Not much sound in Kelkar Committee: Financial Express 6th October 2012

The Kelkar Committee’s recommendations on fiscal consolidation balance on the edge of either sounding clichéd or making impractical suggestions. The report goes on at length to say that India is in a precarious state and resembles its situation in 1991 when we had a crisis, which can be debated. It offers nothing really new and puts numbers to the fiscal impact of various measures that should be implemented. It talks of a fiscal deficit range of 5.2% to 6.1% depending on whether or not we choose to act.There are basically seven issues that come to mind here. First, the committee talks of reducing the gap between the economic cost and issue price of foodgrains. This is not really practical because both the policies are guided by different motivations. The ministry of agriculture fixes the minimum support price to ensure that the farmers get a better income every year, while the issue price has been pegged ostensibly to protect the vulnerable sections. Increasing the issue price is a logical option which has always been there, but has been desisted from on the grounds of protecting consumers from food inflation, especially when it is running at a double digit level. Therefore, the suggestion is just as logical and impractical as saying that the government should run a close-ended procurement programme.Second, the Committee talks at length about the fuel subsidy being a sore thumb. It does not recognise that while the reason for not raising prices could mainly be political, there has been a substantial inflation buffer provided through this route. Increasing prices are seriously inflationary and not only with a short-term effect, as claimed in the report.Third, it is a bit too pessimistic on disinvestment and concludes that not more than R10,000 crore would be garnered, which again can be contested. The government has already announced a fairly aggressive programme for disinvestment, which will probably take us closer to the targeted amount of R30,000 crore.Fourth, the committee has spoken of how the fuel subsidy bill will be exceeded as the targeted amount of R43,500 crore has already been nearly exhausted. An issue missed is that the budget had assumed a price of $115/barrel for the year, and the price has been lower for most of the year. Clearly, the budget had gotten its numbers wrong.Fifth, the Committee talks of ensuring there is no constraint on using MGNREGA to protect farm workers. It, however, says that the late monsoon had helped. But the first estimate of agricultural production shows shortfalls across the board, meaning that there will be financials stress in this sector which will necessitate more action from the government.Sixth, the report talks of savings in plan expenditure of R20,000 crore which can compensate for the higher outflow on other accounts. This is a surprising statement to make because, ideally, the committee should be pitching for this expenditure to ensure that the Keynesian fiscal action takes place meaningfully. While this could have become a habit based on past experience, we should definitely ensure that the money is not saved but spent as a part of conscious policy. It provides a cover by saying that this should not come in the way of social expenditure but should certainly be a result of cost savings through efficiency. Does this mean that there are these many leakages in the system?Last, the committee talks of how the fiscal deficit has crowded out the private sector. While this is a theoretical outcome, in our context, this has never really been proved in the last two years. RBI has never stated that it has raised rates because the government was borrowing too much. It was an anti-inflation stance that provoked such action. Second, liquidity has never been an issue as banks were never constrained to lend to the private sector because of paucity. RBI has supplemented well with open market operations to ensure that the mismatch was corrected. If the private sector could not get credit, it was because of the reluctance of banks to lend on account of fear of NPAs or due to higher interest rates. Also, core inflation has never gone beyond 5%, meaning that excess demand was missing across sectors to really blame excessive monetisation. Besides, with the investment deposit ratio being above 30% for most of the last 2 years, banks certainly were not constrained here.On the positive side, it has rightly observed that changes in fuel prices should be calibrated and in small measures. This it says is easier to be absorbed by the system rather than large increases. This is quite pragmatic as when inflation (CPI and food) is around 10%, it is imperative that input prices should not be increased substantially at one stroke.The other interesting thought from the report is the use of the ETF concept to sell government stake in PSUs. The idea of pooling the stake and then selling the same especially to retail investors has never been tested to see whether it will work, considering that several of such entities may not be the ones to catch investor attention. Nevertheless, it may be worth persevering with.The committee hence does speak a lot of theoretical sense but does not really add much to the practical side of implementation. Some of the theoretical conclusions like the impact of fiscal deficit are not really pertinent today. Quite clearly, while this report will provoke some discussion as everyone today is against subsidies, it will be surprising if these known solutions which have been reiterated here, will actually find utterance through implementation.