Editorials/Opinions Analysis For UPSC 14 January 2023
Contents
- India Missed Public Distribution System Reform
- Will the budget be populist or fiscally prudent?
India Missed Public Distribution System Reform
Context
- On January 1, the Union Government terminated the Pradhan Mantri Garib Kalyan Yojana (PMGKY) free food grain scheme. In March 2020, the scheme was launched as part of the pandemic relief effort.
- The programme gave eligible Public Distribution System (PDS) recipients 5 kg of free cereals, rice, or wheat.
Relevance
GS Paper-2: Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security
Mains Question
With India having declared 2023 as “the year of millets”, it is time to diversify away from the rice/wheat combination and provide people nutritious food. PDS can play a crucial role in it. Discuss (150 words)
Key Highlights
- The primary reason for the scheme’s discontinuation is the government’s growing fiscal deficit.
- To save food subsidies on the former PMGKY, the government also decided to forego the token prices collected from NFSA beneficiaries for food grain entitlement through the Public Distribution System (PDS).
- This extra step will cost the government only Rs. 18,000 crore. However, the combined effect of both of these measures is likely to result in an additional monthly spending of around $500-600 for a family of four, as they will now have to purchase an additional 5 kg from the market if necessary.
Was it the best choice?
- The PMGKY was designed to protect the majority of rural and urban poor people from loss of income and employment during the pandemic. While pandemic-related disruptions have ended, most indicators of the rural economy indicate that distress is still present.
- Given that cereal inflation has been in the double digits and shows no signs of abating, the additional food grain could have been maintained until inflationary pressures subsided.
- The decision to reduce PDS prices to “free” will not save the government much money and will be difficult to reverse. As a result, it may not be the best option in the short or long run.
Do you know?
- A fiscal deficit is defined as the excess of total budget expenditure over total budget receipts during a fiscal year, excluding borrowings. Simply put, it is the amount of borrowing to which the government must resort in order to meet its expenses. A large deficit necessitates a substantial amount of borrowing.
- The fiscal deficit is a measure of how much the government must borrow from the market to meet its obligations when its resources are insufficient.
- Fiscal deficit = total spending minus total receipts minus borrowings = borrowing
Public Distribution System (PDS) Reforms:
- The PDS system, which is used by both the NFSA and PMGKY, has played an important role in recent years, with 75% coverage of rural areas and 50% coverage of urban areas.
- Several studies have shown that expanding the beneficiary pool has helped to reduce leakages and increase the efficiency of the PDS.
- However, despite several economists and the Supreme Court reminding the government to increase the number of beneficiaries to account for population growth, no effort has been made.
- Perhaps a better option would have been to increase the number of beneficiaries while keeping subsidised issue prices for food staples. That would have been a budget-neutral move.
- In the case of NFSA and PMGKY, it is incorrect to classify them as income transfer programmes. The basic goal as envisioned is to make essential food grains available to a large majority of the population at affordable and stable prices.
- More than an income transfer, availability and price stability play an important role in ensuring Indians’ food security.
Way Forward
- When the NFSA was passed, an issue price of 3/2/1 was set for three years. Following that, it was supposed to change as prices rose, as long as it remained below the crops’ minimum support prices (MSPs).
- By simply raising prices slightly to keep real prices constant, the government could have increased the amount of grains distributed to beneficiaries without jeopardising fiscal discipline.
- Raising the prices to even half the MSP levels would have increased entitlement to 7-8 kg per person.
- It is also possible to provide the same pulses and edible oil that were distributed during the pandemic. These are not only important sources of protein and fat, but they also contribute to the NFSA objectives.
- With India declaring 2023 the “Year of Millets,” it’s time to move away from the rice/wheat combination and provide people with nutritious food.
Conclusion
- The PDS is important for consumers, but it is also important for farmers because it allows government procurement for distribution.
- The government has squandered an opportunity to take bold steps toward reforming the PDS in line with NFSA goals by diversifying to oilseeds and pulses, on which the country is heavily reliant. This is not only necessary for ensuring true food security, but it is also fiscally prudent.
Will The Budget Be Populist or Fiscally Prudent?
Context
The Union Budget, which will be presented in Parliament in February, will be the current government’s final full-year budget before the Lok Sabha elections next year. Given the election schedule, it is expected that the Budget will be populist in nature; however, with high inflation, there are concerns about the government’s ability to spend freely at the moment.
Relevance
GS Paper-3: Government policies and interventions for development in various sectors and issues arising out of their design and implementation; Government Budgeting
Mains Question
Distinguish between the capital and revenue budgets. Describe the components of both of these budgets. (150 words)
Given the current fiscal situation and high inflation, can the Central Government afford to present a populist Budget?
- Even though an election is coming up next year, the government is aware that the fiscal deficit ratio must be reduced.
- People vote for a responsible government. As a result, it is unlikely that any major schemes or populist measures will be announced in this Budget. Instead, fiscal consolidation will be prioritised because the fiscal deficit target of 4.5% of GDP must be met by 2024-25.
- The Budget’s tone will be fiscal consolidation, with an emphasis on food security measures.
Do you have any idea?
- Revenue deficit: The excess of the government’s revenue expenditure over revenue receipts is referred to as the government’s revenue deficit.
- Gross fiscal deficit: The difference between the total expenditure of the government on revenue, capital, and loans net of repayments on the one hand and revenue and capital receipts that are not in the nature of borrowing but accrue to the government on the other constitutes the gross fiscal deficit.
- Gross primary deficit: The gross fiscal deficit less gross interest payments. In the Budget documents, the terms ‘gross fiscal deficit’ and ‘gross primary deficit’ have been abbreviated to ‘fiscal deficit’ and ‘primary deficit,’ respectively.
- Effective revenue deficit: It is defined as the revenue deficit minus the revenue expenditure (in the form of grants) that goes into the creation of Capital Assets.
- An accommodative stance indicates that the MPC is willing to lower or maintain rates.
The Fiscal Architecture’s Checks and Balances:
- Inadequate fiscal space: o Prior to the 2019 elections, the government had significantly more fiscal space. That’s why programmes like PM Kisan were implemented, which was likely the government’s first cash transfer scheme.
- High fiscal deficits of the centre and states: o Given the high fiscal deficits of the central government at 6.5% and the states at 3.5% to 4%, there is enormous pressure to maintain fiscal prudence.
- As a result, while many policy measures may be announced, there is not a lot of room to spend in terms of absolute budget numbers, but there may be targeted cash transfers.
- Inflation is rising, which is hurting the poor, and the Reserve Bank of India is raising interest rates to combat inflation.
- As a result, to avoid any electoral backlash, social security measures will most likely be included in the upcoming Budget.
Need for an Accommodative Fiscal Policy:
- The Union Budget must be accommodating because monetary policy is constrained in facilitating the growth recovery process as interest rates rise, which will have a long-term impact on economic growth.
- • Furthermore, fiscal policy must be accommodating, not in the sense of fiscally profligate policies, but a prudent fiscal policy focused on capital infrastructure.
Prospects For Increased GDP Growth As A Result Of The Budget:
- While the Central Government has been fairly aggressive in increasing capital expenditure outlays, the proportion of capital expenditure to total investment, Capex spending by the government is minimal.
- This means that the government’s ability to really push forward economic growth would be severely limited, especially if taxation measures are not implemented.
- As a result, growth must come from the private sector, though the government and the states collectively could also contribute.
- However, it would be a misnomer to claim that GDP growth will accelerate as a result of the Budget.
Prospect Of Announcement Of Structural Reforms During The Budget
- The government has been very positive in terms of structural reforms, but the Budget is typically not the platform where these policies are launched.
- Policies were announced even during the COVID-19 crisis and lockdowns, the majority of which were structural reforms.
- A longer timeframe news to be used when examining various sectors.
- India is a federal country with states and municipalities. As a result, the Centre can only implement limited reforms.
- India requires numerous reforms to make doing business easier, which must occur at the state and municipal levels.
Need for structural Reforms
- The need for structural reforms is critical due to structural bottlenecks.
- Focusing on structural reforms is critical, especially given that the current drop in economic growth is not cyclical.
- Because the growth drop is a permanent scar, the focus should be on structural reforms.
- Cyclical policies will not solve the problem of growth recovery. Growth will not be achieved if only cyclicality is considered, because many issues are structural in nature.
Linking structural reforms to fiscal consolidation
- Power sector reform is an important structural reform to improve the conditions of power distribution companies.
- That policy is also linked to the issue of fiscal consolidation, because the additional borrowing space we are providing to state governments is based on the power sector reforms they implemented. As a result, linking fiscal assistance with structural reforms is critical.
Conclusion
- In the cooperative federal model, policies at the state level are important, but so are policies at the federal level for transfers to the states.
- As a result, an accommodating policy regarding capital spending transfers to state governments, such as interest-free loans, should be included in the upcoming Budget to support capital investment at the state level.
