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Congress, BJP poll sops could hurt economy

At a time when the government’s finances are under strain because of an economic downturn and sluggish revenues, the poll sops from the two leading parties — which range from cheap food to subsidised farm and study loans — pose serious fiscal risks. Chetan Chauhan examines...Sop Opera| See Election Special

india Updated: Apr 07, 2009 08:25 IST
Chetan Chauhan

A tough job in balancing the budget awaits the next finance minister if either the Congress or the BJP comes to power. In their attempt to lure voters, both parties have made very expensive poll promises. Sop Opera

At a time when the government’s finances are under strain because of an economic downturn and sluggish revenues, the poll sops from the two leading parties — which range from cheap food to subsidised farm and study loans — pose serious fiscal risks.

A back-of-the envelope calculation shows that three of the most popular sops on Congress manifesto, if implemented, would cost at least Rs 23,000 crore annually. In the case of Bharatiya Janata Party (BJP), the additional fiscal cost on account of poll sops could be as high as Rs 58,000 crore a year.

The poll sops alone could push up the fiscal deficit by 1 to 2 percentage points of GDP from an alarming 6 per cent in 2008-09. That, in turn, has implications for financial stability and the growth of the broader economy.

“Unviable competitive populism creates expectations, which are not good for responsible democratic growth,” said Rajiv Kumar, executive director of ICRIER, a New Delhi-based think tank. “Its impact on the budget will depend on GDP growth, which is slowing, and tax revenue for the government.”

The BJP’s promise to raise the personal income tax exemption limit to Rs 3 lakh would alone cost Rs 25,000 crore annually in revenue foregone, said a senior income tax official, who didn’t want to be named.

While many experts debate feasibility of the tax relief promised by BJP, what is becoming imminent is that a big spike in spending would come from higher food subsidy, irrespective of who comes to power after this election.

The Congress has promised to provide 25 kilos of either rice or wheat every month to all families living below poverty line (BPL) at Rs 3 a kilo. BJP has gone a step further and said it would give 35 kilos of the same to each BPL family at Rs 2 a kilo.

“To meet such an expense, the Central government may have to prune expenditure on other welfare schemes or allow the fiscal deficit to rise further,” Planning Commissioner member Abhijit Sen said.

Currently, there are 8.1 crore BPL families, but only 6.5 crore are covered by the public distribution system, costing the government Rs 43,000 crore in food subsidy through last fiscal year. The subsidy is the difference between the economic cost of procuring grain – which is now about Rs 17 a kilo for Rice and Rs 15 a kilo for wheat – and the price at which the central government provides them for the PDS.

Of the families already covered by the PDS, about 2.4 crore families are covered by Antodaya Anna Yojana – meaning they get to buy 35 kilos of rice and wheat every month at Rs 3 and Rs 2 a kilo respectively. For the remaining 4.1 crore families, the central government provides 25 kilos of either rice or wheat at Rs 5.65 per kg and Rs 4.15 per kg respectively.