2 September 2024 07:19 am Views - 99
Fuel subsidies are even more problematic, as they lower prices and promote overconsumption, which strains our balance of payments. We must critically assess whether we can afford to subsidize fuel for one million three-wheelers and 25,000 buses. Furthermore, providing interest subsidies to convert three-wheelers to electric vehicles is unwarranted, as there is no market failure necessitating this intervention
Writing off farmer loans rewards bad borrowers - what about those who paid back their loans or managed with their own resources. It is not clear who will pay for this
Public service salary increases – the size of the service is around 1.2 million people. It is difficult for me to assess the cost of the proposed increases due to paucity of information. Salaries were increased by Rs 10,000 a month this year, this will cost Rs 150 bn a year (0.5% of GDP). Can we afford to pay for more increases? How will we pay for it ?
By MURTAZA JAFFERJEE
The SJB manifesto in English is long (11,795 words), comprehensive and detailed. Like most manifestos it is aspirational, but it is also detailed.
The Good
Ideology shapes the world – the SJB has chosen the social market economy with social justice. In essence, it is a system that seeks to balance the efficiency and innovation of capitalism with the fairness and security of a welfare state. The key features of the system are free market principles (forces of demand and supply determine prices), social welfare (citizens have access to basic needs), regulation, employment policies (job growth but also labour rights) and social justice (reduce inequality by providing fair opportunity for all). This system created the German economic miracle after WWII, we need an economic miracle too.
From this ideology stems many of their policy pronouncements which addresses the pillars of the system – competition authority, pro trade, ease of doing business, strengthening regulation, property rights, etc. The “social” part is through increasing funding for education and health and providing targeted cash transfers and price subsidies.
I am highlighting the following policies:
The Bad
Subsidy Policy and Mechanisms
Subsidy programs should primarily take the form of cash transfers, specifically targeting the needy and vulnerable populations. Support should only be extended to firms in cases of market failure—where private returns are insufficient, but social returns justify the investment.
Price-based subsidies, on the other hand, should be avoided due to their inefficiency in targeting, their tendency to encourage overconsumption, and their distortion of relative prices.
For example, offering a 15% interest rate to senior citizens is an ineffective policy; it distorts price signals, benefits only those with bank deposits while neglecting individuals holding other asset classes or none at all, and it is excessively generous (a 15% nominal interest translates to a real return of around 10% when considering an inflation target
of 5%).
Fuel subsidies are even more problematic, as they lower prices and promote overconsumption, which strains our balance of payments. We must critically assess whether we can afford to subsidize fuel for one million three-wheelers (which account for 33% of petrol consumption) and 25,000 buses (which make up 15% of diesel consumption). Furthermore, providing interest subsidies to convert three-wheelers to electric vehicles is unwarranted, as there is no market failure necessitating this intervention. In contrast, incentivising investment in charging infrastructure is essential due to the existing “chicken-and-egg” dilemma.
After a 20-year delay, we finally implemented the 2002 Welfare Benefits Act in 2023, introducing a unified cash transfer program known as Aswesuma. Eligibility is determined by a deprivation score calculated using 22 indicators across six dimensions. While the program is still a work in progress, our priority should be on enhancing its effectiveness. Given that both chronic illnesses, including kidney disease, and old age are already included as indicators, it raises questions about the necessity of maintaining specific programs targeting these issues.
The Ugly
1. Meddling with credit markets.
2. Comparability of treatment for EPF (claw back of losses).
Unlike ISB holders, there was no principal haircut in the DDO for bonds – it was a parity (face value) exchange of existing bonds for 12 new bonds with step down coupons (approximate yields were around 10%).
The value recovery (VR) feature for ISB holders is structured as a lower haircut on principle and coupons. Comparability does not arise. The travesty that needs to be corrected is that 78% of the high yielding (27%) crisis bonds were exempted from the DDO – this has resulted in an additional interest payment of a staggering Rs 250 bn (additional 17% interest) this year alone on the balance Rs 1.45 tn of these bonds.
3. Tax policy
Our tax free threshold is set at the top 30% of households (not 20% as stated previously by me). They account for around 60% of national income – they should be paying taxes. Incidentally, Vietnam a poorer country has no minimum tax free threshold and the lowest rate is 5%.
Due to high rates of abstinence, regular smokers and drinkers (mainly working class people) are less than 10% and 20% of the population respectively – they pay for 15% of total tax revenues.
4. Public service salary increases
– the size of the service is around 1.2 million people. It is difficult for me to assess the cost of the proposed increases due to paucity of information.
Salaries were increased by Rs 10,000 a month this year, this will cost Rs 150 bn a year (0.5% of GDP). Can we afford to pay for more increases? How will we pay for it ?
(Murtaza Jafferjee is a leading Economist and the Chair of Advocata Institute)