A costly decision – Extension of PMGKAY should have been avoided

Source: The post is based on the article “A costly decision – Extension of PMGKAY should have been avoided” published in the Business Standard on 30^th September 2022.

Syllabus: GS 3: Indian economy.

Relevance: About extending PMGKAY.

News: Recently, the government has extended the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY-Phase VII) for a further period of 3 months i.e. October to December 2022.

What is Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY)?

What are the concerns associated with extending PMGKAY?

Not an emergency situation: The scheme has been extended due to successive waves of the pandemic, which affected economic activity. But now the economy has now opened up completely.

Against finance ministry advice: Against the advice of finance ministry officials, the government extended the scheme due to political considerations.

Additional expenditure: In terms of fiscal impact, the extension will lead to an additional expenditure of Rs 44,762 crore. This is expected to take the food subsidy bill to about Rs 3.38 trillion, as against the Budget estimate of Rs 2.07 trillion.

Difficult to withdraw: The extension of the scheme gives an impression that it would continue even in normal times and was not necessarily an emergency intervention.

Impact money market: Because of measures taken by the Reserve Bank of India to contain inflation, the liquidity conditions have changed significantly. Higher government borrowing at this stage can push up the cost of money.

What should be done instead of extending PMGKAY?

Higher revenues at this stage should have been used to either push up capital expenditure, which would have boosted growth or reduced the fiscal deficit.

A swift fiscal consolidation in the case of better revenue realisation is needed in the medium term.

The global economic outlook has worsened significantly and will affect growth in the Indian economy as well. So India should use every opportunity to move forward in fiscal consolidation. This would help create some policy space to deal with another potential adverse shock.