Not just tokenism PDF Print E-mail
Thursday, 19 September 2013 00:00
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FM talks of subsidy cuts, reins in pre-election freebies

All those looking for a pre-election burst of spending to revive a sagging economy are going to be disappointed, as finance minister P Chidambaram announced a fresh set of austerity measures that go beyond the usual tokenism. As has been done in such situations in the past, the finance ministry announced a 10% cut in non-plan expenditure that accounts for 70% of the FY14 budgeted expenditure of R16.7 lakh crore—this, though, does not apply to large-ticket spend like interest payments which are budgeted at R3.7 lakh crore or salaries at R1.25 lakh crore. So, only very essential seminars are to be held, there will be no exhibitions abroad unless it is really critical, 5-star hotels will see less government business, and so on. What is more important, however, is that the 10% cut in non-Plan expenditure also applies to subsidies. Even more critical is the sentence in the finance ministry’s press release on Wednesday that says “no fresh financial commitments should be made on items which are not provided for in the budget approved by Parliament”. Translated, that means there is no question of sanctioning more money for the burst of pre-election freebies that most think is par for the course in a pre-election year. In the case of the Food Security Bill, while the Budget has made a small extra provision, the Bill will be implemented only to the extent the Budget has provided money for it, indeed it will have to live with a tenth less than that provided for in the Budget.

Theoretically, there is always the possibility that the government could use PSUs to get over the budget constraint, as has been done in the past. There is little doubt that, as in the case of the oil subsidies which the budget has kept R65,000 crore for versus the likely R150,000 crore, part of the bill can simply be passed on to companies like ONGC and other oil PSUs. But there is a limit beyond which even this cannot be done since, with the oil PSUs running out of money, they will be forced to ration imports of petroleum products after a point. In which case, a fairly large diesel price hike of R5 per litre and perhaps even R100 per LPG cylinder can be expected pretty soon. For cynics, it is useful to keep in mind that while the finance ministry issued a similar circular last year, on May 31, 2012—Wednesday’s circular is virtually the same in the words it uses—it stuck to its promise and came up with a fiscal deficit that was lower than that even the FY13 budget estimate of 5.1% of GDP. To the extent the conomy slowing down means less revenues for the government, the expenditure squeeze will get more severe.


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