

We will soon have a new government. And like all new governments, this one will have to live with the sins of the past – meaning the past government’s deeds which it might not agree with, but the consequences of which it will have to live with.



The next government comes in with economic growth at its lowest in the last decade, under 5 percent a year. Consumer Price Inflation has been consistently above 8 percent. Industrial Production and Manufacturing have been growing very slowly, at even lower growth percentages than the 5 percent GDP growth. We have just seen four years of very high fiscal deficits.

The current account deficit has been controlled largely by banning gold imports, which has seen a sharp rise in the number of people caught trying to smuggle in the yellow metal from abroad. Organized smuggling has become very lucrative, and in the past it was what built the empire of the Mumbai mafia dons such as Haji Mastan. Mastan then tutored Dawood Ibrahim, another mafia don who reportedly funds and organizes terrorist activity in India.

The terrorism of the dons has been a result of bad policies in the past, and partly due to banning legitimate imports of gold. That policy, which was only dismantled in the 90s, gave us a legacy we still have to live with 20 years later.

The next government, too, will inherit the impact of poor policy measures taken by the previous government. Let’s call them the Six Sins – six things the next government will have to fix as a result. Their impact can be quantified in some measure by the financial damage they cause, but each one has a qualitative impact as well – ranging from the potential inflation it will create to its impact on other parts of the economy as collateral damage. Let’s take a deeper look.

1. Oil subsidies have been rolled over yet again this year in the interim budget, just as they have in the previous three years, transferring Rs 35,000 crore to the next financial year. Business Standard reports that the rollover of oil, fertilizer and fuel subsidies is likely to cross Rs 1 lakh crore (Rs 1 trillion).

This is just a continuation of the earlier bad policy of rolling over subsidies to subsequent years. In 2013-14, the government ‘inherited’ Rs 45,000 crore of oil subsidies from the previous year. Food subsidies are fully provided for only after the Food Corporation of India is audited, which will only happen in the subsequent financial year. (Before that, only a part of the subsidy is released, so what’s provided for in a subsequent year is effectively a rollover.)

Subsidies will hurt the economy in the long term. The taxpayers pay for the preferential treatment of a few, and they also have to pay the interest on the money borrowed to pay for that subsidy, or pay for it with higher taxes. Fuel subsidies, for instance, keep diesel cheaper than it should be and strain government finances – the government could be using that money, for instance, to build better roads that would effectively make for more fuel efficiency anyhow. Food subsidies end up fattening some middlemen, but make food more expensive since the government buys so much of the produce and leaves it to rot, while the rest of us pay more for the limited amount that’s left.

Who will bell this cat? The next government will have to choose between taking the hit, or just like the past governments, kick the can down one more year.

2. The new government will also inherit expenses and collateral damage. Natural gas pricing agreements with natural gas producers, including Reliance Industries, is supposed to be renewed at double the price – $8.4 per million metric British thermal units (mmBtu) instead of the earlier price of $4.2 per mmBtu. While the Election Commission has put this price doubling on hold for now, the Ministry of Petroleum and Natural Gas has ordered that once the period for the model code of conduct is past, this price hike will be made valid retrospective from April 1, 2014. This has caused outrage, even though we pay foreign companies prices higher than $8.4 per mmBTU for imported gas. The new gas pricing agreement should have only been for the interim and should expire when the new government comes in. Since this is not so, the gas prices will now remain at $8.4, making it difficult and distasteful for the next Ministry of Petroleum and Gas to renegotiate the terms.

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