Populist desk-clearing

For the second day in a row, the finance minister has announced a number of measures that clearly reflect his desire to contribute to the ruling coalition's electoral prospects.

Unlike Thursday's announcements, which consisted of mainly tariff and excise measures, the Friday list was far more varied in its coverage and scope.

Also, unlike the previous list, which was generally driven by economic rationality even if its timing and method were questionable, this one contains some measures whose economic merit itself is in doubt.

The most obvious example is the announcement of the senior citizen bonds, which would pay a higher than market rate of interest (although the premium is not specified).

There is no question that many senior citizens who had planned their savings based on the now obsolete high interest rate regime have been badly hurt by recent developments.

But, at a time when the thrust of financial sector reforms has been to close down artificial arbitrage opportunities represented by administered rates or assured returns, this measure clearly goes against the grain.

There are more efficient and less arbitrage-friendly ways of providing financial support to senior citizens; the only argument against them is that the institutional framework is inadequate. Introducing one inefficiency to deal with another is hardly in the spirit of reforms.

Likewise, as important and laudable as the emphasis on rural infrastructure is, providing an interest rate subsidy to targeted lending schemes raises concerns about diversions, non-performing assets and all the other consequences of the regime the economy is still trying to recover from.

But, amongst this list there are also some eminently sensible decisions. For example, while one may question the merits of the current food procurement and distribution mechanism, there is no question that as long as it is there, any opportunity to make it more efficient should not be passed up.

Why the Food Corporation of India was borrowing money from banks at roughly twice the rates that the government itself is able to borrow has been a mystery.

By financing food procurement from market borrowings, the ministry has at one stroke reduced the costs of the system and increased the pressure on banks to look for other lending opportunities. One can only hope that this is a sign of further changes to come in the system, to try and achieve the objective of food security at the minimum possible cost.

On the foreign exchange front, the freedom to buy up to $ 25,000, no questions asked, is a welcome move towards capital account convertibility. Along with the tariff changes of the previous day, this should increase private domestic demand for foreign exchange and ease the pressure on the rupee to appreciate in response to current levels of inflow.

Overall, the two days' policy announcements have two distinct dimensions to them. A lot of economically justifiable things, which have probably been sitting on the minister's desk for a while, have been done.

But, their timing as well as the new distortions inherent in some of them add an unfortunate political colouring that should and could have been avoided.