US-India Global Review

69 US-INDIA GLOBAL REVIEW JANUARY-MARCH 2018 defined as nonrecovered costs of services and goods, at 13.4 per- cent of GDP, of which barely half are for merit goods and half are for nonmerit goods. Subsidies for public health edu- cation and basic services are surely warranted. But many other subsidies are nonmerit goods, and they include free or highly subsi- dized electricity and water, fertiliz- ers and petroleum products, high- er education, food and other ben- efits for well-off people, and a bewildering variety of freebies given by various state govern- ments. The latest election manifesto of the All India Anna Dravida Munnetra Kazhagam, which rules the state of Tamil Nadu, includes the following freebies: cell phones for ration card holders, laptops with Internet connections for 10th- and 12th-grade students, materni- ty assistance of Rs 18,000 ($269), increased maternity leave (from six to nine months), 100 free elec- tricity units every two months, waiver of all farm loans (at a cost of Rs 400 billion or $5.9 billion), increased fisher folk assistance to Rs 5,000 ($75), a 50 percent sub- sidy for women to buy mopeds or scooters, an eight-gram gold coin for women getting married, and a free woman’s kit, including sani- tary napkins. Note that the state government already provides 20 kilos of free rice per family; a free mixer, grinder, and fan per family; subsidized kitchens; and subsi- dized goats or cows for rural fami- lies.45 The most important government programs, like subsidized food and a rural employment guarantee scheme, are plagued by waste, corruption, ghost rolls, and a huge leakage of benefits. The govern- ment itself estimates that it takes three rupees (Rs) to get one rupee to the poor. The list of sub- sidies and freebies excludes tax breaks of all sorts, many of which make no sense, estimated at Rs 623 billion (US$9.3 billion) in the 2016 budget. Losses of state elec- tricity boards have soared to Rs 3 billion (US$44.8 million). A scheme for cleaning up electricity losses has been launched but is likely to fail, as did an earlier res- cue in 2002. The fertilizer subsidy alone has sometimes been 1.5 percent of GDP, more than all public health spending combined.46 Subsidized fertilizer is being smuggled out to Bangladesh, a poorer country that has no such subsidy. Recent stud- ies show that subsidized farm credit is being diverted by farmers to nonfarm uses, and some farm- ers simply borrow cheap and on- lend at higher rates.47 Political parties know subsidies are excessive and irrational but claim they have to continue them to survive in elections. Competition for freebies is a politi- cal race to the fiscal bottom. And it has no easy fixes in a democra- cy. Consequently, the limited resources of a still-poor country are constantly being wasted on a massive scale instead of being used to build the economy, social infrastructure, and effective safety nets. The infrastructure is a mess. Poor infrastructure is India’s Achilles’ heel. Any time economic growth takes off, it runs into an infrastructure constraint. From 2004 to 2014, the government aimed to overcome the problem through a massive expansion of public-private partnerships and boasted that India had more such partnerships than any other coun- try. Alas, many of them are now bust, and many others have been abandoned. The 12th five-year plan (2012- 17) envisaged $1 trillion of invest- ment in infrastructure, of which half was to come from the private sector. That goal now sounds like a pathetic joke. The gargantuan losses of many infrastructure com- panies now threaten to sink the banks that lent to them. About 10- 20 percent of the loans of public- sector banks have been restruc- tured or are under some form of stress. With the slowdown of economic growth after 2008, many infra- structure projects suffered from excess capacity. Delays in land acquisition and environmental clearance plunged others into the red. No less than 30,000 megawatts of power capacity was stranded for want of coal and nat- ural gas. State electricity boards have given massive subsidies to farmers and other users and have simply not paid power distribution companies, which have racked up Rs 3 trillion ($44.8 billion) in loss- es. In India, delays in clearances and land acquisition make early stages of infrastructure very risky. Yet such projects have historically had a high debt-to-equity ratio, so any delay is financially fatal. The Modi administration has given the government a major role in financ- ing fresh equity in infrastructure, with the private sector mainly exe- cuting government contracts. Clearances and land acquisition have picked up. Bank loans to state electricity boards have large- ly been replaced by state bonds, relieving bank stress. Arvind Panagariya, head of Niti Aayog, details the plan to elimi- nate rail capacity and speed issues: Of stuck projects worth Rs 3.8 trillion, this government has already unblocked Rs 3.5 trillion