Indian Economy Once More in Election Mode

Even as last year ended, there were rumblings of the possibility of the free foodgrain distribution scheme being extended beyond 2022. This is the additional 5kg of foodgrain that was offered free to households eligible under India’s PDS (public distribution system of heavily subsidized foodgrain) during the Covid pandemic. It must have brought tremendous relief to many poor and low-income households that might have otherwise struggled under the adverse effects of the pandemic.

Well, the free foodgrain scheme didn’t end with the waning of the pandemic. As often happens with such social schemes, it was extended last year itself, to December 2022. I thought that was obviously with an eye on the assembly elections that took place at the end of 2022. Now it appears that it will be extended to the entire 2023. Media reporting on it has been extremely vague, with The Economic Times even suggesting that the scheme would cost the government only an additional 20,000 crores and that it would result in savings for the government.

I thought that was ridiculous. If anything, it will increase the government’s food subsidy bill not merely over 2022, but over the pre-pandemic years as well. Typically, India’s annual food subsidy bill is in the region of around Rs 90,000 crores to 100,000 crores, which includes government procuring foodgrain especially for the purpose and selling it at highly subsidized prices of merely Rs 2-3 per kg of foodgrain to poor and needy households. Food and agriculture being a state subject, it is the states that manage the PDS system. However, the free foodgrain distribution scheme that was announced during the Covid pandemic was PMGKAY which means it was a central government scheme.  

The question is, do we need to extend the scheme? In my view, it ought to have been phased out in the second half of 2022, and we should have reverted to the old PDS system of subsidized foodgrain. However, this year happens to be a pre-general election year in India, and I suspect the temptation to extend a freebie sop to the poor has something to do with it. Otherwise, what would be the need to extend and increase food subsidy in a year that is going to be marked by inflation, and high borrowing costs thanks to trying to tame inflation, when we should actually be looking at slight fiscal consolidation.

As it is, thanks to the war in Ukraine, India’s fertilizer subsidy has had to be increased twice last year alone because many of the chemicals used in the manufacture of fertilisers are imported from Ukraine and Russia. In a typical year, our fertilizer subsidy has been around Rs 70,000 – 80,000 crores. In FY 23, India’s fertilizer subsidy is likely to hit Rs 2.5 trillion. The food and fertilizer subsidies are usually considered non-plan expenditure, that is outside of the main budget announcement, and they form a considerable part of it, besides government salaries.

Then, consider India’s oil import bill. It has gone through the roof in the past year, with oil prices staying high and firm, and the dollar strengthening against most currencies including the Indian rupee. As I have written before, this government came to power first in 2014, when oil prices internationally were at the lowest in decades. It didn’t think of passing on the benefits of low oil prices to ordinary consumers, but decided to rake in higher taxes in the form of higher excise duties and other taxes, all of which are highly regressive, hurting the poor the most. This, while giving corporates tax breaks in their second term, in order to boost investment. Business investment measured by gross fixed capital formation has grown only more recently, and paradoxically, during the pandemic years. It’s hard to say how much of it is private sector investment and how much government, since that granular data is not available.

The war isn’t ending anytime soon, though there are some indications from either side that talks and cessation of war would be good and in the interests of all. In order to prepare ourselves for the worst, India ought to weigh the benefits of a free foodgrain scheme (as opposed to subsidized) with its costs as well as with the possibility that our fertilizer subsidy and oil import bills are likely to stay high this year as well. Again, one ought to also consider the merits of more money for free foodgrain, or more money for farmers (fertilizer subsidy and not higher MSPs) so that they can continue to grow and harvest good crops. The choices are not so hard to make, especially when the country is not in the grip of a pandemic, but a global war and high inflation environment.

With commodity prices likely to stay high, farmers need help; Image: Ramkumar Radhakrishnan on Wikimedia Commons

As it turns out, 2023 is not merely a pre-election year for our parliament representatives, it is a year of several state assembly elections as well. From what I read, as many as nine states go to elections this year, with five of them being BJP-ruled states. The tendency to spend big on welfare schemes and freebies for the poor will be high. According to reports from the RBI, states have had massive expenditures on account of the Covid pandemic, and as such have managed to rein in their fiscal deficits (though higher than the target of 3% set for them) but their debt levels have increased significantly as has the servicing of the debt.

As I have written previously on my blog, the BJP has recently discovered electoral gains that can accrue from pro-poor policies; unfortunately, they tend to be of the populist kind and don’t go deep enough to provide the poor better education and healthcare. Investments that are long-term in nature and actually go towards creating an educated, skilled and healthy workforce.

In 2023, we also ought to be prepared for another possible wave of the Covid pandemic that could emerge from China reopening its borders and its economy. New variants, and not all mild, are still possible. The central government has already warned states and asked them to be ready with the necessary medical response: testing, hospital beds, oxygen, and vaccinations.

In a testing year of trying to combat inflation and a strong dollar, India has its task cut out. Many economists and India-watchers think that ours could be a bright spot in a slowing global economy. But only if we take the right decisions. I find a lot of the chatter on media, especially on TV channels about India taking advantage of China’s slowdown to attract more investment – what in business parlance is called a China+1 strategy – rather silly and immature. Of course, India ought to attract more business investment, but of what kind, and in what direction do we want to take our business future? The Indian budget is due to be presented on February 1, 2023, and although it is not an economic policy or strategy document, it ought to offer some pointers for the year ahead.

For a country that hardly trades within South Asia, nor with South-east Asia, hoping to be the China+1 country seems like wishful thinking to me. We know that the last time around when India hoped to cash in on companies leaving China -which wasn’t that long ago, but 2019, when this government returned to power – it was countries such as Vietnam, Thailand and Cambodia that benefitted the most. That was when I wrote on my blog about making India a more competitive economy, including making it capable of competing better with the Chinese. These countries trade substantially with China and within the region, whereas we are always looking to block Chinese imports, ban their apps, and reduce our dependence on China. A lot of it, provoked by our political standoff with China across our borders.

Just the other day, there was news of the RSS economic wing pressuring the government to increase import duties on Chinese goods. If we continue to pursue such policies, we will be raising the costs of doing business in India, because in the past few years, India-China trade has only grown (trade balance in China’s favour, of course) despite all our attempts to keep them out.  According to Arvind Panagariya, who writes in The Economic Times about the dangers of India imposing sanctions on China, or even raising import duties on them, India’s imports from China in 2021 amounted to US $87.5 billion. He goes on to detail the kinds of imports from China to make the argument that sanctioning China is next to impossible as it will hurt us more. For a change, I tend to agree with him on this one, though this is the first I am reading of India imposing sanctions on China.

Voting on in Bengal assembly election (2016); Image: Election Commission on Wikimedia Commons under Govt of India license

It is the subject for another piece, when I shall be writing about what China’s reopening means for the global economy, including India. Right now, I am concerned about how we will weather the global slowdown and high inflation in 2023. And what our consolidated fiscal deficit – centre and states together – will look like in a state election year, followed by an even bigger one. As it is, our country’s fiscal deficit is expected to be 6.4% this year, and combined with the states, it is likely to be above 10%. The debt levels are even more alarming; India’s public debt to GDP ratio is now almost 90%. Watching the fiscal deficit and the debt repayment capacity closely is what is required in 2023, as RBI tries to bring down consumer price inflation, especially core inflation which has been stuck at around 6% for a few years.

On the subject of the free foodgrain scheme being extended, and the deliberately sketchy reporting on it, I happened to come across an article by Jean Drèze in The Scroll, of all publications (which I don’t usually read) that sheds a little more light on the plan. Apparently, the PMGKAY (additional free foodgrain scheme) distribution of additional 5kg of foodgrain is going to be discontinued, and the main PDS system will now distribute free foodgrain under the National Food Security Act, a UPA era legislation. This way, Modi manages to appropriate a free food distribution scheme under his banner, when PDS is managed by states, as I mentioned earlier. The centralization of powers under this government continues unabated, while states are always asked to take charge of situations such as Covid-19, and take on loans even against GST compensation, which has led them to be heavily indebted.

I thought the extension of free foodgrain was too good to be true and wondered how it could be called savings of any kind. Now we know, and it won’t cost much more than the PDS system, but it is certainly not savings. The lure of free foodgrain to the poor and needy, especially ahead of elections is sure to work wonders. If we think about why India has so much poverty that persists for decades, it is because our politicians love to keep people poor. Poor and dependent on their largesse. Easier than providing education and skills and creating jobs.    

Speaking of the economy as a whole, I think that while we try and bring in foreign investment as well as increase our own domestically, we ought to really focus on our domestic market. Thankfully, we have a large domestic economy and home market, and in a year of global slowdown, it is our own market and consumers who will come to our rescue.  On that note, let us look forward to the Union Budget of 2023.

The featured image at the start of this post is of crowds at an MNS (Maharashtra Navnirman Sena) election rally in Mumbai in 2014 by Al Jazeera (English), CC by SA 2.0 on Wikimedia Commons.

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