If the reason for postponing the gas decision is true, given the number of elections India keeps having, we are truly in trouble as vital decisions will keep getting postponed. If, on the other hand, the government actually believes it can get even the state-owned ONGC to explore for gas in the countrys deep waters at $6-7 per mmBtu, we are in a different type of trouble!
To be fair to the government, asking it to come up with big policy decisions within such a short time is unrealistic, but part of the problem is the expectations Modi himself has fuelled. The larger problem is that several of the decisions that have been taken so far have been rank bad ones, and the fact that Modi still hasnt completed his team suggests a government not sure of itself.
Begin with agriculture. Instead of disciplining states like Uttar Pradesh (UP) which have ruined the sugar economy, import duties on sugar were hiked dramatically to bail out millsapart from what this will do to prices, the main impact has been to signal to UP that it is okay to play sugar politics by hiking the SAP to levels that bankrupt the industry. In the case of states like Punjab and Haryana which collectively charge extortionary mandi taxes of R7,700 crore a year, no attempt has been made to discipline them by linking FCI procurement to tax levels.
The inflation story is even more curious. No one expects miracles to a problem that has been festering for more than two years now, least of all in what almost certainly looks like a drought year. The best that people expected was an attempt to crash foodgrain prices, so that even if vegetable prices soared, the net impact would be muted. That required large sales of the foodgrains FCI has in its godowns, grain which it cant even store as it has run out of godown space. Yet, the government went and announced a minimalist sale5 million tonnes (mt) against an expected 15-20 mtand even that is to be done through ration shops, not in the open market where the impact will be the highest. Apart from the fact that it will have a minimal impact since ration shop offtake has been below target for years, it will cost the government a lot more as ration grain is sold very cheap given the leakages, this means people wont benefit and middlemen will corner the cheaper grain.
If this wasnt bad enough, the other measures hark back to the past. Putting onions and potatoes in the Essential Commodities Act, cracking down on supposed hoarders and dramatically hiking minimum export prices are an antiquated response to the problem which, eventually, has to be about getting farmers to produce more. No matter what the BJPs argument about middlemen getting the profits, not farmers, you cannot expect more production if the most lucrative export market is constantly being switched on and offGujarats, and Modis, agricultural miracle, it should be pointed out, would never have taken place had cotton exports been banned.
Which is why in the Budget, the governments first real policy document, it will be important for Modi and finance minister Arun Jaitley to set the agenda on a host of issues, and not worry about whether their fiscal deficit is 4.1% of the GDP or 4.4%.
There are already a few hiccups here that are worrying, the second thoughts over retrospective taxation being the uppermost. Given the BJP manifestos talk of ending tax terror, anything short of scrapping the retrospective amendmentsand all the Vodafone-type cases associated with itwill deeply disappoint investors. The government, however, is worried scrapping it will invite the CAGs ire. Pity, as the result will be the international investor community being much less favourably inclined towards India at a time when attention is refocussing on the US. An outright scrapping is the preferred option, but a half-way house is to combine this with an amnesty for existing tax casessettle with Vodafone, etc, and scrap the retrospective tax.
Cutting back on subsidies, and a timeline for this, is high on the investors agenda, which is why it is critical a diesel-type price increase plan be announced for kerosene and LPGthe petroleum minister, for the record, has said no such plan is under consideration right now. Which is why the budget number on oil subsidies will be the figure to watch for. If Jaitley keeps it at the interim budgets R63,427 crore, it either means serious petroleum pricing reforms are on the anvil or that he intends to get ONGC to cough up a lot more of the subsidy burdenin which case, the PMs assurance of professionalising PSUs is just so much talk. You cant professionalise an ONGC if you also expect it to accept a price that is 40-50% of the market price. Since the BJP is planning to be in government for at least five years, if not 10, it needs to keep in mind that a bankrupt ONGC cannot finance oil and gas exploration on a large enough scale.
It is also not clear how the government hopes to cut the burgeoning food subsidiesex-CACP chief Ashok Gulati estimates the Food Security Act will cost R2 lakh crore each year for 3 yearswithout extensive use of Aadhaar-based cash transfers. The Budget needs to spell out its plan. Even without getting into the complicated issue of how FCI is to be restructured, the Budget needs to talk of ending FCIs open-ended procurementIndia needs just around 25 million tonnes of buffer stocks, but holds 60-65 mt. At around R4-5 per kg, the cost of just storing the extra buffer is R15,000 crore. And this does not include the R65,000-70,000 crore locked up in purchasing the extra rice/wheat. There is then the R7,700 crore in mandi taxes. Imagine what fixing this, and lowering the years borrowing target by R80,000-90,000 crore would do to the bond market and interest rates in general.
An equally important issue the Budget needs to address is the issue of bank capital. PSU banks dont have the money to be able to increase lending beyond 10-12% a year, so need to raise capital. So will Jaitley announce a holding company structure as recommended by the PJ Nayak committee In the same manner that a bank holding company will insulate banks from political pressure as well as the CBI/CVC/CAG, a holding company for PSUs is probably the best way of professionalising them since they will no longer be considered instrumentality of state and can run their businesses without getting caught in the L-1 tender trap.
Since the government clearly doesnt want the Planning Commission in its current form, and Modi has spoken frequently enough about freeing the states, presumably this means that the Budget will announce a new reference to the Finance Commission to increase the states share of central taxes in lieu of centrally-monitored programmes.
Given the likely shortfall in taxes, and the difficulty in cutting subsidies, the Budget will almost certainly have a large disinvestment targetR80,000 crore or thereabout is the number being bandied about; most of this can come from just selling government holdings in HZL and Balco and the SUUTI shares in Axis, L&T and ITC, and we are not even talking of selling stakes in Coal India, etc. A week from now, as the prime minister and his finance minister unveil the Budget, we will have a better idea of whether it is going to be acche din for all of us or just chhe (six, in Hindi) din for the babus in place of the old 5-day week.