Scorched economy: poisoning the well

Will the current government choose responsibly, or leave the well poisoned for the rest of us? 

In 1462, Price Vlad III (the original ‘Dracula’) retreated through Turkish-controlled Bulgaria across the Danube river fighting the Ottoman Turks, and in the process, poisoned all sources of water to delay his enemies. This is a scorched earth policy, of ensuring your enemies can’t use a piece of land you have had to evacuate.

scorched earth

In the corporate world, a poison pill might be used by management to ward off potential takeover by adversaries, very common in the United States of America. Facebook, for instance has only about 30 percent of shares owned by Mark Zuckerberg, but by virtue of an “irrevocable proxy” he can vote on behalf of other specific investors who, with him, control 56 percent of the company. Effectively, a person trying a hostile takeover will not be able to control the company even if he buys all the non-Zuckerberg shares.

The idea of poison pill or the poisoning of the well is the same: if I’m not going to be allowed to enjoy this resource, then I’ll make sure you don’t either.  In our political and economic spheres, we’re seeing a change of guard with elections coming up. It’s apparent to many that the next government will not be led by the Congress. And the Congress is going to make their life difficult.

The UPA government has increased the number of subsidised gas cylinders per household to 12 per year, from 9. This is even after calculated metrics that indicate that the 9 number was already too high (the average usage is 6). However, the bigger issue is that they dismantled the system of paying the subsidy direct to consumers in the form of cash through their bank accounts using the Aadhaar system. The direct cash payment ensures tracking of the subsidy down to the micro-level, and therefore reduces leakages. The next government will have a hard time reversing a decision that is actually undoing a good thing, or will have to pay the extra subsidy cost of Rs. 5,000 cr.

The current government has also instituted a pay panel to recommend salary increases to government employees. The cost of this increase will be borne entirely by future governments, and they’ll find it difficult to dismantle a commission already set up.

The Reserve Bank of India (RBI) has a financial year running from July to June, and pays dividends to the government in August. In 2013, it paid over Rs. 30,000 crore to the government. Now the finance ministry wants it to pay an ‘interim’ dividend, to meet fiscal targets for this year. But that means a lower number goes as dividend in August 2014, which hurts the fiscal target for the next year. Who cares, thinks the politician, when I won’t be in power next year?

Coming next week is a “vote on account” – a mini-budget of sorts, usually done in an election year since the major budget should be decided by the winning party. However, there is no law that the government cannot create new subsidies or ‘initiatives’ that must be paid for by future cash flows, which are the realm of a different government.

In the run up to the previous elections, farmer debt of more than 40,000 crores was waived. This wasn’t as much a poison pill then as the economy wasn’t doing too badly. Today, such a measure would be a disaster, as foreign investors wait to see if India’s credit rating gets further downgraded.

It is no longer a question if the Indian voter can be bribed. He has been bribed for ages, and is not just used to it but will demand it as an ante – the minimum you require to even get his ear. The Delhi state government is run by a party that had asked for mass defaults on electricity bills because they were supposedly too high; after coming to power and demanding an audit, they decided to pay for half those defaulted bills with taxpayer money instead. If your government can pay for your sins, then all we have to do is to sin, because there is no downside.

But the downside, to the country as a whole, is that the economy will go into the drain. Foreign investors, who’ve embraced India as an emerging economy, will find it more attractive to fund irresponsible countries in the west instead as they recover. A slide in the rupee will hurt importers – and cause inflation – as they have to now earn more rupees to pay for what they import; and India is a net importing country by a very large margin. This downside isn’t instant, it is like a train wreck in slow motion, so there is no immediate negative impact. The politician will think: I’ll get the goodwill, and the bad stuff is for the other guy to deal with.

Will the government choose responsibly, or leave the well poisoned for the rest of us? While we continue to hope that the threat of a rating downgrade will keep them in check, it is indeed strange that we must depend on the opinion of foreigners to see the malaise in extreme subsidies or fiscal imprudence.   

Photo: USFWS Mountain Prairie