Monday, Nov 24, 2014

Out of my Mind: Many bitter pills

Prime Minister Narendra Modi (Source; PTI) Prime Minister Narendra Modi (Source; PTI)
Written by Meghnad Desai | Posted: June 29, 2014 12:04 am

Argentina used to be one of the five richest countries in the 1930s. It managed, by a combination of populism and protectionism, to achieve its low level of economic well-being today when it faces a severe test of its solvency because of unpaid debts. It did this while popular politicians such as Juan Peron and his wife Eva Peron were in power. They bribed the voters, kept trade unions and farmers happy and frittered away national resources.

Popularity is easy to achieve if you  practice bad economics. It is easy to wrap every demand for subsidy in the rhetoric of helping the poor. In a largely poor country, the appeal to poverty and aam adami is misused constantly. LPG cylinders are after all not something that the bottom 75 per cent of the population uses. Yet subsidy for them is supposed to be a pro-poor gesture. People who drive cars and scooters no doubt think of themselves as the struggling middle class. But in a poor country with a harsh income inequality, the ‘middle classes’ belong in the top fifteen per cent of the income distribution. They are articulate and politically powerful. Even Left parties march out for subsidies for the middle classes. Yet these middle classes seldom deserve the subsidies they demand — on petrol, diesel, power and water.

Subsidies are expensive to whoever has to supply the services or commodities, be it ONGC or the State Electricity Boards.

India has a bad record in power and water services, with frequent outages and shortages. This is because for any service provided by the public authorities, people expect to pay a price way below the cost. If you make a loss, you cannot have the money to invest and improve the service.The ‘under coverage’ — the shortfall of revenue received over the costs of supply —  becomes a burden on the public budget. Few pay income tax, though they complain loudly about it. Thus the poor pay much of the taxes collected — VAT, sales tax, excise tax — which finance the subsidies to the middle classes. Yet revenue falls short of expenditure and we have deficits year after year. The government also borrows, which adds to the public debt. Interest payment on public debt is the largest item in the national budget — to a third or 10 times what the health budget is. Thus subsidies are harming the nation even as they are lapped up by the ‘deserving, not-so-poor’.

The new government faces a tough choice. It has been elected with a massive mandate. It does not need to use coalition-dharma as an excuse for bad policies as the previous government did. (The latest retreat on rail fares for Mumbai commuters should be used to decentralise the fare setting for urban commuter railroads for all the major metros). There is a mountain of bad economic policies from previous decades, especially continued…

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