giveaways: why competition policy needs to take a step back for a better and more prudent economy

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Narendra Modi’s warning about the pitfalls of handouts – in his own words, “revadi” (candy) culture – is an important indicator of the worrying economic health of some of our states. It is also a stark reminder that competitive welfare policy can prove to be a major constraint in dealing with economic challenges – more importantly, in initiating structural reforms, of the kind needed to avoid a situation like the Sri Lanka.

Broadly, three economic issues could, individually or in combination, emerge as potential near-term political crisis points:

  • Uncontrolled social spending
  • Uncontrolled outflow of foreign capital in a context of rising exchange rate
  • High inflation

With many factors ranging from rising oil prices to US Fed rate hikes beyond the Indian government’s control, internal attention will fall squarely on the Center and the states working in sync with each other. In the immediate term, there is room for agreement on fiscal prudence and discipline in welfare spending and planning based on each state’s financial viability, not just political whim.

The urgency over this was first signaled by the Center at a conclave of Chief Secretaries in Dharamshala last month, where the Ministry of Finance, in a detailed presentation, explained how the increase in borrowing , uncontrolled spending, growing budget deficit and low revenue collections, before the pandemic years, were the main reason for Sri Lanka’s financial decline. The concern, of course, was that many Indian states exhibited similar trends.

In states like Punjab, almost 86% of the total revenue is expected to be spent on “committed expenses”. Which basically means interest payments, wages and salaries, leaving “almost no wiggle room to do anything new.” This number is around 75% in Kerala and Uttarakhand, and over 60% in Assam and Tamil Nadu. As for off-budget borrowing between 2019-20 and 2021-22, Telangana holds a share of over 4.5% in GSDP, while Andhra Pradesh and Uttar Pradesh raised almost Rs 24,000 crore and Rs 17,700 crore by sequestering future income.

Sunrise needs a sunset
Alarming as these figures may seem, it is incumbent on the Indian federal structure to find a way to address the shortcomings. The challenge, however, is not to let populist politics derail tough decisions like setting an “expiration date” and tracking the results of each program. Another measure suggested to states is to reduce inefficient subsidies if they do not reach the targeted population, if their collection cost is negligible, if they continue to reach those who no longer need them, and if they lead to abuse, pollution, theft and waste of the type generally associated with free unmetered electricity for farmers.

While focusing on the effective management of social protection schemes, the issue of affordability cannot be ignored. In some states there may be more scope for such programs than, for example, in Punjab. Which means that many states with weaker budget indices will have to make tougher policy decisions. And that is where the test will lie, as high-decibel competitiveness has left little room for political commitment and accommodation.

This conversation becomes even more meaningful when viewed in light of global trends. The Joe Biden administration is bracing for a tough congressional ballot in the United States, where the “good fight” in Ukraine is postulated against unprecedented inflation. This has paved the way for further rounds of interest hikes by the US Fed, which in turn could trigger another flight of capital from Indian markets, although we assume the current one is managed with the recent actions taken by the Reserve Bank of India. (RBI).

A related concern is India’s growing import bill due to rising oil and gold prices. The trade deficit grew at a rapid pace, topping $25 billion in June. Ideally, this would be the time to push for increased exports. There is growth recorded on this front. But the kind of necessary gallop did not take place. In fact, the imposition of export duties on wheat, oil and iron ore underscores the government’s concerns about inflation, which is also on the rise.

These decisions were made to ensure that oil, steel and wheat prices remain under control. More importantly, to ensure domestic availability as well, even if that meant exporters had to take a hit. On the other hand, the Indian government has had to work twice to ensure the availability of edible oil – another politically sensitive item that is largely imported – in sufficient stock and keep its price within manageable limits.

On a broader level, therefore, the uncertainty of the global economy, coupled with fears of recessionary trends and geopolitical turmoil, has provided a dangerous backdrop against which India’s domestic political conversation must seriously grapple. to the reality of the economy.

Libra Economics, Politics
For some time, latitude on the economic front has been exploited for political ends. And while Covid was a big shock, it took an environment of economic benevolence to deal with the human crisis at hand, which justified higher social spending. But in the changing global context, now may be the time for the GoI to set up crisis management groups that meet regularly to assess the situation and work with states to ensure budgetary prudence, as well as to explore the way forward beyond short-term crisis points.

In some ways, it’s time for competition policy to step back and provide space for cooperation for a better and more prudent economy.

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