Modi's Cabinet Reshuffle: What A Waste of an Opportunity

So the biggest move (game-changer, said one over-the-top anchor) of Narendra Modi in this cabinet reshuffle is making Nirmala Sitharaman India’s first woman defence minister? There are women serving in the army and the mere appointment of a woman minister is the breaking of a glass ceiling? If the gender of a minister – and not any policy or directional change – is a game-changer, it is a sad commentary on our expectations from government. As for the media, the less said the better. 

This cabinet reshuffle has certainly been a disappointment, barring some heartening exceptions.

Let’s get the exceptions out of the way, first. Piyush Goyal taking over from Suresh Prabhu as railway minister is good news. Prabhu was undertaking some significant reforms in railways – his only problem was that he was unable to deal with a railway bureaucracy running rings around him. It is unfortunate that he put in his papers after a series of railway accidents, but Indian politics requires such meaningless optics. Goyal is a go-getter and his chartered accountant background could be useful in dealing with the mess in railway finances. He has addressed some of the fundamental problems in the power sector (though how the UDAY scheme plays out in the long run remains to be seen). He will be getting an equally go-getter of a Railway Board chairman in Ashwani Lohani. So he is well placed to take Prabhu’s creditable legacy forward.  

Fortunately, Prabhu has been given an equally important portfolio in commerce and industry. His immediate task will be to prepare for the World Trade Organisation ministerial in Buenos Aires in December. There are several knotty issues there and he will be on top of things. India needed a competent negotiator for the ministerial and Prabhu will fit the bill. The ministry holds other challenges for any minister – the need to grow the country’s exports at a time of increasing protectionism, the need to get investments going, to name two crucial ones. Prabhu’s presence gives a sense of reassurance. 

The fact that Goyal, Dharmendra Pradhan and Mukhtar Abbas Naqvi got promoted to cabinet rank is also a positive. All three have earned their spurs. R. K. Singh replacing Goyal in the power and renewable energy ministry is being touted as a positive, but one will have to see how he performs; the power sector is a pretty knotty one, after all. 

But this reshuffle has certainly not been about rewarding performance. If that were the case, there would have been change in the agriculture ministry. Radha Mohan Singh’s stewardship of the ministry has been uninspiring, to say the least. Agriculture is in deep crisis and there was need for a dynamic minister there in the run-up to the 2019 elections. The argument being put out that Modi did not want to take any chances with new people having to learn the ropes does not wash. Singh has been given three years of chances; it has not worked. Sitharaman, too, did  not exactly set the Yamuna on fire with her underwhelming stewardship  of the commerce and industry ministry; yet she has got a promotion in rank and portfolio. 

The performance-oriented reshuffle line draws strength from a shifting of additional charges of some ministers. But none of these are going to make a big difference to governance, which should have been the main criterion for the cabinet rejig exercise. 

If this reshuffle was about performance, what explains ignoring the core strengths of people when allotting portfolios? This has been a common malaise in most governments over the decades and, unfortunately, Modi is continuing on the same path. What is the logic of putting Hardeep Puri, an extremely distinguished diplomat who would have been better placed in external affairs, commerce or defence as minister of state, in the urban development ministry? And in giving Alphons, a seasoned bureaucrat who shook up the Delhi Development Authority and was PS to Ram Jethmalani when he was urban affairs (or whatever that ministry was called those days) in Atal Behari Vajpayee’s cabinet, responsibility for tourism, a ministry that has no business to even exist? The befuddlement at these postings is best summed up in a tweet by Kunal Singh @d_extrovert: “In India if you have specialised in a particular field, it is counted as a negative in ministry allotment”.     

A slight digression here to deal with the jeers about the induction of four ex-bureaucrats into the cabinet. That, Modi’s legion of critics say, is a sign of the lack of talent in the BJP and further proof of Modi’s preference for bureaucrats. This is a silly criticism. One, there is a factual problem with this. And all four are BJP members, Alphons since 2011. Two, if there is a lack of talent among elected representatives, that shows talented people lack winnability and that is a reflection on us voters. But R. K. Singh and Satya Pal Singh have won elections.  Three, if you are bemoaning lack of talent, how can you object to Modi bringing in talent from outside? Doesn’t it  show Modi in good light – he is accepting the lack of bench strength and is addressing  it? Four, why should former bureaucrats not come into politics? 

What completely boggles the mind is the way ministers have been given additional responsibilities. There is very little synergy with the main ministry in most cases. When Modi in 2014 clubbed power with new and renewable energy and, more importantly, coal, that seemed to indicate he understood the need to combine related ministries. But that principle has been completely undermined in the latest reshuffle.

What synergy does petroleum and natural gas have with skill development? Why has coal been de-linked from the power ministry? Goyal has additional charge of coal along with railways. The only link between coal and railways relates to movement and coordinating that does not require the railways minister to be in charge of the coal ministry. On the other hand, coal is important for the power sector and that is why the two ministries had been brought under a single minister in 2014. Why has Gadkari been given additional charge of water resources; what does it have to do with the transport related sectors he is looking after very competently? He’s pushing for inland waterways but that is a small part of what the water resources ministry deals with. What is the logic of clubbing mines with rural development and panchayati raj?

All in all, this exercise is a waste of opportunity. Pity.  

Why This Blog and Why This Name: An Update

Quite a few people have been curious about my blog (which I resumed after a long gap) and I have had to refer them to my first post in January 2005, Why This Blog and Why This Name. Then I started reading the post myself. And I realised nothing has changed since then. In fact, things have gotten worse now.
The sharpening of polarisation in discourse had, even in the early 2000s, made normal conversation difficult. Now it has become impossible.  Not virtually impossible. Not next to impossible. Just impossible.
Nuance was fading then. It has disappeared now. There was some labelling then. There is outright name-calling now. And yes, it is all centred around Narendra Modi – the Divine Deliverer or the Devil Incarnate, depending on which side of the ideological divide one is on. If you believe – like I do – that he is neither, that he is as much capable of getting things right as getting things hopelessly wrong, then your plight is worse than that of the proverbial dhobi ka kutta.
This is not about the bhakt brigade alone. Stories about their trolling, abusive name-calling, peddling of lies and fake photos/news and assertions that whatever good is happening in the country is only because of Modi are well known. I am not going to spend time repeating them.
This post is equally about the Modi/BJP/RSS haters. In fact, it is more about them, because they are not being called out sufficiently. They rue the demise of nuance and the rise of intolerance, but they have contributed to both in no small measure. Try saying something positive about this government at a gathering of Modi haters. Try pointing out factual inaccuracies and logical flaws in their arguments. Try outing their fake news and fake photos (yes, they too indulge in them). Hell, just try joking about their obsession with Modi. You will not emerge unscathed. They are as sneery and spew as much venom as the bhakt brigade, except that the English is better.
Nothing brings this out better than the cacophonous debate over demonetisation. The DeMo Deriders (an assortment of libertarians, Modi hating liberals or MoHaLis and opposition politicians) are no less shrill and unreasonable than the DeMo Defenders (an assortment of liberals and Modi bhakts). It is one thing to question someone’s claim to being an economic liberal/libertarian or their understanding of basic economics if they made even a `yes, but’ kind of equivocation on the issue. It is quite another to question their professional and personal integrity. The bhakt brigade calls anyone who doesn’t agree with them a Congress chamcha. The hater brigade calls anyone who doesn’t agree with them a Modi chamcha. Is there a difference?
Personally, though, my experience has been slightly different. I have liberal friends who are bhakts and liberal friends who are allergic to the very mention of Modi. The former lot are okay with my not deifying Modi. They don’t bully me. The bullying has come only from bhakts whom I don’t know. I have been told to change my name to Soorpanakha (which explains my Twitter handle) and go back to Lanka (Pakistan is not an option for me, clearly).
But my MoHaLi friends, have a huge, huge problem with my refusing to demonise Modi, and have not hesitated to bully me. I have been told I need to fight the good fight, that my pox on both houses stand won’t do, that my obsession with facts is irksome and so on and so forth.
But I am not going to be bullied by either side and I will continue to strive to be beyond labels, through this blog and other writings. The writings on this blog will be more free-wheeling than in my journalistic pieces. I believe the need for this blog is more in these times. As in my journalistic writing, I will take a stand on issues based on facts. Regardless of what the bhakt brigade or the hate gang feels. Just one word to members of both: don't waste your time posting abusive comments; comments are moderated.

Moving Beyond DeMo and GST: Growth Crisis is More Deep Rooted and Needs Tackling

Posting after a long, long time.😊

The economic growth figures released by the Central Statistical Office (CSO) will have the strident critics of demonetisation in a see-we-told-you mode and the ardent supporters more subdued than they have been in a while.

Fiscal year 2017-18 has started out on a dismal note indeed. Gross domestic product (GDP) grew a measly 5.7 per cent in the first quarter (Q1, April-June) against a healthy 7.9 per cent in Q1 of 2016-17.  Other economic data also released yesterday too did not give cheer – eight core industries grew only 2.5 per cent in April-July 2017-18 against 6 per cent in the same period of 2016-17.

For a government that has been patting itself on the back for pulling the economy out of the morass it was in when it assumed power, this is not be welcome news.

The DeMo Deriders insist that the note ban is solely responsible for this worst-ever quarterly growth figures in 13 quarters. However, it would not be entirely factually correct. The other explanation, that the draw down of inventories by manufacturing companies ahead of the goods and services tax (GST) rollout is also responsible, is not the spin that this lot insist it is. It is not just the government that is offering  this explanation; most economic analysts are saying the same. Not all of them will trot out the government line.

It is the combined effect of demonetisation and preparing for GST that saw growth in gross value added (GVA) in the manufacturing sector plummeting from 10.7 per cent in Q1 of 2016-17 to 1.2 per cent in Q1 this year (though base effect could also have played a role). The higher growth posted by the trade, hotels etc segment – 11.1 per cent against  8.9 per cent in Q1 of 2016-17 – shows sales were happening. Anubhuti Sahay of Standard Chartered also  said on Bloomberg Quint that de-stocking has been far more than was expected. It is this manufacturing slump that has pulled down overall GDP growth.

The only sector where demonetisation can be identified as the sole cause of slowdown is construction and real estate. Growth in construction has fallen from 3.1 per cent to 2 per cent between Q1 of 2016-17 and 2017-18. Chief Statistician T.C.A. Anant pointed out that in the `financial, insurance, real estate and professional services’ segment, real estate has done poorly, though he said this was a longer, pre-demonetisation story. But cement production figures in the index  of  core industries also shows a de-growth, month-on-month since November 2016.

But one needs to move beyond the demonetisation explanation. Because the fact is that the economy had been slowing down well before November 2016. This has been said before and has been dismissed as spin, but it bears repeating.

After a blip in Q3 (October-December) of 2015-16 when year-on-year growth fell to 6.9 per cent over the Q2 (July-September) year-on-year growth of 7.8 per cent, there was a rebound to 9 per cent growth (year-on-year) in Q4. But, thereafter, from Q1 of 2016-17, there has been a steady decline, every quarter. Yes, the deceleration sharpened after demonetisation, but it had set in before.

Blaming the slump entirely on demonetisation will give the government a ready excuse – this is an expected but temporary fallout, which will peter out. And it will allow the government to escape an inconvenient question – you promised to put the zing back in the economy, why did it start slowing down under your watch? Have you identified the cause and started  doing something about it? One has to keep the focus on these questions.

Beyond demonetisation and GST, there are clearly some deep-rooted problems that are pulling the economy down. And the signs for the near future are not very good.

Private investment, which is crucial for sustained and robust recovery, is still sluggish. There is a slight uptick in investment as a percentage of GDP – from 25.5 per cent in Q4 of 2016-17 to 27.5 per cent in Q1 of this fiscal. But this is way below what the economy needs and it is not certain if this will sustain.

What is also worrying is that this comes along with a slight dip in private consumption as a percentage of GDP; this has been fluctuating through 2016-17 and in Q1 of this fiscal has dropped to 57.3 per cent. It needs to get back to the around 60 per cent plus levels of the boom years of 2004 to 2008. The economy needs both consumption demand and investment demand. Earlier it was the former which was holding things up, but if this also begins to flag, then there is a serious problem at hand. How much of a boost government spending alone can give remains to be seen. Government expenditure has risen 17 per cent in Q1 and this is because of the front-loading of expenditure thanks to advancing the budget.

Economists continue to debate about whether it is interest rates or other reasons (including the twin balance sheet problem) that are holding up private investment. The government needs to get to the bottom of this urgently and do what it takes to get companies to invest.

There are challenges on the agricultural front too, as evidenced by the difference between the real and nominal agricultural GVA growth (2.3 per cent and 0.3 per cent. This is an indication of a problem in prices and this could translate into a dip in rural demand. A State Bank of India research notes cautions that agricultural growth in the coming quarters could be muted as the monsoons were deficient in key food grain producing states in the first three months.

The laundry list of what the government needs to do at a general level is pretty well  known; it needs to get down to it. The government has moved  on some fronts – subsidy reform, bankruptcy reform, indirect tax reform (though this will be a bit painful initially) – but it needs to move  on others as well – drastically paring down the public sector, banking reforms, to name just two.

The government’s spin doctors are explaining away what is said to be the economic failure of demonetisation by saying the note ban was a political move. The government should now see economic revival as a political matter and do all it takes to get growth back.

Earth to Mr Jaitley: socialism is not pro-poor, markets are not anti-poor

http://firstbiz.firstpost.com/budget/earth-to-mr-jaitley-socialism-is-not-pro-poor-markets-are-not-anti-poor-90604.html

So why did the Narendra Modi government, whose high-pitched pre-election rhetoric promised a decisive rightward shift in the management of the economy, debut with a budget that would have done the Congress proud? This is something both Congress president Sonia Gandhi and former finance minister P. Chidambaram have smugly pointed out.
This piece by M. K. Venu argues that the maiden budget was `socialist’ because Modi wanted to be seen as pro-poor. Venu quotes finance minister Arun Jaitley telling him in an interview done for Rajya Sabha TV that in a country with so many poor people, any economic philosophy which is totally market based will not work. Listen to the interview here.
That is the problem – the assumption that socialist policies are pro-poor and market-friendly policies are not.  This fairly widely-held assumption is itself based on two wrong assumptions, one about socialist policies and the other about pro-market policies.
That socialist policies are pro-poor flies in the face of evidence from India itself. India’s economic policies were overwhelmingly socialist before 1991. Indira Gandhi’s socialist agenda got an emotional anchor, as it were, with the Garibi Hatao slogan. Apart from the plethora of anti-poverty schemes, all economic policies supposedly had a pro-poor focus. And yet the pace of poverty reduction has been faster post-1991, once India embarked on pro-market policies!
All manner of subsidies have been rolled out in the name of the poor; any withdrawal is slammed as a move to abandon the poor to the vagaries of the market forces. But, barring a few, these subsidies really go to the better off. The poor are anyway left to the market forces. Take Delhi, where highly subsidised water and electricity supplied by the government go to the middle classes while the poor, who live in slums and unauthorised colonies, pay several times more for the same facilities supplied by the market. Yes, the rates are exploitative but the so-called pro-poor state is just not present in these areas peopled by the poor. Yes, the issue is that of governance, and that precisely is the point. Good governance is not about socialism or capitalism; it is about how efficiently the state goes about fulfilling its responsibilities.
Now for the other bogey that Jaitley seems to be mindlessly parroting – that a pro-markets approach necessarily neglects the poor. This stems from the trenchant criticism by the critics of socialism of the dole-centric approach to helping the poor, especially the rights-based entitlements legislations that the Congress initiated (and the BJP supported). But the question whether doles are more effective in helping the poor needs to be examined. This question came up last year when poverty figures released by the Planning Commission showed a sharp decline in poverty levels between 2009-10 and 2011-12 and also a decline in the absolute number of poor. The Congress party was quick to claim credit – not for the years of highest ever economic growth during UPA 1 (which they otherwise kept boasting about), but for welfare measures during its rule, especially the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). 
But economist Surjit Bhalla questioned this claim in this article. Using NSSO data, he pointed out that MGNREGA accounted for only 1 percentage point of the 13.1 percentage points decline in poverty between 2009-10 and 2011-12. In this second article, he gives a more direct link between growth and poverty reduction.
Now to the wrong impression about pro-market policies.
Venu’s article argues that Modi’s statements that government coffers are meant for the poor is `very socialist in its tenor and intent’. This reinforces the completely fallacious image of pro-markets ideologues as unfeeling cads who want the government to work for the well-off and the rich. Not even free market fundamentalists (except those in the loony fringe) argue against measures to help the poor. There will, they admit, always be disadvantaged people who will need the helping hand of the state. The point of divergence between socialist policies and pro-market policies is not about helping the poor; it is about how to help them.
The socialist approach is through price-distorting doles and welfare programmes (no matter how leaky and inefficient they are). The pro-markets approach is to get the state to stop meddling in, and micro-management of, the markets and to concentrate on providing public goods, thus ensuring high growth which will bring more people above the poverty line (no matter how high or low it is set).
Venu cites two new schemes in Jaitley’s budget - Deendayal Upadhyay Gram Jyoti Yojana and  Shyama Prasad Mukherjee Rurban Mission – as examples of BJP social sector schemes and calls this BJP’s own brand of socialism. But these are not welfarist schemes; these are schemes to provide physical infrastructure - clearly the role of the state even in a market economy – that will spur economic activity and growth. Socialist policies do not bring high growth; pro-market policies do. We have seen that in India.
High growth will not only help address the problem of poverty, it will, far more importantly, provide the resources for targeted interventions to help the poor and the needy. If there is no money in government coffers, even socialist states cannot help the poor. Such interventions should ideally be through income support and cash handout measures than inefficient welfare programmes that are liable to corruption and cornering by the better off, leaving the poor where they are. Even Amartya Sen has not argued against excessive state intervention in the markets; he too believes growth is necessary for poverty reduction. It is another matter that he prefers inefficient welfarism over more efficient income support measures.
The problem with the discourse on political economy in India is that words like socialism, pro-poor and market friendly are bandied about, especially by politicians, without adequate understanding of what they mean. Jaitley’s statements prove this.

India just published its most explicitly pro-markets policy document in history

http://qz.com/232064

Each year, the Economic Survey offers a snapshot of the economy and a glimpse into the government’s thinking on important policy matters. Along with the budget, it is the most important annual statement on policy made by the government of India.
This year, the Economic Survey tabled by finance minister Arun Jaitley in Parliament earlier today, is an emphatic statement. It is the first policy document in modern India that has explicitly pitched for a market-based economy and for the government to work on an enabling regulatory framework. It goes to the extent of saying that market failure should be demonstrated before the government considers stepping into any sphere of economic activity.
If this document is any indication, the Narendra Modi government intends to usher in an unprecedented policy push towards a markets-based economy and away from the welfare-centric approach favoured by all the previous governments, including the earlier governments led by the Bharatiya Janata Party (BJP) .
Since the mid-1990s, Economic Surveys have pitched for many reforms—of the labour market, real estate market, agriculture, the food economy and the subsidy regime. But none have set out a case for the market economy in such explicit terms as this one has.
Consider this: a chapter titled Issues and Priorities has a section called Foundations of a Market Economy. The opening paragraph says: “The biggest challenge today is improving state capacity suitable for a market-based economy. A long-term, careful and systematic effort is required for undertaking institutional change.” This is perhaps the closest a government can come to in moving away from a socialist legacy which has got enshrined in the Constitution. The Preamble to the Constitutions describes India as a sovereign, socialist, secular, democratic republic (the words socialist and secular were inserted in 1975).
And mull on this: “In a market economy, the economy thrives because the state interferes only when there is ‘market failure’, i.e. monopoly power, asymmetric information or externalities.” The Survey argues that any restrictions on private activity must be “part of a known and predictable regulatory regime unlike now where a lot of restrictions—well intentioned as they are—are not part of a stable framework.”
That is probably a veiled reference to the retrospective amendment of tax laws by the previous government, an issue that has been making foreign investors extremely jittery. It could just as well be interpreted as a reference to the ruling BJP’s opposition to foreign direct investment in multi-brand retail. One of the first actions that the BJP government in the state of Rajasthan did was to rescind the earlier Congress government’s decision to allow FDI in retail. There are differing schools of thought within the ruling BJP on economic matters.
Though the Survey speaks about the state intervention in the case of market failures, it insists on credible and strong grounds for such intervention. “Before a state intervention is initiated, it is important to demonstrate that there is a market failure. It should be shown that an intervention will solve the market failure. Further, the costs to society of government intervention should be outweighed by the benefits.” The significance of this is underlined by the fact that even a reformist government like the present one thinks it fit to impose stockholding limits on potatoes and onions and clamp down on exports when prices of these vegetables started heading north.
Will these issues influence the budget that is to be presented tomorrow?
Many of the issues that need to be addressed in order to lay the foundations of a market economy are not within the scope of the Union budget—they relate to other ministries and to state governments (state-level regulations do more to hamper economic freedom). Within the BJP itself there is a group that is not in favour of a genuinely free market economy; it prefers to protect domestic business against foreign competition.
How much of the prescriptions in the Economic Survey will be carried out by the government? This depends on the degree of consensus that differing factions within the BJP can reach. In the past, Economic Surveys have made bold and reformist suggestions. The governments of the day have not always closely followed the policy recommendations.
But as the Survey points out, this government may not have the luxury of inaction. Setting up legal and regulatory frameworks for a market economy is one of the three key measures it recommends to revive investment (the other two are ensuring a low and stable inflation rate and fiscal consolidation). There is hope, then, that this government will move—slowly—in the direction of a real market economy.

The Essential Commodities Act is essentially problematic

http://firstbiz.firstpost.com/economy/why-modi-should-scrap-essential-commodities-act-not-invoke-it-to-control-food-prices-89747.html

Perhaps it is not surprising that the Narendra Modi government has brought onions and potatoes under the Essential Commodities Act, 1955. After all, a committee of chief ministers that he headed on the issue of food prices had recommended that offences under the Act should be made non-bailable and cases should be tried by special courts.
That a committee which rooted for liberalisation of agricultural markets and reform of the Agricultural Produce Marketing Committee Acts should want an outdated piece of legislation strengthened is a bit of an anachronism, but the Indian political economy is full of such contradictions.
Yesterday’s move has come on the back of steady and rapid rise in the prices of these two items, throwing already stressed household budgets out of kilter. There have been reports of hoarding, which is what prompted the decision. But  is this the right way of going about it?
The Essential Commodities Act has its origin in a pre-Independence wartime measure - the Defence of India Rules of 1939. These were promulgated to address the problem of wartime shortages and consequent hoarding. Section 3 of the Essential Commodities Act gives the central government powers to control the production, supply and distribution of specified essential commodities listed in it. The list is drawn up after joint consultation between the centre and the states, and the latter impose stockholding limits on the listed commodities (these vary as conditions and food habits in states differ widely).
The intention may be noble – after all one cannot deny that hoarding and creation of artificial shortages does happen. The retail price of onions in Delhi has been double of what it is in the Azadpur mandi. Ahead of the Delhi assembly elections last year, tomatoes started disappearing from the market and prices headed north. Charges of hoarding were scoffed at, especially since tomatoes have a lesser shelf life than onions and potatoes, till the market was suddenly flooded with stocks and prices crashed the day after voting.
But invoking the Essential Commodities Act is problematic. Stockholding limits do not distinguish between food processing industries and food retail chains, which need to hold large stocks for their operations. Food processing industries especially need to keep stocks for a few months at a time so that fluctuating prices don’t throw their economics out of gear. But under the Essential Commodities Act, these can become liable at least for harassment. These are corporate entities with large, earmarked storage facilities which can be easily identified. So it is easy for inspectors to go after them.
On the other hand, identifying the actual hoarders is not at all easy. These may not be small traders but their operations are not corporatized and they have many avenues to spirit away and hoard supplies. The conviction rate under the Act is also abysmally low. So the hoarders go scot free and genuine players in the food economy are harassed.
The Act is not in tune with present times. It made sense at a time when the transport infrastructure across the country was poor and markets not integrated. So a production shock in one part of the country could lead to hoarding and black marketing. That’s not the case any more. Shortages in one part of the country can be countered if there is ample supply somewhere else.
So does that mean no steps should be taken against hoarding? Certainly not. The state has to step in where there is a clear case of market distortion. There is another legislation called the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities (PBMSEC) Act, 1980 which the centre and states can invoke to check hoarders.
There is, however, a problem with this law – it is linked to the Essential Commodities Act. So action under the PBMSEC Act can only be taken against offences punishable under the Essential Commodities Act. The list of items that the PBMSEC can be invoked for comes from the Essential Commodities Act. And it is the stockholding limits under the Essential Commodities Act that defines hoarding.  It is this anomaly that needs to be addressed, not pushing more and more items under the Act whenever there is a price shock.
The Essential Commodities Act is out of tune with current realities and needs to be either scrapped or drastically overhauled to deal with crisis situations like supplies getting disrupted due to war, natural calamities and breakdown of law and order. But if even an otherwise natural reformist like Modi wants the Act to be retained and strengthened, looks like the country is going to have to live with an ineffective, harassment-prone law. And ordinary people will continue to suffer.

Do a FRBM on subsidies, Mr FM, put a cap on the subsidy bill

http://firstbiz.firstpost.com/budget/budget-2014-mr-jaitley-do-a-yashwant-sinha-on-subsidy-enact-a-law-to-cut-it-progressively-89938.html

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.