Economics of subsidized rice

A lot of questions are being raised about the feasibility of the DMK proposed "Rs.2 a kg" rice scheme. As I wrote in an earlier post, it works out to about Rs. 540 crores a year. Now, my question is, why can't the government do this? After all, it will add to the deficit when the next budget is tallied.

1. Does anyone care about the fiscal responsibility of state governments? Who is supposed to monitor the deficits and make sure state governments fall in line?

2. Is there an upper limit on the amount of deficit a state government can have?

3. If the budget goes red, can a court dismiss the government? I am guessing that if a legislative solution is available, it won't be enforced since the legislature will be controlled by the ruling party. So, can a court do it? If not, I don't see any accountability at all. Atleast, until the next elections.

4. Are there credit ratings for state governments? I just looked up S&P ratings, there were entries for State of Tasmania, city of Toronto etc, but no entry for State of Tamilnadu. When will the credit rating for Tamilnadu fall off the cliff, at a deficit of 500 crores? 1000 crores? When will the state governement officially be of "junk" status?

5. In addition to (4), does the state government even borrow in the open market? Or, does its borrowings all come from the likes of World Bank/RBI?

6. Can the Central government invoke Article 356 and dismiss a state government, for failing to keep the budget deficit in check?

I don't know the answers to any of these, but it looks like the state government can do what it wants. It can rake up huge deficit, pass it on from year to year, and if the party loses the next elections, hand off the deficit to the successor and go. Scot free.

So, unless I am mistaken, there should not be any problems in implementing the Rs.2 a kg rice scheme. The DMK government can do that, as well as give away free Color TVs and more.

P.S. Former DMK minister Ponmudi has said that he will resign from his MLA post if their government doesn't give the 2 a kg rice within a month of their rule. Wonder if Kalaignar will also announce likewise :)

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