Monday, 7 July 2014

Do a FRBM on subsidies, Mr FM, put a cap on the subsidy bill
President Pranab Mukherjee, once the finance minister, has often been blamed for the mess the economy itself is in. Why, even his successor from his own former party, P. Chidambaram, has often hinted that the economy may have been in better shape if the fiscal easing that Mukherjee had done in the wake of the global meltdown had been reversed a year earlier than it ultimately was.
But one has to give credit to Mukherjee for one initiative in his last budget in March 2012, which has not got the attention it deserved. Dealing with the vexed issue of subsidies, Mukherji had said he would try to restrict the subsidy bill of the Centre to under 2 per cent of GDP in 2012-13 and bring it down to 1.75 per cent of GDP over the next three years.
It is another matter that the subsidy bill in 2012-13 actually shot up to 2.54 per cent of GDP, up from 2.41 per cent in 2011-12. Mukherjee could perhaps disown responsibility, using the excuse that he had moved to Rashtrapati Bhavan within a few months of that landmark statement.
But it is a pity – and a surprise - that Chidambaram did not take this ball and run with it. After all, he had, in his first stint in North Block in the United Front government backed by the communist parties, made bold to commission a discussion paper on government subsidies. He got an update done in 2004 soon after assuming charge during his second shift. In both his stints – and in between – he had constantly stressed the need to trim this bill.
Capping the subsidy bill is a sound idea and one that Arun Jaitley needs to push. It imposes a measure of discipline on the government, saying this is all the cloth you have, now cut it in a manner as to make the most of it. Decide which subsidies are more important, give more to those, less to the others but all within this limit.
Mukherjee took the initial step; Jaitley needs to take the next one and get legislative backing for this, something similar to the Fiscal Responsibility and Budget Management (FRBM) law. Once the cap is set – to be achieved in a phased manner over a period of time like Mukherjee suggested - any move to spend more than the cap will have to be get parliamentary approval. How will this help?
Right now the subsidy burden is a problem of only the government in power. When it attempts any trimming exercise, the rest of the political class comes together to force it to roll back subsidy cuts. Getting legislative backing for a subsidy cap will force Parliament to debate on an appropriate ceiling. Hopefully, it will be one that will not threaten macroeconomic fundamentals. Indeed, the very process of debating the need and level of the cap will reinforce the logic of reining in subsidies, highlight wasteful and unjustified ones, bring out hidden ones, strengthen the case for the necessary ones and focus attention on effective delivery. Importantly, the ownership of that cap will be that of Parliament as a whole.
Since breaching this cap will also require parliamentary approval – an exercise that will involve going through the legislative rigmarole – governments will not be so cavalier in infringing it. This might force more serious efforts at ensuring that only the really deserving get subsidies.
And even if a government does go back to Parliament, once again the entire debating process will again highlight its own inefficiencies and put a black mark on its fiscal performance. So it will try to come back on track soon.
This does sound too easy and good to be true. After all, Parliament did legislate the FRBM Act. And Parliament itself allowed it to be breached. But no party is denying the legitimacy of the milestones set in the FRBM Act and the fact that the UPA government breached it is something that it is constantly pilloried for. The whole process of legislating the FRBM Act – from the time the idea was floated to actual enactment – took a few years and intense debate. Thanks to this, Parliament is serious about it; there is no talk of raising the deficit caps or postponing implementation or even scrapping it.
In taking the initiative to legislate a cap on subsidies, Jaitley can show his party as a fiscally responsible one. It was Yashwant Sinha, during the NDA regime, who initiated the FRBM legislation. It just so happened that the Act got passed toward the end of the government’s tenure and the UPA government notified the rules, allowing it to take credit. But the sheen was taken away from that credit by the fact that first Chidambaram asked for a pause in its implementation (in 2005) and then Mukherjee amended it to relax the deadlines.
Jaitley can now do for subsidies what Sinha did for overall fiscal consolidation.  It will be a feather in the BJP’s cap both economically and politically.

No comments: