Fiscal slippage caused by government schemes
17th May, 2019
- 15th Finance Commission headed by Chairman N.K. Singh held a detailed meeting with Reserve Bank of India (RBI) Governor Shaktikanta Das and deputy governors.
- The RBI has voiced its concern over government schemes such as income support schemes, Uday scheme (revival package for power distribution companies) and farm loan waivers as such schemes lead to fiscal slippages.
- The central bank noted that outstanding debt as percentage of GDP had been rising despite moderation in interest payment as percentage of revenue receipts.
Income support schemes:
- In the Interim Budget presented in February, the government announced a cash transfer scheme (PM-KISAN), for small and marginal farmers with landholdings of up to two hectare, of ?6,000. The government had allocated ?75,000 crore towards the scheme for financial year 2020.
- Odisha’s Krushak Assistance for Livelihood and Income (KALIA), inclusive of landless households, proposes to transfer Rs. 5000 to every family in every cropping seasons for five seasons.
- Telangana’s Rythu Bandhu scheme grants Rs. 4000 per acre per farmer each season to purchase agricultural inputs.
- Jharkhand Mukhya Mantri Krishi Yojna proposes to grant Rs. 5000 per acre per farmer for Kharif crops.
- The Bhavantar Bhugtan Yojana by the state government of Madhya Pradesh transfers the price differential between the crop’s minimum support price and the selling price, to the beneficiaries account.
- Congress party in its manifesto for the 2019 Lok Sabha elections promises of NYAY (Nyuntam Aay Yojana). Conceived as a minimum income guarantee, the NYAY promises unconditional transfer of Rs. 72,000 annually to 20 per cent of the poorest families for reduction of poverty in the country.
- Ujjwal Discom Assurance Yojana (UDAY) is the financial turnaround and revival package for electricity distribution companies of India (DISCOMs) initiated by the Ministry of Power with the intent to find a permanent solution to the poor financial health and operational efficiency of India’s debt-ridden power distribution companies.
- It allows state governments, which own the DISCOMs, to take over 75 percent of their debt and pay back lenders by selling bonds. DISCOMs are expected to issue bonds for the remaining 25 percent of their debt.
- The other objectives of the scheme are:
- Operational improvement
- Reduction of cost of generation of power
- Development of Renewable Energy
- Energy efficiency & conservation
- Under UDAY, discoms can convert their debt into state government bonds, but are required to fulfil certain conditions - reduce the average aggregate technical and commercial (AT&C) losses to 15%, maintain commercial sustainability, and bring down the gap between average cost of supply (ACS) and average revenue realized (ARR) to zero.
- It is a Centrally Sponsored Scheme.
Rationale of introducing such schemes:
- The success of already existing income support schemes of some states like Telangana’s Rythu Bandhu, Odisha’s KALIA has inspired the central government to take this scheme at national level.
- The government may be advocating these schemes in the face of rural distress and agitations.
- These populist economic measures announced ahead of the general elections shows that the government is giving unemployment benefit as bribe to the marginalised sections, including the farmers and the poor to garner more votes.
Impact on Indian economy and society:
- The income transfer will reduce the inequality between the rich and the poor. To fund the support scheme government will increase the tax percentage, taking out a good amount of money from the riches and will distribute it to the poor and needy.
- With additional amount of money made available to the needy, they will spend it on meeting their family’s food requirement now with more nutritious and diversified variety. They will have adequate resources to meet their health expenditure They will provide their children with good quality education.
- It enables households to afford goods and services that are available in the market. It gives people purchasing power to access services in the market.
- Overall we can say the standard of living of the lower strata of our society will improve. They will be able to maintain a minimum quality of life.
- Given that the transfer is linked to size of the farm holding, it may result in sharpening rural inequality and exclusion of landless farmers from such a subsidy.
- With food being the largest part of consumption spending across low income segments, an impact on the food economy is appreciable. One way this could play out is that demand for basic food items like milk, meat and eggs, as well as fruits and vegetables will rise. This in turn will cause the inflation to increase.
RBI opinion about these measures:
- It has termed these schemes as "poor fiscal marksmanship".
- It says that the outstanding debt as percentage of GDP has been rising despite moderation in interest payment as percentage of revenue receipts.
- It has raised concerns that these unemployment benefits to the marginalised sections will stretch the fiscal position of states. The states’ fiscal position was stretched due to the UDAY bonds for the power sector.
- It has flagged these concerns for a long time fearing the impact of these schemes on inflation rates. With more available money in the economy there will be increase in inflation.
Impact of income support scheme on other world economies:
- Procampo, one of the cash transfer programs introducewd by the Mexican government in 1994 to negate the impact of the North American Free Trade Agreement (NAFTA) used cultivated crop area as the basis of the cash transfer.
- On an average, a transfer of $1 resulted in additional income of $2 — $1 directly and $1 indirectly, depending on quantum of land that the farmer had. While the smallest farmers generated an equal amount in income effect, small and medium farmers were able to multiply income faster as they did not have to consume the transfer immediately on account of having existing assets.
- In Programa de Apoyo, yet another food aid program, recipients received either cash or food equal to about 10 percent of the household income.
- Food-producing households benefited under cash transfers by selling their crops at higher prices and were worse off under in-kind transfers as they were selling their crops at lower prices.
- Bolsa Familia, a direct transfer program has been one of the biggest and used up 0.5 percent of Brazil’s GDP annually.
- Household consumption increases as the direct income transfer allows for higher consumption across goods and services.
- However, this increase in consumption is offset by a decrease in investment if higher taxes are levied to collect the amount transferred.
- The higher household consumption will cause higher imports and lower exports, deteriorating trade balance further.
- Cash versus non-cash transfers:
- For goods and services that can be efficiently provided through markets, cash transfers are always better than transfers in kind.
- However, markets are not always efficient for example, in health or education. Such sectors require non-cash transfers in terms of discounted fees.
- Providing the people of country with income support will only provide them a minimum quality of life. A better option is to train and skill them with which they will be able to earn much higher and thus will have a good standard of living.
- So, once the person is skilled, s/he would stand a better chance of earning market-linked wages and breaking out of poverty.
- People cannot be kept out of poverty by giving cash. Poverty reduction needs sustainable livelihoods. And so the problem that public policy needs to and should resolve is: How to supply the appropriate skills imparting infrastructure.
- Some people opine that why can’t the poor just work hard; why the government should give the money. For them we can say that everyone employed in the technology sector does not becoming as rich as Narayan Murthy or Nandan Nilekani and not everyone in the manufacturing sector becomes as rich as Anand Mahindra or Kiran Mazumdar Shaw.
- Lastly, we have too many people in farming. To solve this problem, we should focus on diverting people to non-agriculture sectors- manufacturing, services, and, information and technology sectors.
There has been an increase in launch of income support schemes by the government both at the state and national level. Critically analyse their impact on the Indian economy and society.