons suggest that Chandrababu Naidu should reconsider his decision of waiving loans to farmers and self help groups of the New Andhra Pradesh.

The article originally appeared in The Asian Age/Deccan Chronicle dated June 11, 2014.
(Vivek Kaul is the author of the
Easy Money trilogy. He can be reached at [email protected]

Why the gutka ban in Maharashtra won’t work

Vivek Kaul

One of the things about having grown up in erstwhile Bihar was that I ended up with the habit of having paan now and then. For brief periods of time it would turn into an addiction and I needed my paan right after lunch.
Nearly 10 years back, while working in Hyderabad my paan-eating habit was at its peak. I went out for my afternoon paan right after a heavy lunch. On one such occasion, while I was waiting for the paanwallah to make my daily fix, someone came and stood next to me. In chaste Hyderabadi Hindi he asked the paanwallah“kya miyan unne rakhe kya?
The paanwallah, who till then was sitting cross-legged, quietly got down and suddenly put his hand next to his crotch. For a moment I was too shocked at the scene that was playing out in front of me. The paanwallah then quietly handed over something wrapped in polythene and was handed over a Rs 10 note in exchange.
Once the exchange was over I asked the paanwallahkya diya usko?
Gutka!” the paanwallah replied.
In March 2002, the state of Andhra Pradesh had banned the sale of gutka. But such was the addiction of the people that gutka never really stopped selling in the state, and the system simply went underground. You could buy gutka packets at almost any paan shop in Hyderabad.
The only thing that had changed was that the price had more than doubled. Everybody made more money in the process. The police turned a blind eye to this menace because they had bigger criminals to catch. And at the end of the day how many paanwallahs could they have put in jail? Also, while I have no concrete proof for this, I am sure that the local hawaldars must have been kept happy by passing them a share of the increased profits. The gutka manufactures pleaded ignorance by saying that the packets were being smuggled into Hyderabad and Andhra Pradesh from the other neighbouring states where the sales weren’t banned.
So everybody made more money in the process. The gutka consumer lost out because he had to pay a higher price for his addiction, but then he really didn’t mind. The government lost out on the taxes that would have come from official gutka sales.
The government’s reasoning in banning the sale of gutka was simple. The decision was made in the interest of public health. The loss in tax revenue for the government was thus secondary. Using similar logic the government of Maharashtra recently banned the sale of gutka in the state. While at face-level this might seem like the “right” thing to do, it doesn’t really work.
Gutka is also banned in Kerala, Madhya Pradesh, Bihar and Uttar Pradesh. Maharasthra has also banned pan masala, becoming the first state in India to do so.
Bans to stop people from consuming products that are injurious to their health have never really worked in this country. Manufacture, sale or consumption of alcohol has been banned in Gujarat since 1960. But as anyone who has lived in Gujarat long enough will tell you, sourcing any kind of alcoholic drink isn’t a problem. You just need to know the right person who can home-deliver it.
The charismatic NT Rama Rao implemented prohibition in 1994 after an anti-liquor movement spearheaded by women grew across the state. The men never really stopped drinking. Liquor continued to be available and was simply smuggled into the state from the neighbouring states.
N Chandrababu Naidu, son-in-law of NTR, became the Chief Minister in 1997. He revoked prohibition on the pretext that it was “not successful or feasible because of the leakages within the state and from across the borders”.
Haryana implemented prohibition in mid-1996 and lost out on Rs 1,200 crore of tax revenue during the period. The drinkers simply moved to drinking in neighbouring Delhi and Punjab during the period.
When states ban consumption of alcohol, or gutka for that matter, they are following what the Directive Principles of State Policy envisaged when the constitution of India was made. Article 47 of the Directive Principles of State Policy states, “The state shall endeavour to bring about prohibition of the use, except for medicinal purposes, of intoxicating drinks and of drugs which are injurious to health.”
But such bans have never really worked. The government doesn’t have the administrative machinery required to implement such bans. Also, leakages from neighbouring states ensures that the supply of the banned good never really stops, be it gutka, pan masala or alcohol for that matter. In fact, with more profits to be made the risk of smuggling becomes increasingly lucrative.
Given these reasons, the ban on gutka and pan masala in Maharashtra will have no real impact accept moving their sales underground. The consumer addicted to it will readily pay more for the product. The government will lose out on the tax revenue.
The only way to ensure that the ban works is to have a nationwide ban and systematically ensure that no gutka-pan masala is produced or sold in this country. But that again is easier said than done. A lot of state governments may not be ready to lose out on the revenue that the sales of these products brings in. Moreover, what is to stop its smuggling from Nepal or Bangladesh? It also raises the question: why stop at banning gutka-pan masala and alcohol. What about banning cigarettes and bidis as well?
(The article originally appeared on on July 13,2012.
Vivek Kaul is a writer and can be reached at [email protected]