Modi’s inflation-fight and budget-fix starts here
For a government that has been so quick in giving permission to raise the height of the Narmada dam as well as to start the $2billion phase II of the Karwar naval base in Karnataka—both stuck for years due to environmental reasons—it is not clear why it should be taking so long to begin its fight against inflation. Given how long experts have been talking about the need to dump 10-15 million tonnes of foodgrain held with the Food Corporation of India (FCI)—a zero cereals inflation would shave off a fifth from the inflation numbers—this was one of the first things the Modi government should have done. Dumping FCI stocks in themselves are only a temporary solution, and so it is just as well that Modi told party workers the time had come for tough solutions, necessary if the economy was to be revived over the next couple of years.
The reason why dumping stock from FCI is only a temporary solution is that, given the current open-ended procurement system, FCI will just go and buy up the stock all over again. Indeed, given that state governments like Madhya Pradesh and Chhattisgarh offer huge bonuses over what FCI pays, the stocks tend to swell up hugely—right now, FCI has around 71 million tonnes of foodgrain compared to the norm of 32 million tonnes on July 1. Based on current costs, that’s an additional expenditure of R88,000 crore the government has made. So, immensely unpopular as the step will be, Modi needs to stop the open-ended procurement by FCI and he needs to stop the chief ministers of BJP states at least from offering large procurement bonuses—indeed, procurement targets should be linked to removing mandi taxes that are as high as 14.5% in states like Punjab. This will not just do wonders for the budget, it will remove serious distortions in agriculture since this encourages farmers to grow just wheat and rice whereas they should be growing more fruits and vegetables.
Sooner, rather than later, Modi needs to relook his party’s aversion to Aadhaar-based cash transfers – giving Aadhaar to the home ministry will kill the project, and it has to be realised that Aadhaar is a way to curtail subsidies, it is not proof of citizenship. The government plans to spend R1.15 lakh crore on food subsidies in FY15 (interim budget)—as compared to this, giving India’s 250 million poor their entitlement of 5kg of rice/wheat (under the Food Security Act) in cash would cut this down to under a third. Assuming a R20 per kg subsidy, that’s R100 per person per month, or R30,000 crore per annum. Carrying on with the diesel deregulation, and perhaps a R100 (of the R432 subsidy) hike in LPG prices will reduce the R1.40 lakh crore under-recovery by around R40,000 crore or so. As finance minister, Arun Jaitley would do well to ensure other ministries are forced to do their bit—without that, his maiden budget is sunk.