Business Today

The real cost of populism

Political parties have made tall promises in their manifestos, unmindful of the high cost of fulfilling them later borne by the voters who were once lured by the promises.

Puja Mehra        Print Edition: May 3, 2009

Fidel Castro would feel at home in India today. Across the political terrain, prominent parties have launched stridently populist manifestos leading up to the general elections— from handing out cheap food grains to farmers’ loan waivers—in order to lure India’s large, underprivileged vote bank. While it is unclear whether these parties plan to make good on any of their promises, what is certain is that the cost of implementing these populist measures could have disastrous effects on the population.  

Congress
Promise: A food law guaranteeing 25 kg of rice or wheat per month at Rs 3 per kg to rural and urban BPL families
Cost: Rs 31,500 crore a year* (Subsidy would be about Rs 15 per kg)
Consequence: Food subsidy bill will rise by over 70% from Rs 43,627 crore in 2008-09, worsening the fiscal position
Desirability: Low, since only 19% of the BPL families in rural India and 17 % in urban India benefit from the Public Distribution System

* Assuming 5 members per BPL family; BPL population is about 350 million; Source: NSS, Union Budget, Commission For Agriculture Costs and Prices, Party Manifesto

The Congress manifesto, released on March 24, promises to follow up its Rs 1,275,000 crore National Rural Employment Guarantee Scheme (NREGS) with a National Food Security Law, guaranteeing rice or wheat at Rs 3 per kg. Playing copy-cat, the BJP—whose India Shining pitch proved no match for the Congress’ populist Aam Admi campaign in the last elections—quickly drew up a poll manifesto offering food grains at Rs 2 per kg, just ten days after the Congress’ announcement. Not to be outdone, the CPI (M) is promising an extension of the NREGS to urban segments of the population.

These are ironic developments, considering that the Congress is led by someone who was the chief architect of liberalisation in the early 1990s while the BJP has generally been recognised as a party committed to deepening economic reforms. At a CII discussion in New Delhi last month, Member of Parliament and industrialist Rahul Bajaj lit into such dubious manifestos: “Where are the reforms in the manifestos? There is only populism. I hope they won’t become policies later,” he said, setting off a round of boisterous applause.

Populist politics sell easily—especially the cheap rice variety—in a country where a huge vote bank of 350 million exists below the poverty line. Ironically, populism thrives in manifestos because— and inspite of—the failure of populist schemes in reducing poverty. In fact, “Rice-at-Rs 2” politics dates all the way back to 1983 when matinee idol-turned-TDP Founder, N.T. Rama Rao, won Andhra Pradesh on the promise of subsidised rice at Rs 2 per kg. Since then, the state has voted out every incumbent that raised the price of rice, including NTR’s son-in-law Chandrababu Naidu, in 2004. And yet the masses in the state have largely remained poor.

This is exactly what critics of populism are incensed about—that populist measures are in fact exercises in inefficiency and excess, and just don’t work. The Congress party should have known this best. A Planning Commission report of the 11th Plan Working Group released in January 2007 had concluded that the subsidies and poverty alleviation expenditures of the Centre and states of Rs 53,770 crore during 1999-2000 should have been sufficient to eliminate poverty within the same year even if administrative costs and leakages used up a third of the allocation. In fact, the Group reached the same conclusion for the outlays for the year 1993-94 as well.

Moreover, the Public Distribution System (PDS) has been disbursing 35 kg of food grains per month at highly-subsidised rates of Rs 3 per kg of rice and Rs 2 kg per kg for wheat to underprivileged people in the country for 10 years now. Still, barely 19 per cent of the rural BPL families and 17 per cent of urban ones benefit from the system, according to the latest round of the National Sample Survey.  

Congress
Promise: Interest relief to all farmers who repay bank loans on schedule
Cost: Rs 19,700 crore* per percentage point of interest relief
Consequence: Will raise the debt-waiver subsidy by 78% from the current Rs 25,000 crore
Desirability: Moderate, as interest subsidies are acceptable only for marginal farmers affected by droughts, etc.
* Loans from PSU banks; Source: RBI, a former RBI Governor


Even ex-finance minister P. Chidambaram has been candid about these failures. Addressing the National Development Council in December 2007, he said that 38 per cent of the subsidised grains do not reach the targeted poor: “While the PDS is necessary, unless it is efficient, it could become an albatross around our neck and an opportunity for rentseekers to enrich themselves.” A few days later, at the Institute of Economic Growth, the PM himself remarked that “too much money is being spent on funding subsidies in the name of equity, with neither equity objectives nor efficiency objectives being met”.

These realisations haven’t stopped today’s political manifestos from being chockfull with new populist policies— and they could prove disastrous to the country’s finances. The CPI (M)’s desire to take the NREGS to the urban centres will trigger a huge ruralurban migration (owing to the wage differentials), defeating its very purpose. The BJP’s promise of lowering home-loan rates would amount to a return to the administered interest rate regime that was prevalent till about 15 years ago.

Trying to alleviate endemic and serious problems of income inequality, malnutrition, lack of water and sanitation and literacy is, by any measure, a necessary and noble undertaking. Problem is, intended beneficiaries in India rarely receive such succour. That’s why the mother of all election promises should have been to deliver on all the promises made in the past—and not make any new ones. This isn’t much different from the resolve to match outcomes with outlays that both Chidambram and Singh had made under the UPA government.


BJP

Promise: 35 kg of rice or wheat ever y month to BPL families at Rs 2 per kg
Cost: Rs 33,600 crore a year* (Subsidy would be about Rs 16 per kg)
Consequence: Food subsidy bill will rise by over 70% from Rs 43,627 crore
Desirability: Low, since only 19% of the BPL families in rural India and 17 % in urban India benefit from the PDS
* Assuming 5 members per BPL family; BPL population is 350 million; Source: NSS, Union Budget, CACP, Party Manifesto

Promise: Waive all agricultural loans; maximum ceiling of 4% on interest for all agricultural loans to farmers from banks
Cost: Rs 2,50,000 crore for the waiver and Rs 15,000 crore for the interest subsidy*
Consequence: Will raise the debt-waiver subsidy by over ten times from the current Rs 25,000 crore
Desirability: Low, since interest subsidies and farm loan waivers are acceptable only for marginal farmers affected by droughts
* Loans from PSU banks; Source: RBI, a former RBI Governor, Party Manifesto

Promise: Bring down interest rates for housing loans
Cost: No cost to the exchequer
Consequence: Will set the banking system back by 15 years by curbing banks’ autonomy and undermining the RBI
Desirability: Zero, since it is only acceptable for governments to subsidise borrowers rather than force bank interest rates down
Source: A former RBI Governor, Party Manifesto

Promise: Exempt income up to Rs 3 lakh from income tax; additional benefit of Rs 50,000 for women and senior citizens
Cost: Rs 60,000 crore a year
Consequence: Personal income tax revenue will fall to half at a time when the fiscal deficit is high and rising
Desirability: Zero, since no alternative source of revenue has been proposed to make up for the lost tax collections
Source: Union Budget, Party Manifesto, sources at Ministry of Finance

CPM

Promise: Extension of the NREGS to adults in urban areas
Cost: Rs 3,83,921 crore*
Consequence: Higher urban wages could trigger migration from rural areas defeating NREGS’ purpose
Desirability: Zero, since urban poverty allieviation needs solutions different from those for rural poverty *81 million urban people live below the poverty line
Source: India: Urban Poverty Report, 2009, Party Manifesto, Ministry of Rural Development


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