New Delhi: Finance Minister Pranab Mukherjee's talent for troubleshooting seems to be on ample display everywhere than in his own ministry. The report card that he will present on Budget day will do his reputation no good. The person he has displaced has excelled in the Home ministry. Pranabda is a disappointment.
Mukherjee's credibility has taken a hit. How can you believe a finance minister's whose fiscal deficit is off target by 20 per cent or more? The numbers seemed incredulous when presented last year. Expenditure was projected to rise by three per cent, when it has grown in double digits all through this coalition's years (except one) in power. Subsidies were under-provided on the assumption that crude prices would rule at around $90 a barrel. The average price of the Indian mix of crude is $120 now. Subsidies have more than doubled to three per cent of GDP. They have shrunk the funds available for investment.
The price of petrol was deregulated last year. Despite revisions, last in December, the retail price is said to be short of cost by Rs 5 a litre. Diesel prices were also floated, but the government developed cold feet. A big hike is difficult to implement but if they were varied every week or fortnight people would have got used to the idea of changing prices. Inaction is costing the nation dear. Oil companies claim they are losing Rs 12 on diesel, Rs 439 on cooking gas and Rs 28 on kerosene. With private players shooed away, and only government companies in the fray, cost padding cannot be ruled out.
Three committees have told the government what to do. The Finance Ministry's economic adviser, Kaushik Basu, has a practical plan. For petrol he wants the government to announce a maximum price based on crude prices, the exchange rate and marketing costs, so that retailers can innovate, sell below that rate and grab profits. For politically sensitive diesel, he wants a fixed dole per litre to cap the government's subsidy bill. This is how rationed rice and wheat and fertilizers like potash and phosphate are subsidized.
All governments are good at spending and this one is no different. Inclusive growth or tax and spend policies were fine when the world economy was growing and lifting India's economy. Open-ended subsidies are unsuitable for downturns. They make a bad situation worse.
This is a good time to rethink the design of our welfare projects, like the food security scheme. Basu says our plans are conceptually sound but falter on the assumption that the delivery people – the ration shop owner or the panchayat official – are flawless moral beings who would not use an opportunity to make easy money. He wants the government to tap the market rather than tamper with it. Instead of wastefully impounding grain in buffer stocks for distribution to the poor through fair price shops, (and driving up grain prices in the open market), Basu suggests that the poor should be given an income subsidy though Aadhar-enabled bank or post office accounts, so that they can buy whatever they want from any shop. This would boost the local farm economy and spur private traders into investing in such things as warehouses.
Reckless spending had stoked inflation and driven the Reserve Bank into raising interest rates, which in turn, has crimped economic growth. Manufacturing industry and construction have suffered. With inflation now in check, the RBI is keen to cut interest rates, but wants the Finance Minister to act first. The Prime Minister’s economic adviser and former central banker, C Rangarajan, has also said that there should be a credible commitment to reduce spending and not a mere statement of intent. Credit rating agencies like Standard and Poor's have warned of a downgrade if Mukherjee hesitates.
Defying his party boss and risking his chair, railway minister Dinesh Trivedi has raised railway fares. The finance minister must follow the lead and raise fuel prices. The government has clung on to office for three years. It is time to show spine.
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