UPA destroyed economy. Where will Modi get the money to sort out this financial mess?

The Congress-led United Progressive Alliance (UPA) seems to have more or less realised that the 2014 Lok Sabha elections is a lost cause. Hence, the idea seems to be to make things difficult for the next government, especially on the finance front.

I had written on this issue on 17 February, 2014, the day finance minister P Chidambaram presented the interim budget. Since then, more details have come out, and these details clearly suggest that things are much worse on the finance front than they first seemed.

A recent news report in the Daily News and Analysis points out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax. The newspaper quotes a finance ministry official to point out that a 2% cut in the central sales tax was introduced as part of the process to phase it out and move towards goods and services tax. The state governments were to be compensated for the losses they had incurred because of this. This payment hasn’t been made for the last three years and the amount has now gone up to close to Rs 50,000 crore.This is something that the next government will have to deal with.

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On 28 February, 2014, the government raised the dearness allowance of five million central government employees to 100 percent of their basic salary. This was earlier at 90 percent. This move is expected to cost around Rs 6,390 crore in 2014-15. Interestingly, the government had hiked the dearness allowance from 80 percent to 90 percent of basic only in September 2013, with effect from July 2013.

The government also approved among the terms of reference for the seventh pay commission, the addition of 50 percent dearness allowance with the basic pay. This is expected to push salaries of public sector employees up by 30 percent, that is, if the recommendations of the seventh pay commission are implemented in the time to come. Also, once the dearness allowance of the central government employees is increased, it puts an immense amount of pressure on state governments to increase the salaries of their employees as well.

There are some points from the interim budget that need to be highlighted as well. An amount of Rs 1,15,000 crore has been budgeted against food subsidies for 2014-2015 (the period between April 1, 2014 and March 31, 2015). Out of this, around Rs 88,500 crore has been allocated under the Food Security Act.

The problem with this number is that the food security scheme is expected to cost much more than the amount that has been allocated (you can read a detailed explanation here). Also, with Rs 88,500 crore allocated towards food security scheme, it doesn’t leave enough, for the public distribution system that is already in place.

As the DNA article cited earlier points out “The next government will have to find a lot of resources for the public distribution subsidy as well. Out of the total Rs 115,000 crore for the food subsidy, the government has allocated Rs 88,500 crore to the Food Security Act.”

And if all this wasn’t enough there are expenditures from the current year that haven’t been accounted for and will spill over to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.

In fact, in a last ditch effort, the government tried to push in nine ordinances before the election commission announced the elections dates. But the President Pranab Mukherjee did not agree to it. As economist Arvind Panagariya points out in a recent column in The Times of India, “Perhaps the worst poison pill is UPA’s attempt to push as many as nine ordinances and clear vast numbers of projects on literally the last possible day before Election Commission’s Model Code of Conduct was expected to kick in. Only sage advice from the president held back the government’s hand from pushing the vast majority of these ordinances.”

The Congress led UPA government has left the country in a huge financial mess and the next government will have a tough time dealing with it, from day one. And if they mess it up even slightly, India will end up in an even bigger mess than it currently is.

The opinion polls suggest that Narendra Modi is likely to be the next Prime Minister of India. The great Indian middle class and Indian business have high hopes from Modi and his ability to get the Indian economy back on track. But the question is where will Modi get the money from, for whatever he wants to do, to set the economy back on track? Close to Rs 2,00,000 crore of government expenditure next year, hasn’t been accounted for.

One way out is to cut down on the subsidies. But will Modi be able to do that, given that he is likely to lead a coalition government. Also, during all the years that the BJP has been in opposition it has supported the populist entitlement programmes, which have led to the government expenditure going up big time. So it is really not in a position to reverse that expenditure even if it is voted to power. To cut a long story short, where will Modi get the money from?

As Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, recently told Mint “The power of the finance minister in the new government will be key… as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”

Now that, as the common phrase goes, is easier said than done.

Vivek Kaul is a writer. He tweets @kaul_vivek.