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Economic Highlights
Acute Housing Shortage:MORE INVESTMENTS NEEDED, by Vinod Mehta, 13 December 2007 |
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ECONOMIC HIGHLIGHTS
New Delhi, 13 December 2007
Acute Housing Shortage
MORE INVESTMENTS
NEEDED
By Vinod Mehta
Former Research Director
ICSSR
In spite of the fact that interest rates on housing loans
have been almost halved in the past five years and the urban middle class has
now more access to bank finance for housing, the housing problem remains as
acute as ever. In fact, in the past more
than five decades the gap between the demand for housing and the supply for
housing has been steadily widening.
The Seventh and the Eighth Five Year Plans had laid some
emphasis on meeting the housing needs of the people. However, the subsequent
plans have not laid any emphasis on housing.
It is estimated that more than 500 million people in the
developing countries have no proper housing and India is one among them. The developed
countries invest about 5 per cent of the Gross Domestic Produce (GDP) in
housing compared to a negligible amount in India.
Currently less than four dwelling units per 1000 population
per annum get constructed in the country. As against this, the UN
recommendation is 8 to 10 dwelling units per 1000 per annum in the next 20 to
30 years to arrest the deterioration of the housing situation. No wonder then the shortfall in housing is
increasing day by day.
Think. Over 350 million people in India still need homes. The
reported slum population in 607 towns and cities in the country is over 40
million, living in sub-standard living conditions. Worse, there number is all
the time increasingly putting pressure on public amenities like water supply,
sewage, public transport, power supply, education, health care etc. In the rural areas the problem is somewhat
different.
The shortfall in housing is estimated to be more than 41
million units. The problem is more acute in the rural areas than in the urban
areas. Besides, the reduction in institutional (bank) interest rates on housing
loans is mainly beneficial to the urban people.
This is only the number of houses which are in short
supply. But there are houses which are
dilapidated, kutcha houses, houses
without amenities or little amenities like drinking water and sewage. In some
of the metropolitan cities there are housing complexes especially in the industrial
areas where there is only one toilet and one bathroom per one 100 people.
Thus, if were to take the quality aspect of housing into
account then the shortage of housing would assume gigantic proportions.
According to the 1991 census only 41.6 per cent of the population lived in pucca houses, while 30.9 per cent lived
in semi-pucca houses and 27.4 per
cent in kutcha houses.
Again, according to the 1991 census, 62.72 per cent of the
total households had safe drinking water; of this 81.59 per cent of the urban
population had access to safe
drinking water while in the rural areas only 55.92 per cent of the population
had access to safe drinking water.
As for toilet facilities, the less
said the better. Only 23.55 per cent of the households had toilet facilities.
In this respect also the urban households scored over the rural
households. In the urban areas 63.8 per
cent of the households had toilet facility while in the rural areas only 8.84
per cent of the households had any access
to the toilet facility.
Again, according to the 1991 census only 42.98 per cent of
the households had electricity. The figure for availability of electricity for
the urban sector was 75.93 per cent and for the rural sector 31.10 per cent.
Certain things are very clear from the data quoted
above. Firstly, the problem of housing
is quite acute, but it is relatively more acute in the rural areas than in the urban
areas. Secondly, the basic amenities
like safe drinking water, toilet and electricity which generally go with
housing are concentrated mainly in the urban areas only.
The rural housing
still has to go a long way in getting such amenities. Thirdly, a very large proportion of the houses are kutcha houses which are unable to
withstand natural calamities like floods, earthquakes etc.
It is reported that Rs.1,000 billion are needed to provide
shelter to all. It works out to roughly ten per cent of the Gross Domestic
Product (GDP). This is no doubt a huge amount in absolute terms but if people
could be helped to raise funds for building houses the housing problem could be
surmounted between the next one-and-a- half decade.
For starters, the people would have to be helped with
generous funding for building purposes as family savings might not be enough for
the construction of a house. True, the Life Insurance Corporation (LIC) and
other housing finance companies are extending a helping hand to those who wish
to construct their houses, but the funds supplied by them fall short of the
total financing requirements of the people. For the simple reason that most of
these funds are locked up in Government securities. Besides, the LIC house building advances
hover around 3 to 4 per cent of its investible funds.
This effort on the part of the LIC, however, needs to be
supplemented by making housing finance available through other financing
organizations. One such source could be the specific mutual funds schemes to
finance construction of houses by the household sector (as distinct from the
construction for commercial purposes).at is imperative, however, is to make large amounts of
funds available both in the rural and the urban areas at reasonable rates of
interest. More and more organizations like the LIC, the General Insurance Corporation
etc. must be allowed to lend funds for the construction of houses instead of
investing them in low interest-bearing Government securities. In the rural
areas, the panchayats could play an
important role in canalizing funds for construction purposes.
Apart from this, the Government would have to take other
supplementary measures to encourage the construction of housing. In the urban
areas it must regulate the real estate market for housing for residential
purposes. Because of lax regulation, the prices of real estate are rising at a
very fast pace thus making it difficult for an average household to construct a
house.
Again, the prices of building raw materials are skyrocketing
because of the mis-match between the demand and the supply of building raw
materials. The Government must develop an appropriate policy to increase the
supply of the building materials.
Thirdly, the housing construction technology being used in
the country is still a very old one. There is thus a greater need to update the
housing construction technology so as to not only accelerate the construction
of houses but also save on the construction costs.
In most countries large blocks of flats are built by using
the pre-fabricated technology. The
country can, however, develop its own technology which makes use of the locally
available building materials at least in the rural areas.
The cost of construction can be considerably reduced if the
use of black money is eliminated from the construction activity. But this would first require eliminating the
black market transactions in the real estate and house building business.
It is true that the interest paid on the house building
advance up to a certain level is deductible from the current income, but that
is not sufficient. We should learn from the American experience which has
provided great impetus to the house building activity there.
Importantly, buying a house in the US is one of
the best tax-free investments available.
Any gain on the sale of a house is excluded from the taxable income if one
has lived in that house for two out of the past five years. The exclusion can be used as many times as
one wants in one's life time, the only restriction being that the exclusion can only be used once every two
years. Can we have this policy in India? ---- INFA
(Copyright India News & Feature Alliance)
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Reduce Reliance On Fossil Fuels:NEW ENERGY POLICY NEEDED,by Dr. Vinod Mehta,5 December 2007 |
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ECONOMIC HIGHLIGHTS
New Delhi, 5 December 2007
Reduce Reliance On Fossil
Fuels
NEW ENERGY POLICY NEEDED
By Dr. Vinod Mehta
(Former Research Director, ICSSR)
A year-and-half ago, the Finance
Minister had said that the huge surge in the global price of crude was a matter
of concern. Since then the price of
crude has been rising steadily and is currently hovering around US $100 a
barrel. And, even as the rupee is getting stronger vis-à-vis the US dollar, meaning
that we pay less for the crude in terms of dollars, the import of oil continues
to cause concern.
It is common knowledge that India
does not produce enough of crude to meet its requirements and that 70 per cent our
oil requirements are met by imports. A
large part of our export earnings go to meet our import requirements of crude
and natural gas. This means that we have
less foreign exchange for import of other products and services. In addition,
it needs to be constantly monitored. Thus, our major effort should be to reduce
this dependence on imported crude for strategic reasons.
This can be tackled at various
fronts. At the first level, we need to increase the domestic output of crude
oil by improving the recoveries from existing oil fields and by exploring new
oil wells. At the second level, we need to reduce the consumption of fossil
fuel in a planned manner.
For the past few years, the Ministry
of Petroleum has been actively pursuing a strategy not only to increase the recovery
of oil from the Bombay High wells but allowing the Oil and Natural Gas Corp
(ONGC) to enter into deals with foreign
companies for oil exploration outside India on production-sharing basis.
The first such venture was 20 per
cent participation in a Russian oil firm Roseneft. The ONGC has invested about Rs 8,000 crore here
along with oil companies from the US and Japan and is expected to get about 2
to 4 million metric tonnes of oil and 5 to 8 millions metric tonnes of
gas.
In fact, the ONGC is giving out places
for oil exploration. The private sector company, Reliance, too is exploring oil
in the country and has met with some success. This strategy is likely to go a
long way in enhancing the oil security for the country.
At the same time, the Government
has not yet completely written off the Iran-Pakistan-India gas pipeline deal
and other gas sources in Central Asia and Myanmar
(Burma)
too are being tapped. But all this will
take time.
The previous NDA Government had
taken up the development of ethanol, which could be blended with petrol and
diesel to reduce the consumption of imported oil. Brazil is way ahead in the research
in ethanol. Three projects on Gasohol (blend of petrol and ethanol) have been
launched in Maharashtra and in Uttar Pradesh.
Ethanol which is extracted from
sugarcane bagasse can be successfully blended with petrol. It is estimated that a 5
per cent addition of ethanol would help save petrol to the tune of 3.3 lakh
tonnes per annum. If we could succeed in
blending 10 per cent ethanol the savings in the use of petrol would be much
more.
Interestingly, the researches
that have been done in Brazil
show that the blend of petrol and ethanol was good for the environment. However, it will take a few years before a
reliable blend of petrol and ethanol and diesel and ethanol is devised for
commercial use.
Moreover, the Central Government
is also conscious of the bad effect of fossil fuel on our environment. To fight the menace of pollution in
metropolitan cities, unleaded petrol has been introduced. Apart from this,
extra low-grade sulphur and low sulphur diesel have also been introduced in
major cities.
At the same time, effective steps
are being taken to check the adulteration of diesel which is playing havoc not
only on the environment but also reducing the effective life of diesel
engines. To top it all, the vehicle
manufacturers have been asked to switch over to the production of vehicles
which conform to Euro III emission norms.
There is no gainsaying, that all
this is going to have a salutary effect on our environment. Most of the pollution-related diseases like
asthma etc., which have increased in the past few years, will go down
substantially.
It must be understood that India
does not have large reserves of crude oil and that it would always be dependant
upon imports to meet its requirements of petroleum products. It must also be understood that whatever
refinements are introduced in fossil fuels like petrol and diesel, they would
continue to spread pollution and harm the environment.
Therefore, one has to think of an
energy policy that takes into account these two facts. It then leads us to think that India
should reduce its dependence on fossil fuel and switch over to the use of other
sources of energy.
Why we have not been able to
think in these terms is because of the fact that the country has no integrated
approach to energy requirements. We have separate Ministries and departments which
deal with different kinds of sources of energy like coal, renewable sources of
energy, nuclear energy and so on.
The users of these various
sources of energy are also treated as separate identities with very little
coordination among them. It is for this reason that instead of a coordinated
energy policy we have separate policies for each of these sub-sectors which are
contradictory at any point of time.
It is here that the Government
needs to bring a strong coordination among the Ministries which are dealing
with various kinds of fuels and the Ministries which oversee sectors which use
those fuels.
If we look at it in an impartial
manner, we should, in the next 10 to 20 years reduce our consumption of
petroleum products and gas and switch over to use of other sources of
energy.
For instance India has large deposits of coal
and water resources which are used for generation of electricity. If we switch our public transport system from
the use of fossil fuel to the use of
electricity then in one stroke we would not only be reducing our consumption of
petroleum products but also contributing to a cleaner environment and saving
our import bill. The Metro rail in Delhi
is the finest example of a clean fuel transport system leading to saving in the
use of fossil fuel.
But, the Metro rail system may
not be cost-effective in middle-level and small towns and cities. The answer
could lie in a mono-rail, tram and trolley buses. Many developed countries use
tram cars and trolley buses, which run on electric power for their urban
transport system.
This is the mode of transport
which should be encouraged in small and middle-sized towns and to the extent
possible in the large metropolitan areas, especially in the new districts which
come up in these mega cities.
However, to take a decision to
run trams and trolley buses would require coordination among many Ministries.
Clearly, it is high time the Government moves fast to develop a coordinated
strategy to reduce the consumption of fossil fuels. ---- INFA
(Copyright India News
& Feature Alliance)
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Creating More Jobs:URGENT NEED FOR STRATEGY, by Dr. Vinod Mehta,29 November 2007 |
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ECONOMIC
HIGHLIGHTS
New Delhi, 29 November 2007
Creating More Jobs
URGENT NEED FOR
STRATEGY
By Dr. Vinod Mehta
(Former Research
Director ICSSR
The UPA Government after assuming power four years ago had
promised to create more jobs under the Common Minimum Programme (CMP). It is a
year and a half to go for the general elections but the UPA Government has yet
to redeem this promise.
Specially against the backdrop that the jobs and the job
opportunities have not grown in the past four years other than in ICT and to
some extent in the manufacturing sector. There has also not been much job
creation in the rural sector.
Generally speaking, the increase in the level of investment
generates more jobs in the country, but it does not guarantee generation of
more jobs on its own. Moreover, in a
vast country like India,
job opportunities need to be created evenly all over especially in the rural
areas with a view to check undesirable migration to cities.
The time, however, is ripe to devise strategies, both at the
local level as well as the national level, which lead to creation of more jobs
without resulting in mass migration of population from the village/towns to
large cities. The manufacturing sector is growing and the rate of growth is
around 11 per cent. Many economists are of the view that we can sustain this
growth rate in the coming years.
It is common knowledge that 74 per cent of the population
lives in rural areas and 26 per cent in the urban areas. In urban areas the
problem of unemployment is not acute but it is serious mainly in rural
areas.
The sheer size of the urban population in metropolitan
cities like Delhi,
Mumbai, Kolkata and Chennai provide many job opportunities, especially in the
unorganized sector. There is so much demand for various kinds of labour and
services that anyone looking for a job can find some work even if it may not be
to one’s liking. The labour that migrates to these areas is bound to find some
work. It is a different matter that the unregulated migrations leads to many
problems in the urban areas like the emergence of slums, increase in the crime
rate etc.
Therefore, the real challenge of generating employment is in
smaller towns and villages where the size of the population is so small that
there are hardly any opportunities for generating remunerative employment.
Setting up of factories or small businesses does not make any economic sense.
Since there are no factories or workshops in these areas the
demand for labour is almost nil. Again, the total population of the area is so
small that it does also not make any economic sense to provide services or
generate some kind of a work in these areas.
According to the census figures out of a total number of
5,88,781 villages, 2,90,093 villages i.e. about 50 per cent have a population
less than 1,000. The number of
villages having a population between 1,000-2,000 is 1,14,395; the number of
villages with a population between 2,000-5,000 is 62,915; for villages with a population
between 5,000-10,000, the number is 10,597 and the number of villages with over
10,000 population is 2,779. It means that for 70 per cent of the villages the
size of the population is less than
2,000.
What impact can it have on employment generation? For one, you cannot make massive investments
as it would not be able to reap any economies of scale. It will not be able to
supply the required skilled or semi-skilled labour. The demand for services
from the villagers will not be enough to provide job opportunities. This means
that the demand factor will also not work. Thus, there will be almost nil
opportunities for the young people of these villages to find jobs even in the unorganized
sector. This problem is acute in the North East.
In other countries of the world the rural population is
small while the urban population is very large; less than 25 per cent of the
population is in rural areas. A large number of jobs are being created in these
countries in the service sector followed by the manufacturing sector. (Even
though some of the services are being outsourced by these countries, it has
also been noticed that some of the affected employees are also migrating to the
developing countries.)
Therefore, the employment opportunities are relatively more
in these countries than in a country like India where the population is
overwhelmingly rural. It is a sheer challenge how to generate employment in
areas where the population is less than 2000.
Clearly, the Government will have to have some kind of a
strategy to generate employment in these villages in the coming years. One of
the ways to overcome this situation would be to club these villages into viable
economic zones on the basis of some economic criteria before making investment
in these areas. Most of the activities may be centred around food processing of
various agricultural products including milk and milk products and smaller
workshops, production units etc.
For instance, the Government can help these villages to
start food processing and marketing cooperatives, small repair and maintenance
workshops to attend to repair of mechanical equipments, set up cold storages
etc., which in turn will raise employment opportunities for the local people
both in the organized as well as the unorganized sector.
The second equally important point is to link all these
villages with towns and metropolitan cities with all-weather good quality
roads. This will help the rural people from these villages to take their
products to nearby towns and metropolitan cities where there is a market for
them.
Good roads can facilitate the to and fro movement of labour
on a daily basis to nearby towns where they are bound to find some work. Once these villages are linked by good roads
many of the companies in the private sector may find it economical to procure
their raw materials or outsource their work from these places. They may even
come forward to set up small units.
Besides, large scale investment does not mean that one puts
big money and sets up bigger projects. Large scale investment also means that
one spreads out investment all over and help people to engage in meaningful
economic activity.
The food-for-work programme is not just enough. What is
needed is gainful employment on a sustained basis. This requires the Government
to ensure easy movement of agricultural and other products from one place to
another and easy to-and-fro movement of labour from the village to nearby
towns.
In the long run, however, the emphasis will have to shift
from the creation of jobs in the agricultural sector to creation of jobs in the
service and the manufacturing sectors. The experience of developed countries
shows that more jobs are created in the non-agricultural sector.
It has been noticed by the Indian economists that the country’s
service sector is expanding very fast. This defies the experience of other
developed countries. Be that as it may, the creation of jobs in the rural
sector can at best be a medium term solution to the unemployment problem; the
emphasis will have to be on the creation of jobs in the manufacturing sector in
the long run. ---- INFA
(Copyright India News & Feature Alliance)
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Rethinking Agriculture:STATES NEED COMMON FOCUS, by Dr. Vinod Mehta,21 November 2007 |
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Economic Highlights
New Delhi, 21 November 2007
Rethinking
Agriculture
STATES NEED COMMON
FOCUS
By Dr. Vinod Mehta
(Former Director,
Research, ICSSR)
The development of the agricultural sector has become
critical for sustaining an overall growth rate of about 9 per cent. While discussing the Draft Eleventh Plan the Prime Minister
underlined the need for a central focus on agriculture given the importance of
rural population and the need for food security in the coming decades.
There is an urgent need to reinvigorate a sector on which
two-thirds of the billion-plus population depends, but which is growing at less
than one third of the pace of the overall economy. Assuming a 7-8 per cent GDP
growth rate, by 2020 we would require 340 million tonnes of food-grains.
According to the World Bank, India's agricultural growth rate in
the past decade (1995/96-2004/05) slowed down to less than 2 per cent per year,
compared to about 3.5 per cent per annum in the preceding decade. It further notes that in the poorest states,
such as Madhya Pradesh, Orissa, and Rajasthan, growth in the last decade was
below one per cent per year.
It has also been observed that the yields of major crops
(food grains, oilseeds, other cash crops) in India are lower than in many other
countries. For example, rice yields in India
are one-third of China’s and
about half of those in Vietnam
and Indonesia.
Last year, a poor wheat crop led to 5.5 million tonnes of
expensive grain imports, the first in six years, pushing up food prices and
adding to inflationary pressures. With international wheat prices very high
import of wheat has become a political issue.
It would be economically suicidal for any government to import grain or
for that matter any agricultural commodity like pulses, edible oil at the
ruling higher international prices and sell it at subsidised prices in the domestic
market for a considerable period of time.
It is in this context that the development of the
agricultural sector becomes critical not only from the point of view of overall
growth but also from the point of view of feeding the billion plus population.
The Eleventh Plan aims to raise the agricultural growth rate
to four per cent per year. Importantly, to achieve this, the Plan aims to: (a)
accelerate the expansion of irrigated area and improve water management in
rain-fed areas, (b) bridge the knowledge gap through effective research and
extension, (c) foster diversification to higher value horticulture, fisheries,
and animal husbandry, (d) increase food grain productivity for food security,
(e) facilitate farmers' access to credit at affordable rates and (f) improve
farmer access to markets.
Besides, numerous researches on the agricultural sector in
the past five decades have made these points, the important point, however, is
to implement them in letter and spirit.
Take for instance point (b) relating to research and extension; may one
ask what our agricultural research institutes have been doing for the past 50
years?
Why are the foreign private seed firms able to offer high
quality seeds than our agricultural research institutes? Why has the role of
extension workers in helping the farmers to adopt new seeds and technologies
been reduced over the years? What is credit to farmers at affordable
rates?
Astonishingly, instead of codifying and implementing the
recommendations of various reports/studies on tackling these issues we have
been paying only lip service to them all these years. Otherwise the
agricultural sector would not have come to such a pass.
True, the provision of irrigation water, timely credit at
affordable rates etc., are all very important measures, but the time has also
come to think of institutional and organizational changes in the agricultural
sector. If the organizational structures
in the past have not been able to deliver shouldn’t we change them to make them
more effective?
The economists are talking about contract farming. Are our farmers ready for contract farming? Do they stand to gain from contract farming?
How does one ensure that the companies entering into contract with farmers will
not take them for a ride for the reason that these contracts are cleverly drawn
in a language which the farmers may not understand.
No doubt a few farmers in certain states have gone in for
contract farming and many others are willing to go for it. However, the idea is
to put more money in the hands of the farmers through this mechanism.
Therefore, to safeguard the interests of the farmers the Government must first
have a policy on contract farming and then model contracts in a language which
the farmers understand.
Take our archaic agricultural marketing laws. Everyone is
talking about putting more money in the hands of the farmers. But in reality the farmer is forced to sell
at lower prices because of our archaic agricultural marketing laws. The farmers
are supposed to bring their perishable produce of fruit and vegetables to the
designated mandis where the middlemen
would help find a buyer for their produce.
Look at the absurdity. First the farmer has to spend money
on transporting his produce to the mandi,
then wait for a suitable “buyer” for a day or two. In the meantime the middleman
pockets his commission and ultimately the farmer gets less than what he should
have.
Recall, when some of the business
houses in the organised sector tried to venture into the retail of fruit and
vegetables by directly procuring their supplies from the farmers, the middlemen
and vendors were up in arms. Thus, forcing the State Governments either to shut
down the organised outlets or seek refuge under the marketing act.
There is no gainsaying that the ultimate loser has been the
farmer. The farmer will always be the loser in such an institutional set up.
Therefore, the Government will have to rethink the institutional changes in the
marketing of fruit and vegetables.
Then there is the problem of wastage of farm produce, both
grain and fruit and vegetable, either on the farm itself, or in transit from
one place to another or in the godowns.
It is estimated that around 20 to 30 per cent of the farm produce is
wasted in this manner which ultimately reduces their availability to the
nation. We have done nothing to check this wastage but can we afford such
wastage now?
Further, like the management of scarce water, the management
of scarce grain and fruit and vegetables are equally important. Perhaps the farmers are helped to process a
part of the fruit and vegetables on the farm itself? How do we ensure that pests don’t eat the
stored grain?
Significantly, agriculture is a State subject. But the time has come for the States to come
together to think over the common problems facing the agricultural sector and
to the extent possible develop a
common response to marketing of agricultural produce, contract farming, water
sharing, checking of wastage and institutional and organizational changes so as
to help the farmers get their legitimate dues as well as assure the nation adequate supply of food grain and
other agricultural produce like pulses, oilseeds, fruit and vegetables, milk,
poultry, meat and fisheries.
Our aim should be to be self sufficient in the agricultural
sector with surplus for export. We are
heavily dependent on imported fuel spending almost half of our export earnings
on it. This kind of situation we should
avoid as far as agricultural produce is concerned. Hopefully the Eleventh plan will help change
the face of the agricultural sector. --- INFA
(Copyright,
India News & Feature Alliance)
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Mounting Subsidies:NEED FOR STREAMLINING, by Dr. Vinod Mehta,14 November |
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Economic Highlights
New Delhi, 14 November
Mounting Subsidies
NEED FOR STREAMLINING
By Dr. Vinod Mehta
(Former Research
Director, ICSSR)
Exactly a year ago the National Development Council (NDC) at
its 52nd meeting approved the Approach Paper to the Eleventh Five
Year Plan (2007-2012). The Government
has now approved the Draft Eleventh Plan and a month later the NDC is likely to
give its final approval to the Eleventh Plan.
The Plan’s focus remains on development of agriculture,
infrastructure and spending on social sectors like education, healthcare etc.
However, while approving the Draft Plan at the meeting the Prime Minister
expressed his concern over mounting subsidies on 3 Fs – food, fertilizer and
fuel.
The PM observed that the Government was providing subsidy to
the tune of Rs.1,00,000 crore which essentially meant a cutback in essential
spending on education, healthcare, agriculture, healthcare etc. He was of the view that these subsidies need
a fresh look and need to be streamlined.
In fact the subsidies (as well as the administered prices
which go along with subsidises) appear to be getting out of control and could
harm the growth in the long run. No Government has ever told the public as to
what is the purpose of administered prices and subsidies as of now.
These short term palliatives, which were introduced in the
early years of our economic development, have been allowed to continue for more
than five decades without any rational explanation. So much so that interest
groups have emerged around administered prices and subsidies that will not let
them go under any circumstance. Since
everything is hidden from the public view nobody knows what is happening in
this area.
Besides, the subsidy paid out on food rarely percolates down
to the consumer but gets absorbed in the costs of handling and storing
foodgrains. The main purpose of food subsidy is to provide food security to
citizens, particularly the poor, as well as
incentives to farmers to keep foodgrain production at a comfortable
level.
However, there are distortions in the way the food subsidy
is paid. It has been estimated that the
cost of transferring a rupee to the poor through the PDS (Public Distribution
System) is Rs.6.68 and the administrative costs account for 85 per cent of the
total expenditure.
Shockingly, only about 12 paise of every rupee spent on the
PDS actually reaches the poor in the form of food. The rest goes to wastage and
bureaucratic expenses, according to Dr Kirit Parikh, former Director of the
Indira Gandhi Institute for Development Research, and now Member, Planning
Commission.
Again, the so-called subsidy on fertilizer is not a subsidy;
the difference between the sale price and the production costs is being funded
to the fertilizer industry. It is misnomer to call it a subsidy. It is reported
that the fertilizer subsidy for 2007-08 is estimated at Rs 22,532 crore, which
is stated to be less than half of the requirement. In other words, the fertilizer industry wants
more subsidy.
But are the benefits really commensurate? Studies have shown
that (a) almost half of the fertilizer subsidy goes to the fertilizer industry
rather than to farmers and (b) the returns on government spending, are higher
in the case of agriculture R&D, rural roads, rural education or irrigation;
for every additional rupee spent on fertilizer subsidy, the returns are very
low – at only 0.53 compared to returns from other sectors: agriculture R&D
(6.9), rural roads (3.2), rural education (1.5) and irrigation (1.4),
So is the case of petroleum products. It is common knowledge that we are a net
importer of petroleum products as the domestic production is not enough to meet
our current demand. We have to pay for
these products at the international prices.
When the Approach Paper was approved the international price of crude
was US $80 a barrel and today it is US $98 a barrel. Logically speaking, there
is no case for providing any subsidy or cross subsidy to any section of the
society on these products.
These products could have been sold at commercial prices --
falling when the international prices are falling and rising when the
international prices are rising. What
have we done? The price of petrol in the
domestic market have been kept at almost three times the price of petrol in
other countries while the prices of cooking gas, diesel and kerosene have been
kept lower than the international prices.
Clearly showing that there is no rational economic explanation
for this kind of pricing policy. The
opposition to hike in the oil prices would not have arisen if we had kept the
prices of all the petroleum products in line with international prices all
these years.
Moreover, unnecessary subsidies are leading to wastage of
scarce resources. For instance the extremely
low recovery rates in sectors like irrigation, water, electricity and diesel
lead to their wasteful use as these have been withdrawn from some other sectors
in which these could have been very useful.
Besides, the provision of free electricity to the farmers is
a big drain on resources. It may be mentioned that except for petrol all other
petroleum products like diesel, domestic gas, wax, naphtha, etc. are being
subsidized in a big way. Of the total
subsidies paid on the petroleum products nearly half of it goes to diesel,
kerosene and domestic gas in that order.
As per the Rangarajan Committee Report on petroleum prices, the current
subsidy on cooking gas is still whopping Rs.171 per cylinder.
One could go on and on but it is sufficient to say that the
nation cannot afford to go on paying subsidies on every conceivable product and
service. Subsidies beyond a certain level are harmful to the economy in various
ways. Firstly it leads to wasteful use
of resources. If a farmer is getting diesel or electricity at a very cheap rate
he would not bother about economizing on the use of these two inputs.
Additionally, who knows whether the electricity and diesel
is also being used by farmers for non-agricultural purposes? The wasteful use
of electricity and diesel by the agricultural sector implies that some other
important sector of the economy like industry is being denied the optimum use
of these inputs.
Secondly, subsidies lead to distortion of relative prices in
the country and send wrong signals to business units. For instance, the railways
are known to be the cheapest mode of transport as far as bulk commodities are
concerned. But by subsidizing diesel we are artificially propping up the motor
transport sector and at the same time forcing the railways also to keep their
freight rates relatively lower from those of the motor transport etc. None of
these two sub sectors have any incentives to economize on the use of diesel,
coal and electricity or to improve their efficiency by reducing their
operational expenses.
Thirdly, subsidies beyond a certain level also imply that
either the country resorts to deficit financing or imposes higher taxes on the
people. Subsidies are not produced out of thin air; somebody has to pay for it.
Subsidies are essentially, what economists call transfer incomes. Subsidies are in fact, a modern version of
the old saying "Robbing Peter to pay Paul". Therefore, at one level
the choice boils down to either having more subsidies and more taxes or fewer
subsidies and fewer taxes.
Fourthly, the subsidies are also inimical to the export
sector. They make the cost of exports lower to the foreign buyers; to that
extent the domestic population is aiding the consumption of foreign
buyers. One cannot afford to support the
export sector on the basis of subsidized inputs for all times to come.
Subsidies only reflect the uncompetitiveness of the domestic production and
hence there is no incentive for the exporters to improve their efficiency by
reducing production costs.
Therefore, what the country needs is to have a dispassionate
look at all kinds of subsidies and decide as to which subsidies need to be
continued, which subsidies need to be reduced and which subsidies need to be
discarded. This cannot be a one-time
affair but a continuous process in the sense that the effects of subsidies need
to be reviewed every three to four years to see if they are fulfilling their
role and a decision taken as to whether it needs to be continued, reduced or
discarded. ---- INFA
(Copyright India News & Feature Alliance)
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