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UPA Government & The Indian Welfare Economy
“Congress Ka Haath: Na Tere Saath Na Mere Saath”
The United Progressive Alliance govt. (“UPA”) for all its internal security failures, multi-billion dollar scams and absolute chaotic-handling of the economy; continues to be portrayed as the grand old party serving best interests of 300 million poverty stricken people of India. On the face of it, UPA govt. does have policies that should benefit the poor in the form of loan waivers, free electricity, and fertilizer subsidies for farmers; subsidized food schemes and guaranteed rural employment schemes to rural poor, and mid-day meals to school children; to name a few. But recent economic data and research conducted on Congress’ fiscal ‘benevolence’ has made people turn the Congress election tripe into a legitimate question: “Congress Ka Haath, Aam Aadmi Ke Saath?”
First, let us take a look at the fuel subsidies program over eight years from 2004-2012 under the UPA. Fuel subsidies comprise a major portion of the UPA government’s subsidy program. Specifically, petroleum subsidy increased to 1.9% of GDP in 2013 compared to 0.6% in 2004-05 when the first UPA govt. came to power. An IMF study on ‘The Fiscal and Welfare Impacts of Reforming Fuel Subsidies’ in India , points out that most of the benefit received from price subsidies on petroleum products goes to higher income groups, who consume greater amount of fuel products. Now imagine if the same $19 Billion of budgetary expenditures were used to improve public transport, city infrastructure, local trains, buses, etc; you would significantly increase the opportunity cost for the higher income groups of using private transportation. In effect reducing demand for diesel and petrol, fuels that comprise more than 70% of this $19 billion fuel subsidy or ~$12 billion.
With the Rupee’s steep depreciation recently, it is important to notice its fiscal impact on fuel subsidies. A fall of Re.1 against the USD has a fiscal impact of almost $2 billion on the deficit. So how beneficial is the fuel subsidy to the Indian in the lower income deciles?
The math is simple: the cost of fully compensating the poorest 40% of households in India is less than 0.2% of GDP (for fuel consumption). The Aam Aadmi living in the lowest income deciles, allocates only around 1.6% of their total monthly expenditures on fuel consumption. In contrast, higher income groups allocate almost 6% of their total expenditures on fuel consumption. The fuel subsidy costs the exchequer almost 2% of the GDP. After compensating the poor for kerosene/LPG related subsidies, the government spends $11.9 Billion on petrol/diesel subsidies. Essentially, the UPA govt. is spending 1.2% of India’s trillion dollar GDP on financing/subsidizing the automobile industry – “Congress Ka Haath Aam Aadmni Ke Saath?”
Now let’s look at the UPA government’s flagship welfare program- the Mahatma Gandhi National Rural Employment Guarantee (MNREGA) scheme. The scheme, controversial amongst economists, has seriously skewed the rural labor market, having artificially increased rural wages (to be discussed later). More importantly though, the scheme has tapered off and is plagued with implementation issues, malpractices, leakages, inefficiencies and most importantly it has consistently failed in achieving its budgetary targets. Although the scheme guarantees 100 days of labor to rural households in exchange of Rs. 100/day, the average days worked nationwide, under the scheme, currently stands at 35 (source: Parliamentary Q&A). The budgetary expenditure allocated to the scheme has not been met in the last three fiscal years. Other than the operational failures and poor implementation, the scheme has also distorted the labor market across India. Manufacturing, agriculture, mining and power industries are facing labor shortages as the poor who would otherwise go to labor-intensive industries for jobs are instead making similar wages under the easy-to-achieve employment guaranteed under MNREGA . The scheme provides people with stipends for digging holes and filling them later, while the country reels with labor shortages in growth-inducing industries that are a key driver of development in an emerging economy – “Ho Raha Bharat Nirman?”
Finally, the Food Security Bill, soon to be tabled in the Parliament is expected to have the worst impact of any other welfare scheme designed by the UPA so far in the last 10 years. The scheme provides for subsidies to almost 60% of the population on primarily food items such as grains and cereals. This scheme on paper seems Godsent. Poor who are unable to provide for a square meal a day for their families will get to meet their most basic needs. Chetan Bhagat, a popular Indian author, correctly asked how can your financial data, economical retorts and arguments compete against the picture of a malnourished hungry child in an Indian village?
Well it can, because food-related expenditure of a rural household has dropped from 63% two decades ago to 48% today. On average, cereal related expenses were less than 12% of monthly rural household spending. In urban Indian households this number falls to 7.3% spent on cereals. The numbers just don’t add up. The government through FSB will only provide rotten cereals at a cost to the exchequer that is needless and would’ve been better spent on improving downstream infrastructure, removing supply chain bottlenecks, to provide the poor with essential diet ingredients like fruits and vegetables necessary for wholesome nutrition, at cheaper market prices.
The government intends to spend $13.2 billion in the first year itself on investments related to increasing production yields in agriculture. A noble idea for a country the size of India, but the supply chain bottlenecks in the distribution of food grains are unable to hold the current production levels, let alone create space for another increase.
The storage capacity for wheat is currently at 20 million tonnes, while the stocks are around 50 million tonnes. Where does the rest go? Worldwide export? No. Energy production? No. Sold over the market? No. It’s left to rot in government warehouses, or worse, open spaces from where they’re usually fed to animals or sent abroad to poorer nations for a pittance. Then why is the government spending Rs. 60k crore on production when grains worth Rs. 50k crore are wasted every year? Wouldn’t it be better to invest in the distribution supply chain before investing precarious funds on production? And yet despite clear supply chain issues, the government through its whimsical FDI policy, lack of taxation guidelines and overall ineptitude at assuaging foreign investment concerns has left this area of reform in a complete mess.
There are many other misinformed decisions of the UPA government that have in fact ended up hurting the poor. Infrastructure: that would single-handedly provide employment for millions and solve one of our country’s biggest problem, continues to lag behind other sectors. Projects worth up to Rs. 70,000 crores are currently stalled due to uncertainty over regulation and environment clearances that are hard to come by. And what is an absolute slap to the poor’s face is that the UPA govt. have reduced the poorest-of-poor to survive on Rs. 17/day. If you can survive on Rs.18 a day without receiving any government schemes reserved for the poor, kindly contact me so I can outsource my monthly budgeting to you and pay you more than Rs.17/day for your services.
P.S.: Enjoy this 2009 ad film released by the UPA government describing its achievements and plans for next five years: http://www.youtube.com/watch?v=CWOf3mkKnIQ
One of the comments pointed out that the official poverty line of the Govt. is Rs. 27-32 (Rural-Urban), as suggested by the Tendulkar committee. I accept that the figure that I used (Rs.17) was incorrect in the usage but my argument for the Rs. 17 figure is presented in the comments section. Thanks for pointing it out.
By now we have all read or heard from one source or the other that India is suffering a huge Current Account Deficit (CAD). This post is for those who are wondering what this is and why does it make a difference.
A lesson in Economics
Let us forget the individual companies and corporate houses for a minute and view India as a single entity. When we purchase things from another country we have to pay them in return. Similarly, when other countries buy things from us, they pay us. A simple understanding of budgeting tells us that if we do not sell as much, if not more, than the amount we buy, we are sooner or later going to run out of money. This is what we call a current account deficit. Effectively we, as a nation, are borrowing from other countries to fund our consumption. One way to sustain such a situation is to offset the Current Account Deficit with a Capital Account Surplus.
Capital account is the measure of money that enters and leaves our country in terms of investments. There are three main forms that this can take:
- Foreign Direct Investment (FDI): When foreign investors pick up a large stake in an Indian company or set-up their own operations in India. This is usually a longer term investment as compared to FII (below). For example, when Etihad will buy a stake in Jetairways, they will be paying Indian shareholders with capital from their country.
- Foreign Institutional Investment (FII): When foreign institutional investors trade in the Indian stock exchange they bring capital from their economy into our market.
- External Commercial Borrowing (ECB): When Indian companies borrow from foreign entities which are able to provide capital at a lower rate of interest.
If the cumulative of such investments into the country is greater than such investments out of the country we achieve a capital account surplus. Thus while overall we are running a deficit on our current account (i.e. money is leaving the economy) we are able to sustain it because of the capital account surplus (i.e. money is entering the economy).
Why we are a mess
India has historically managed to run a CAD of around 2% of GDP without stress as the capital inflow was easily able to offset it. However, with the rising uncertainty for investors in India, capital inflow is no longer as reliable as it once was. To add to this, there is threat of capital flocking back to the US where the interest rates might be on the rise soon. The situation is further worsened as our CAD has risen from 2.7% (2011) to 4.8% (2013) of GDP making us ever more reliant on the capital inflow.
So what happens if due to macroeconomic instability, capital inflow decreases and we reach a stage where the capital account surplus cannot offset the current account deficit?
International transactions happen in the US Dollars (USD). Hence, if overall more money were to leave the economy than enter it, the demand for the USD viz a viz Indian Rupee (INR) would be greater, causing the dollar to gain value relative to INR (i.e. INR would depreciate). What does this lead to? Say a year back a good produced in India was priced at $1 in the international market and Rs 50 in the domestic one. At that exchange rate the producer was effectively receiving Rs 50 for his product and he would be indifferent between selling it on the domestic market and the foreign market. However, a year later with the new rates, the foreign consumer is now able to pay Rs 60 to the producer with no extra cost to him. The producer will thus divert his goods to the foreign market till the scarcity in the domestic market raises its price to Rs 60 at which point he will once again be indifferent.
The example above has been simplified considerably to get the basic point across: Devaluation of our currency will cause further inflation. Inflation which is already in its double digits (CPI) and is the worst enemy of the poor which the Government swears to protect.
To make things worse the government has dug us another pit fall due to lack of timely reforms. Of the $502 billion worth of imports in the financial year 2013, $170 billion was spent on oil. Oil which the government provides at a bench-marked price no matter what the price they buy it at. Thus as the currency depreciates faster than the rate at which the government is increasing the price of oil (and related products) the government is in fact forced to provide more subsidy than it previously did. Hence not only is the rise in prices causing inflation but is also increasing the government’s fiscal deficit which reached 4.8 at the end of FY 2013 – another threat to our macroeconomic stability.
And so the cycle continues.