Modinomics

According to India's Economic Survey released yesterday, India's fiscal situation is worse than it appears. It has underscored the need for taking tough measures to shore up public finances and reduce inflation. The newly-elected Prime Minister Narendra Modi and his Finance Minister Arun Jaitley have indicated the government's intent to repair public sector finances in the budget to be announced today. The need for the repair is critical given that two months into the budget for the current fiscal year expenditure is greater than revenue - close to half that was envisaged for the entire year. This is unlikely to deter Modi from providing subsidised food to the poor estimated at 1.25 billion people. External shocks too are anticipated including a weak monsoon year, which would push many subsistence-level farmers to seek government support as well as rising international oil prices due to the ongoing insurgency in Iraq. Oil prices are already rising, which would raise energy costs (though India has a deal with Qatar to procure LNG at 14 dollars per mmbtu - the price prevalent when India made the deal) that may generate calls for increasing subsidies.
The Indian government is unlikely to be offered a cash gift from any foreign country, (an example unique in itself was Saudi Arabia's 1.5 billion dollars gifted to Pakistan), and analysts argue that given that India has refused the offer of assistance from multilaterals and bilaterals even during natural calamities in the past a gift may be unwelcome. However, given that the state of the Indian economy is much better than that of nuclear Pakistan the country can easily access market loans from multilaterals (unlike Pakistan, India has graduated from being eligible for grant assistance as well as assistance extended at Libor plus rates from multilaterals), bilaterals and the international capital markets. But enhancing borrowing either domestically or from abroad would disable the government from meeting the already impossible to achieve budget deficit target of 4.3 percent.
So what is the way out in conventional market economic theory? Reduce untargeted subsidies with the objective of reducing the government's current expenditure and privatise loss-making units that act as a drain on the budget through requiring periodic large bailout packages that become unaffordable when the budget deficit is reaching dangerous levels. Reports indicate that Modi is favouring the end of untargeted fuel and other subsidies and instead is considering cash injections, which are less wasteful and less likely to be abused on a large-scale. But the new government says it is committed to reforming and privatising India Railways - a major annual drain on the budget.
The Congress (I) government was focused on raising rail fares as a means to generate revenue to reduce dependence on government bailout packages; however, given the large number of Indians who travel by rail this option is unlikely to be supported by the Modi administration as it is bound to lead to widespread protests. It was last month that his government had to withdraw, albeit partially, a steep rise in rail fares after strong protests.
The Indian budget is reported to project 11.7 billion dollars in asset sales of state-owned entities (SOEs) - money that would be used to finance the newly-elected government's social safety net and social sector including health and education programmes, as well as buy some time prior to launching structural reforms. This amount is comparable to the privatisation proceeds of the last four years.
A senior Indian official told the media that "the finance ministry has approached different ministries to increase the divestment target". Modi is not expected to sell controlling shares in SOEs that can best be described as white elephant as that may create a hue and cry over selling the family silver but is expected to chip off government stakes in SOEs that have already been partly sold like the Steel Mills and Indian Oil. Pakistan's privatisation policy could benefit from the Indian example. It is, however, important to note that the Indian government is proceeding with caution keeping in mind the public's sensibilities and likely criticisms while Pakistan's privatisation plan is being viewed as one-off payments that would be used to balance the budget with a major outlay on current expenditure.