Narendra Modi

Modi's first fiscal challenge

narendra_modi

 

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]) 

Please cut our losses

narendra_modiVivek Kaul  

The investment industry suddenly got into an overdrive in the aftermath of the Narendra Modi-led Bhartiya Janata Party (BJP) winning a majority in the 16th Lok Sabha on its own. Both Indian and foreign stock brokerages immediately upped their Sensex/Nifty targets and categorically stated that the Indian stock market is ready for its next big bull run. Of the many targets bandied around, the most optimistic target was that of Sensex touching 35,000 points by the end of December 2015. It currently quotes at around 24,200 points.
Now, every bull run has a theory behind it. What is the theory behind this bull run? The investing community is of the opinion that the new Modi government will take measures to set the Indian economy back on track. But that is nothing more than hope and hope alone can’t  go a long way.
In the noise of the elections what everybody seems to have forgotten is that the Indian economy is still in a bad shape. The gross domestic product (GDP) numbers that were released on May 30 showed that economic growth, as measured by the growth in GDP for the year ending March 31, 2014, stood at 4.7 per cent. It was the second straight year of less than 5 per cent economic growth. Rather worryingly, the manufacturing sector contracted by 0.7 per cent during the course of the year.
Setting this right will be a major long-term challenge for the Modi government. Economic history clearly shows that countries which have moved from being developing to developed at a fast rate have done so by creating jobs in the manufacturing sector. That hasn’t happened in India as yet.
When it comes to short term challenges, the fiscal deficit remains one of the bigger challenges. Fiscal deficit is the difference between what a government earns and what it spends. The fiscal deficit during the rule of the Congress-led UPA government burgeoned big time. In the interim budget presented in February, the then finance minister, P. Chidambaram, claimed to have brought it down to Rs 5,24,539 crore or 4.6 per cent of the GDP. Numbers later released by the Controller General of Accounts suggest that the fiscal deficit for the year ending March 31, 2014, came in a little lower at Rs 5,08,149 crore.
But this 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 (their recognition was postponed to this financial year, i.e. the year starting April 1, 2014). This primarily includes oil, food and fertiliser subsidies. This anomaly needs to be set right. More than anything, the Government of India should not be indulging in what is a clear accounting fraud. One of the basic tenets of accounting is to recognise expenditure during the period it is incurred. In the short run, if this leads to the actual expenditure of the government shooting up, then so be it.
The government can, instead, look at encashing some low-hanging fruit. SUUTI (Specified Undertaking of the Unit Trust of India) holds shares of bluechip companies like ITC and L&T which are worth around Rs 42,400 crore currently. SUUTI was formed in the aftermath of the Unit Trust of India going bust in early 2000s. These shares can be sold to help shore up the government revenues.
Over and above this, the BSE PSU Index has gone up by 36 per cent since the beginning of this year. What this means is that the government can use this opportunity to sell shares it owns in a host of public sector units (PSUs). Take the case of Coal India Ltd. There is no reason that the government has to own 89.65 per cent of the company. Even at a significantly lower stake, it can retain the management control of the company.
Along similar lines, the government needs to bring down its stakes in public sector banks (PSBs). Currently, India has 27 PSBs. Why does the government need to run 27 banks? There is clearly no logic to it. A lot of money can be raised by selling shares of PSBs. Money can also be raised by quickly selling telecom spectrum. The last auction which happened in February 2014 fetched the government close to Rs 61,000 crore. There are a whole host of loss making PSUs which are sitting on a lot of land in premier locations. This land needs to be monetised.
It needs to be pointed out that trying to meet regular expenditure by selling assets is not the best idea going around. It is like you and me trying to meet our regular expenditure by selling things that we own. It may be necessary sometimes in the short run. What can also be done is that some of the money coming in through the sale of assets can be used to set up an infrastructure fund. The allocation to this fund can be increased over the years, and this money can be used to boost the physical infrastructure across the country.
Other than trying to raise revenues, the government should also try and limit its losses. Air India, which has constantly been losing money, either needs to be shut down or just sold off (assuming we can find a buyer for it).
Many analysts and experts want the government to cut down on expenditure allocated towards programmes like NREGA and the Food Security Scheme. This may really not be possible given that the BJP had voted to legislate them.
But what the government can easily do is to get the Food Corporation of India (FCI) to go slow on its purchases of rice and wheat. Currently, FCI has double the stocks than what it actually needs. Going slow on purchases can really help control the government expenditure. It will also help to control food inflation, given that more rice and wheat will land up in the open market.
To conclude, the economic scenario remains a huge challenge for the new Modi government, but to get going it can cash in on the low-hanging fruit.
This article originally appeared in The Asian Age/Deccan Chronicle dated June 4, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

Everybody loves a good story

bullfighting

 Vivek Kaul

I am writing this piece sometime in the middle of April 2014. The stock market in India has been on fire over the last one month, with the NSE Nifty and the BSE Sensex regularly touching new highs. Every time the market touches a new high, editors of newspapers/magazines/websites have to look for a new reason to explain the bull run.
Several reasons have been offered during the course of the last one month. First we were told that the stock market investors were betting on Narendra Modi becoming the Prime Minister. The numbers in this case didn’t really add up. The domestic institutional investors sold stocks worth Rs 13,130.77 crore during March 2014. Their selling continued in April as well. Till April 11, 2014, the domestic institutional investors had sold stocks worth Rs 3,728.06 crore. If these investors are really supporting Modi, then why are they selling out of the stock market?
Then we were told that the foreign investors were betting on Modi coming to power and setting the faltering Indian economy right. In this case, the numbers do add up. In March 2014, foreign institutional investors bought stocks worth Rs 25,376.45 crore. In April, the trend continued and by April 11, they had bought stocks worth Rs 3,658.21 crore.
But is the logic as simple as that? It is worth remembering here that the Western central banks have been running an “easy money” policy for a while now. The Federal Reserve of the United States, has been reducing the amount of money it has been printing since the beginning of the year. But at the same time it has reiterated time and again that short term interest rates will continue to be close to 0% in the near future.
Interestingly, the Fed repeated this in a statement released on March 19, 2014. The foreign institutional investors invested Rs 4,222.10 crore on March 21, 2014, in the Indian stock market. This is the highest amount they have invested on any single day, since the beginning of this year. So, are the foreign investors investing in India because they have faith in Modi? Or are they simply investing because “easy money” continues to be available to them at rock bottom interest rates? The stories appearing in the media haven’t got around to explaining that.
Another theory that went around briefly was that the stock market is rallying because India’s economic data had been improving. Inflation was down. Industrial output as measured by the index of industrial production had marginally improved. And the current account deficit had been brought under control. This theory lasted till the index of industrial production for the month of February 2014 was declared. Industrial output for the month was down 1.9%.
The conspiracy theorists also suggested that it was the black money of politicians coming back to India. They needed that money to fight elections. Well, if they needed that money, they would have sold their stock market holdings, and the stock market would have fallen. But that hasn’t really happened.
So what is happening here? As Ben Hunt writes in a newsletter titled Epsilon Theory and dated February 28, 2014 “Ants, bees, termites, and humans – the most successful species on the planet – are constantly signaling each other so that we can make sense of our world together. That’s the secret of our success as social animals.”
The point is that everybody loves a good story. We want coherent explanations of what is happening in the world around us. As Nassim Nicholas Taleb writes in The Black Swan—The Impact of the Highly Improbable “We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotionally laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official…the lurid. Most of all we favour the narrated.”
And this is where the media comes in, which tries to give us convincing explanations of what is happening in the world around us. Whether the reason behind a market movement is the real reason or not, does not really matter, as long as it sounds sensible enough. Taleb gives an excellent example of the same in The Black Swan.
“One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: U.S. TREASURIES RISE, HUSSEIN CAPTURE MAY NOT CURB TERRORISM,” Taleb writes.
Basically, what Bloomberg was saying was that the capture of Hussein will not curb terrorism and hence, investors had been selling out of other investments and buying the safe US government bonds, thus pushing up the price.
Around half an hour later, Bloomberg had a different headline. As Taleb writes “At 13:31 they issued the next bulletin: U.S.TREASURIES FALL: HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.”
What had happened was that during a period of half an hour the price of the US government bonds had fluctuated. First they had risen as investors had bought the bonds. In half an hour’s time some selling had happened and the prices were falling. Bloomberg now told its readers that prices were falling because investors were selling out of US government bonds and looking at other investments given that with the capture of Hussein, the world was a much safer place.
Hunt offers a similar example in his newsletter. On November 28, 2008, Barack Obama, who had just been elected the President of the United States, appointed Tim Geithner, the President of the Federal Reserve Bank of New York, as his Treasury Secretary. The S&P 500, one of America’s premier stock market indices, rallied by about 6% on that day and Geithner’s nomination was deemed to be the major reason behind the same. As Hunt writes “All of the talking heads on the Sunday talk shows that weekend referenced the amazing impact that Geithner had on US markets, and this “fact” was prominently discussed in his confirmation hearings. Clearly this was a man beloved by Wall Street, whose mere presence at the economic policy helm would soothe and support global markets. Yeah, right.”
Geithner’s nomination was good news, but was it big enough to drive up the stock market up by 6% in a single day? As Hunt explains “So long as Obama didn’t nominate a raving Marxist I think it would have been a (small) positive development in the context of the collapsing world of November 2008. Was the specific nomination of specifically Tim Geithner WHY markets were up so much on November 24th? Of course not.”
The moral of the story is that first things happen and then people go looking for reasons. Hunt calls it “the power of why”. As he writes “It is the Power of Why, and it has no inherent connection to any true causal connection or the way the world truly works. Maybe it’s all true. Probably it’s partially true. But it really doesn’t matter one way or another.”
What is true of the financial markets in particular is also true for the world at large in general. As Taleb puts it “It happens all the time: a cause is proposed to make your swallow the news and make matters more concrete. After a candidate’s defeat in an election, you will be supplied with the “cause” of the voters’ disgruntlement. Any conceivable cause can do. The media, however, go to great lengths to make the process “thorough” with their armies of fact-checkers. It is as if they wanted to be wrong with infinite precision.”
So what is the way out? Taleb has an excellent suggestion in his book Fooled By Randomness—The Hidden Role of Chance in Life and in the Markets “To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing, such as by saying “Today the market went up, but this information is not too relevant as it emanates mostly from noise.””
But that is easier said than done.

The article originally appeared in the May 2014 issue of the Wealth Insight magazine

 (Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]) 

When it comes to faith in Modinomics are we becoming victims of the Karan-Arjun syndrome?

karan arjun Vivek Kaul  
Rakesh Roshan made a fairly trashy but super successful movie called Karan Arjun, which was released in 1995. It was a rare occasion when the Khan superstars, Salman and Shah Rukh, shared screen space (They were also seen together in Karan Johar’s Kuch Kuch Hota Hai and K C Bokadia’s Hum Tumhare Hain Sanam).
So, Karan Arjun was a story of reincarnation, where the two heroes(played by Shah Rukh and Salman) are killed by the villain. They are reborn and come back to their original village and take revenge. But before they are reborn, their mother(played by Raakhee) keeps telling everyone, “Mere bete aayenge, mere Karan Arjun aayenge … zameen ki chaati phad ke aayenge, aasman ka seena cheer ke aayenge.”
Despite the ridiculousness of the idea, the sons are reborn and they come back and take revenge. Such confidence in something happening is rarely seen in reel or real life for that matter. A similar confidence seems to have taken over stock market investors in India right now. They firmly believe that Narendra Modi will become the next Prime Minister of the country and clear up all the economic ills that have held back economic growth for a while.
Stuck projects will be cleared. Investment will pick up. Consumption will be back. And happy days will be here again. Or so the logic goes.
The BSE Sensex has been rallying on this possibility and between September 2013 and March 20, 2014, it has rallied by 14.4%. The foreign investors seem to be more taken in by the possibility of Narendra Modi coming in as the knight in the shining armour and rescuing the Indian economy.
Goldman Sachs said in a recent report that “the upcoming parliamentary elections could have an important bearing on policy choices and the progress of structural reforms. Adoption of more decisive and/or pro-growth policies could help boost investment activity and provide impetus to the overall growth cycle, in our view.”
The bank had been a little more direct in a November 2013 report where it had said that “Domestic equity investors tend to view the BJP as business-friendly, and the party’s prime ministerial candidate Narendra Modi (the current chief minister of Gujarat) as an agent of change. BJP and Mr. Modi, in particular, have been focussed on infrastructure and capital spending in the past and a BJP-led government may be beneficial for the investment demand pick up, in our view.”
The foreign institutional investors have bet big time on this possibility. Between September 2013 and March 20, 2014, they have invested Rs 62,271.54 crore into the stock market. During the same period the domestic institutional investors have sold out stocks worth Rs 45,034 crore.
And this investment by the foreign investors is clearly because of the Modi factor. As Geoff Lewis, Global Markets Strategist, JPMorgan AMC told The Economic Times recently “Well, Modi is obviously a very big influence on the stock markets.”
But even Narendra Modi, despite his best intentions, may not be able to do much, if and when he does take over as the Prime Minister of India. And there are several reasons for the same. Let us look at them one by one.
A big hope from a Modi led government is that he will restart the investment cycle. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a report titled Elections: Much Ado about Nothing dated March 19, 2014 “Hopes are high among investors that elections can re-start the investment cycle. Even if the electoral verdict is favourable, such misplaced optimism ignores the realities of the business cycle, and overestimates the powers of the central government. Only a fourth of investment projects under implementation are stuck with the central government; the rest are constrained by overcapacity, balance sheets, or state governments.”
They further point out that “two-thirds of the projects awaiting central approval are in Power and Steel sectors, both wracked with massive overcapacity, obviating new investments. True utilisation in thermal power generation is below 60%, near 20-year lows (reported plant load factor is 65%). Of the litany of problems in the sector, two are crucial: SEB[state electricity boards] reforms, and coal availability.”
The reforms for state electricity boards need to happen at the state level. As far as solving the problem of coal availability is concerned that is something that cannot be solved overnight. As Swaminathan S Anklesaria Aiyar pointed out in a recent column in The Economic Times “our systems are now clogged with so many laws and regulations at the central and state level that Cabinet clearance is just the first step in a long obstacle race. It takes 10-12 years and over 100 permits to open a coal mine. India, with the world’s third-largest coal reserves, has become a coal importer.”
What about accelerating private coal production in the country? That also is not likely to happen any time soon. As Mishra and Shankar of Credit Suisse point out “Given the controversy around coal block allocations, auctions are the only way forward. These are unlikely till the data on reserves in these mines are updated. The government has been planning to conduct coal block auctions for close to three years now (see link), but despite repeated pronouncements of it being a few weeks/months away, there has been little progress. In our view, the challenge is inadequate prospecting—the ministry may be apprehensive of the winning private bidder in an auction managing to increase reserves estimates within a short time frame. Such a development would create negative press and possibly trigger anti-corruption investigations.”
Hence, coal blocks most likely won’t be auctioned till the reserves have been updated. “Blocks are unlikely to be auctioned till reserves have been updated. This is a time-consuming process, and in our view is unlikely to be completed in less than 1-2 years. From the time the blocks are auctioned to the time coal can start to get mined could be another 3-5 years at least,” write Mishra and Shankar.
What about other infrastructure projects? There are many challenges on this front as well. “Challenges abound elsewhere too: legal challenges are likely to stall the National Highways projects, and matter less for India’s road network; Railways lacks financial muscle, and Private Partnership schemes are yet to take off,” write the Credit Suisse analysts.
What does not help is the fact that the banking sector seems to be headed towards difficult times in the days to come. The stressed asset ratio of the Indian banking sector currently stands at 10.2%. This means that for every Rs 100 of loans given by Indian banks Rs 10.2 worth of loans have either not been repaid or been restructured in some way, where the borrower has been allowed easier terms to repay the loan (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate on it. Also, nearly 85% of the restructured loans have been restructured over the last two years.
What makes the situation even more dangerous is the fact that the non performing assets are likely to increase in the years to come. The Credit Suisse analysts point out that their banking team has been highlighting that “that there is Rs 8.6 trillion of loans with the top 200 companies with interest cover less than one. Only about 23% or Rs2 trillion has become NPA yet.”
Interest cover is earnings before interest and taxes divided by the total interest expenses of s company. If the interest cover of a company is less than one what it means is that the interest expenses of the company are more than its earnings before interest and taxes. Hence, the company is not in a position to fully repay the interest on the loans that it has taken on. In this situation it has no other option but to default or get the loan restructured. Either ways it means problems for the banking system. Or as John Maynard Keynes once famously said “If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”
If the problems in the banking system erupt that would mean that there would be lesser money to lend. Also, the government will have to come to the rescue of the public sector banks, and that would mean greater expenditure for the government, something it can ill-afford to do at this point of time.
And if all this wasn’t enough, the ability of the next government (irrespective of who leads it) to spend its way through trouble is fairly limited. As I had estimated in this piece, nearly Rs 2,00,000 crore of the government expenditure hasn’t been accounted for in the next financial year’s budget.
As Mishra and Shankar point out “The apparent reduction seen in the last three years has been achieved mostly by pushing expenditure into subsequent years: while earlier the month of March used to see 16% of the full-year expenditure, in the last three years, it has come down to 11-12%.”
Obviously, this trick of pushing expenditure into the next year cannot continue forever and needs to stop at some point of time.
To conclude, Modi will have to work in a coalition, which will severely limit his ability to make decisions as quickly as he is used to. Given these reasons, the foreign investors and everyone else who feels that Narendra Modi will turnaround the Indian economy in a jiffy, need to understand that they might be becoming victims of what I would like to call the Karan-Arjun syndrome. Reel life and real life do not always go together.
The article originally appeared on www.FirstBiz.com on March 21, 2014 with a different headline
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

UPA destroyed economy. Where will Modi get the money to sort out this financial mess?

narendra_modiVivek Kaul 
The Congress led United Progressive Alliance (UPA) seems to have more or less realized that the 2014 Lok Sabha elections is a lost cause. Hence, the idea seems to be make things difficult for the next government, especially on the finance front.
I had written on this issue on February 17, 2014, the day the finance minister P Chidambaram presented the interim budget. Since then, more details have come out, and these details clearly suggest that things are much worse on the finance front than they first seemed.
A recent news report in the Daily News and Analysis points out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax. The newspaper quotes a finance ministry official to point out that a 2% cut in the central sales tax was introduced as a part of the process to phase it out and move towards goods and services tax. The state governments were to be compensated for the losses they had incurred because of this. This payment hasn’t been made for the last three years and the amount has now gone up to close to Rs 50,000 crore.
This is something that the next government will have to deal with. On February 28, 2014, the government raised the dearness allowance of five million central government employees to 100% of their basic salary. This was earlier at 90%. This move is expected to cost around Rs 6,390 crore in 2014-2015. Interestingly, the government had hiked the dearness allowance from 80% to 90% of basic only in September 2013, with effect from July 2013.
The government also approved among the terms of reference for the seventh pay commission, the addition of 50% dearness allowance with the basic pay. This is expected to push salaries of public sector employees up by 30%, that is, if the recommendations of the seventh pay commission are implemented in the time to come. Also, once the dearness allowance of the central government employees is increased, it puts an immense amount of pressure on state governments to increase the salaries of their employees as well.
There are some points from the interim budget that need to be highlighted as well. An amount of Rs 1,15,000 crore has been budgeted against food subsidies for 2014-2015(the period between April 1, 2014 and March 31, 2015). Out of this around Rs 88,500 crore has been allocated under the Food Security Act.
The problem with this number is that the food security scheme is expected to cost much more than the amount that has been allocated. (you can read a detailed explanation here). Also, with Rs 88,500 crore allocated towards food security scheme, it doesn’t leave enough, for the public distribution system that is already in place. As the DNA article cited earlier points out “The next government will have to find a lot of resources for the public distribution subsidy as well. Out of the total Rs 115,000 crore for the food subsidy, the government has allocated Rs 88,500 crore to the Food Security Act.”
And if all this wasn’t enough there are expenditures from the current year that haven’t been accounted for and will spill over to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.
In fact, in a last ditch effort the government tried to push in nine ordinances before the election commission announced the elections dates. But the President Pranab Mukherjee did not agree to it. As economist Arvind Panagariya points out in a recent column in The Times of India “Perhaps the worst poison pill is UPA’s attempt to push as many as nine ordinances and clear vast numbers of projects on literally the last possible day before Election Commission’s Model Code of Conduct was expected to kick in. Only sage advice from the president held back the government’s hand from pushing the vast majority of these ordinances.”
The Congress led UPA government has left the country in a huge financial mess and the next government will have a tough time dealing with it, from day one. And if they mess it up even slightly, India will end up in an even bigger mess than it currently is.
The opinion polls suggest that Narendra Modi is likely to be the next Prime Minister of India. The great Indian middle class has high hopes from Modi and his ability to get the Indian economy back on track. But the question is where will Modi get the money from, for whatever he wants to do, to set the economy back on track? Close to Rs 2,00,000 crore of government expenditure next year, hasn’t been accounted for.
One way out is to cut down on the subsidies. But will Modi be able to do that, given that he is likely to lead a coalition government. Also, during all the years that the BJP has been in opposition it has supported the populist entitlement programmes, which have led to the government expenditure going up big time. So it is really not in a position to reverse that expenditure even if it is voted to power.
As Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, recently told Mint “The power of the finance minister in the new government will be key… as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”
Now that, as the common phrase goes, is easier said than done.
The article originally appeared on www.FirstBiz.com on March 13, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek)