A K Bhattacharya: Facing the fiscal rites of passage

The govt might have zeroed in on a strategy to deal with politically difficult reforms but it will face a big question on its fiscal policy in the next two months

The Narendra Modi government seems to have put in place a new strategy to deal with politically difficult reforms. In the beginning, it appeared that the government was hesitant to bite the bullet. But a couple of moves in the last few weeks indicate a clear strategy to deal with politically difficult reforms.

It all began with the ordinance to facilitate the auction of all the coal mines whose allocation had been declared illegal and, therefore, cancelled by the Supreme Court. Even as industry and political parties were busy discussing the merits and demerits of the auction norms, a much more significant provision in the ordinance was ignored.

This pertained to the opening up of commercial coal mining to the private sector. Mind you, this was not denationalising Coal India Ltd, suggestions of which were made soon after the Cabinet decision on the ordinance and which the ministers in the Modi government stoutly and correctly denied. But what they did not disclose was that the ordinance also allowed the private sector to mine coal for commercial sale.

Private-sector mining of coal for captive use had been allowed many years ago. Now, this was an even bigger step. True, it raised many questions about the need for an effective and independent coal regulator to monitor private-sector mining, but there is little doubt that a politically difficult reform was given a legal sanction. As and when the coal ordinance is passed by Parliament, the country should heave a sigh of relief that yet another difficult reform is in place. Hopefully, this would be followed up with the relatively easier step of creating an independent regulator.

Last week, the Union Cabinet approved a new financial package under the voluntary retirement scheme for the remaining 270-odd employees of the state-owned Kolkata-headquartered Central Inland Water Transport Corporation or CIWTC. Now, even as most employees welcomed the improved financial package for the golden handshake, the larger implication of the Cabinet decision was lost. Or was that deliberately played down by the government while making public the Cabinet decision?

The more significant import of the financial package for the CIWTC employees was that it would make the prospects of selling the company brighter. Consider this: the loss-making company has around 19 hectares of land and 58 vessels that can operate on the long riverine network that can connect the north-eastern region with states such as West Bengal, Odisha and even Bihar. An enterprising company from the private sector will see value in its land, vessels and the business opportunity. Yet, the company has remained a burden on central finances for years. A plan to sell the company had been prepared in 2003, but remains unimplemented till now.

That dormant proposal for a strategic sale of CIWTC's 100 per cent stake seems to have been revived now. But it has been packaged as a move to make the voluntary retirement scheme more attractive so that the company's sale to investors can be expedited. This may have arisen from Prime Minister Narendra Modi's general aversion to be seen as heading a government that privatises public sector units. But his reported belief so far has been that he is open to selling loss-making units, if these companies cannot put together a revival plan on their own within a given time frame. It seems CIWTC is the first such case and similar action for other such loss-making unviable public sector units may follow soon. But the packaging of such decisions shows the government's pragmatism in not overtly rattling deeply entrenched political interests.

The big question that the Modi government will face in the next two months will be on its fiscal policy. Apart from the imperatives of reviving investment and growth without diluting its commitment to fiscal consolidation, the government will be put to severe test by the recommendations of the 14th Finance Commission, whose recommendations are with the finance ministry and will have to be implemented with effect from the Budget for 2015-16. The Commission's recommendations are believed to have recommended a package that will greatly benefit the states and eliminate the Centre's discretion in all centrally sponsored schemes. Fresh recommendations on an equitable sharing of subsidies between the Union and state governments will also pose political as well as fiscal challenges to mandarins in the finance ministry. How the Modi government faces up to these challenges will be known on February 28, 2015.