Populism is still dragging down a Manmohan Singh government that wants to restore its reformist image. The tough decisions on cutting the diesel subsidy and allowing more foreign investment in supermarkets and airlines that rocked the UPA may not be enough to pull the economy back from fiscal ruin, says a report commissioned by the finance ministry to avoid the eventuality. Its author, Vijay Kelkar, who has advised several central governments on issues as diverse as fuel price decontrol and a unified goods and services tax, comes up with an alarming diagnosis — doing nothing now could push India into a bigger crisis than it faced in 1991. The medicine he prescribes is equally strong: phase out all fuel subsidies, go easy on the food-for-all scheme, raise prices of rationed food and urea periodically, cut excise duties and step up stake sales in state-owned companies. The official reaction to the report is not overly enthusiastic because some of the recommendations would force the UPA to dilute its welfare commitments.
The near-term scenario Mr Kelkar draws is particularly worrying. A hands-off attitude could see the fiscal deficit bloat to 6.1% of the gross domestic product despite protestations from the administration that it will stay pretty close to the projected 5.1%. Already the government has worked its way through two-thirds of the budget target. The UPA's spending habits have edged out productive investment and are now threatening household budgets. For almost half its second term the UPA has surrendered the gains of growth to rising prices. With prices still outrunning incomes, the effect of falling real incomes among a large section of the voting population must not be lost on an election-bound ruling coalition. It is thus imperative that Mr Kelkar’s views are taken on board. The fiscal consolidation he is suggesting now is less daunting than that proposed in 2010 by the 13th Finance Commission, which Kelkar chaired.
One way out of the fiscal precipice Mr Kelkar has forecast is improved welfare delivery through an infotech backbone. The prime minister hopes to use electronic cash to reach subsidies straight into individual bank accounts, sidestepping the twin traps of doles reaching those who do not need them and not reaching those who do. Although the biometric identification of all Indians is still some way off, Mr Singh has taken it upon himself to supervise, and hasten, the transition to cash transfers. This is welcome, especially because the initiative comes just two years after the unique identification project was set rolling. But till we switch over completely to cash transfers, the UPA would be doing the economy a huge service if it manages to rein in its populism.