There are two promises in Congress' election manifesto that cut each other out

Reuters
Manifestos are meant to be about things that cannot be achieved.

The best example of this perhaps is The Communist Manifesto written by Karl Marx and Friedrich Engels. Those still left with the left, continue to believe that one day, the words written by the prophets in this manifesto, will come true.

As the Hindi film lyricist and poet Sahir Ludhianvi once wrote: “ wo subah kabhi to aayegi (the morning we are waiting for will come one day).”

The Congress party released its manifesto for the 2019 Lok Sabha elections earlier this week. On the whole, the manifesto makes the right noises about getting the Indian economy back on the right track. Nevertheless, there are a few points which when read together are simply not achievable and if they are, the party hasn’t explained how it plans to achieve it.

Let’s take a look at this issue point-wise.

1) The first point that the manifesto makes in the economy policy section is: “Fiscal stability is the starting point. Congress promises to reverse the BJP Government’s fiddling with the target of fiscal deficit… Off-Budget and extra-Budget borrowings will be faithfully reported with the justification for such debt and the means of servicing and repaying such debt.”

Over the years, governments (including the previous Congress government) have managed to control fiscal deficit by simply not paying up on some expenditure. Fiscal deficit is the difference between what a government earns and what it spends. The government accounting works on a cash basis. So, if money does not leave the government account, no expenditure has been made.

Take the case of Food Corporation of India (FCI). FCI and other state procurement agencies buy rice and wheat directly from farmers at a minimum support price, declared by the government. They then sell this rice and wheat at an extremely low price through the public distribution system (or what we call ration shops). By selling rice and wheat at an extremely low price, the FCI suffers losses. The government is supposed to compensate FCI for these losses through food subsidies allocated in the annual budget.

Typically, over the last few years, the total amount of food subsidy allocated in the budget has not been enough to pay for the losses that FCI faces while selling rice and wheat. By not allocating enough food subsidies, the government doesn’t incur extra expenditure, in the process it keeps its expenditure as well as the fiscal deficit under control, and reports the fiscal deficit number it wants to. In the 2018-19, this allowed the government to report a fiscal deficit of 3.4% of the GDP, when its actual fiscal deficit was much more.

FCI, in order to continue operating has to borrow money. In 2017-18, it borrowed Rs 1,21,000 crore just from the National Small Savings Fund because the government did not pay up on time. Of course, it could borrow money because ultimately any lending to FCI is seen as lending to the government and is based on the assumption that the government does not default on payments.

Postponing payments to FCI is just one part of the trick. The right amount of fertiliser subsidies also don’t get paid on time. Over and above this, the borrowing carried out by Indian Railways for its expansion plans isn’t treated as government borrowing and in that sense, the interest paid on that debt as well as principal repayment, isn’t treated as government expenditure.

The same thing is happening in the financing of power projects.

In that sense, the Congress party’s plan to faithfully report the fiscal deficit can’t be argued against. The idea behind any set of accounts should be to present the right picture, which the current government accounts and consequently the fiscal deficit number, don’t present.

2) Just paying off FCI, is going to push the government fiscal deficit to around 4% of the GDP. Doing other things correctly will only push the fiscal deficit number up further.

3) Other than reporting the fiscal deficit number correctly, the Congress party if it comes to power, plans to waive off farm loans as well. As the manifesto points out: “Immediately after forming the governments in Chhattisgarh, Madhya Pradesh and Rajasthan, as promised, the three Congress Governments waived the loans of farmers. Congress promises to waive the outstanding farm loans in other States as well.”

The manifesto further points out: “ We will not stop with just providing “Karz Maafi” or a loan waiver. Through a combination of remunerative prices, lower input costs, and assured access to institutional credit, we will set our Kisans on the path to “Karz Mukti,” or Freedom from Indebtedness.”

If the farm loans are waived off, banks which made those loans to the farmers, will have to be compensated for by the government. And any compensation will need money. This will push up government expenditure and the fiscal deficit further up.

4) The manifesto states: “Congress promises to achieve the target of 3% of GDP by 2020-21 and remain under that limit. The revenue deficit will be contained, as far as possible, under 1 per cent of GDP.”

Take a look at Figure 1, which plots the fiscal deficit as a percentage of GDP, over the years.



The only year since 2004-5, in which the fiscal deficit as a percentage of the GDP has gone below 3%, was in 2007-08, when it was at 2.6% of the GDP. In the last few years, the fiscal deficit has been brought down by not paying fertiliser firms and FCI on time, along with moving capital expenditure outside the budget.

The Congress wants to correct this. Along with this, it also wants to waive off loans given to farmers. Both these moves, will push up the fiscal deficit beyond 4% of the GDP. But at the same time, the party wants to get the fiscal deficit down to 3% of the GDP by 2020-21, if it comes to power. 2020-21 basically means the next financial year.

How is this going to happen? The manifesto does not mention any new ways that the party has thought up, for raising revenue, other than selling non-core, non-strategic public sector enterprises, whatever that means.

Hence, there is a paradox at the heart of the manifesto. The things that the party wants to do will cost money, and mean extra expenditure for the government; but at the same time, the party, if it forms the government, wants to control expenditure and hence, bring down the fiscal deficit as well. It wants to run a responsible fiscal policy.

How will that be possible? We don’t know.

Which is why I said at the beginning of this piece, that manifestos are meant to be about things that cannot be achieved. At the heart of the Congress manifesto is one such thing which cannot be achieved.

Vivek Kaul is a Business Insider India contributor. Kaul is an economist and the author of the ‘Easy Money’ trilogy.





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