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During the pre-election period in Parliamentary democracies, the risk of fiscal profligacy is very high. New populist schemes are often announced to help win the elections. This takes a heavy toll on the government budget.
Ballooning fiscal deficits and government borrowing are particularly worrisome in the present context. High inflation, low growth, high current account deficit ( CAD) in foreign exchange have already put our economy in a deep crisis mode.
It is not correct to blame external economic turbulence alone for this situation. The Government should achieve medium-term fiscal stability to control inflation, stimulate investor and consumer confidence and economic growth.
Against this background, our record is depressing. Election sops have been offered and all essential fiscal reforms have been put on hold. The Food Security Bill has put us in fiscal disaster mode.
Before the last general election to the Lok Sabha in 2009, the Farm Loan Waiver and the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) schemes were implemented.
IRREGULARITIES IN SCHEMES
With respect to the former, the Comptroller and Auditor General’s report pointed out serious lapses in disbursal of benefits as well as specific instances of diversion of funds. Ineligible farmers who had taken loans for non-agricultural purposes got a waiver. Overall, 1,257 waivers (about Rs 20 crore), were given to ineligible persons. The Reserve Bank of India and NABARD have directed the banks to identify errors in execution of the scheme.
The MGNREGA came into force in 2006 as a pre-election move with the aim of enhancing the livelihood security of people in rural areas by guaranteeing a hundred days of wage employment in a financial year. However, labour must generate productive local developmental assets. This requirement has not been achieved in numerous cases. The latest performance audit report of the CAG has highlighted many serious shortcomings in implementation, ghost workers who exist only on paper, impermissible works undertaken and incomplete works. In many cases, the full wage benefit did not reach the workers.
The previous pre-election populist schemes described above pale in comparison with the National Food Security Bill, recently passed by the Lok Sabha. The stock markets nosedived on August 28 not only due to the battered rupee, but also due to the worry that the food security programme will add to fiscal deficit, erode consumer and investor confidence and add to the risk of downgrading of our rating.
The objective is to make available rice at Rs 3, wheat at Rs 2 and pulses at Re 1 a kg to roughly 75 per cent of rural and 50 per cent of urban population. The annual cost is estimated at Rs 1.24 lakh crore, a staggering figure for a subsidy. Many key issues need to be addressed, including the computation of the number of beneficiaries under various categories; the lack of storage capacity for the huge quantities of foodgrains and the cost of constructing additional storage space; and defects in public distribution system and specific steps to ensure the food grains reach the intended beneficiaries.
The track record of the government in containing fiscal deficits within the targets fixed by the Parliament in the FRBM Act 2003 has been poor even after a decade. Crucial issues under revenue and expenditure management remain unaddressed.
The Food Security Bill, passed by both Houses of Parliament, only makes matters worse.
(The author was Joint Secretary in the Union Government and IMF Budget Advisor.)
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