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Subsidy Story: TIME FOR ‘OUT OF BOX’ APPROACH, by Shivaji Sarkar, 10 Feb, 2012 Print E-mail

Economic Highlights

New Delhi, 10 February 2012

Subsidy Story


By Shivaji Sarkar


An endless debate going on for decades is whether subsidies should be cut or not. The undeniable fact, which even the Finance Ministry admits is that in the name of subsidy, supposedly on agriculture petro prodcts and fertiliser among other heads, there is a steady outgo from the government coffers. Worse, those targeted do not get the benefit of this subsidy.


And, the debate has become all the more relevant in the wake of the economy witnessing the lowest-ever GDP growth rate at 6.9 per cent from 8.4 per cent a year ago. The slowdown is mainly on account of a slower growth in manufacturing output, confirming fears of an industrial deceleration. 


Inflation and high bank rates have taken their toll too– private consumption has come down to 58.1 per cent against 58.7 per cent last year. That itself has been a fall by quite a few notches from the previous year. This is a clear indication that people are putting off planned purchases as inflation is eroding their income.


This is further aided by policy uncertainty as the Government dithers on taking any decisive steps. It definitely needs to think “out of the box” but it regrettably unable to get out of hackneyed approach of “reforms”, which too are not happening. Its definition of reform since 1991 is pegged on cutting subsidies, depriving the working class of their dues and allowing the large corporate to hire and fire.


India’s job situation is one of the worst in the world despite the MNREGA – employment guarantee scheme in rural areas. Whatever its impact, the Rs 40,000 crore much-touted project gives direct dole to people despite largescale corruption and very often low payments. As per official estimates unemployment remains at 9 per cent  i.e. 12 crore people. And, the slowdown is likely to throw many more out of jobs in almost all sectors, including information technology. The squeeze in the pay packet is also imminent despite notional rise of per capita income to Rs 60,000 a year.


The other major subsidy that the Government gives through bonds is to oil marketing companies (OMC). Though the outgo is not immediate, on an average it doles out Rs 30,000 crore a year to these  companies to meet their “under recoveries” – not losses. The public sector oil companies, the Finance Ministry has finally realised, have presented to the Government an inflated bill for over a decade. Interestingly, the OMCs have been given a free hand to both increase prices and also receive a subsidy.


This is a double trick to deprive the people and the Government its due share. Additionally, the  policy failure is too glaring. The high petroleum product prices have made transportation of all sorts – train, bus, truck and private travel dearer. In turn, it makes all commodities expensive and has immensely contributed to slowdown. Thus, this is one subsidy that Government can consider doing away with, without wasting any more time. It must realise and admit that it has been a skewed policy. Though the OMCs are earning large profits through high prices, these still get subsidy, which should be done away with. Sadly, the lobbies working within have not allowed the Government to take the much-needed step.


Add to this another anomaly. Over the years the Finance Ministry has increased its own expenditure by many times. Whatever it earns through tax collection is frittered away in high expenses. The Tendulkar committee had estimated that over 48 per cent of tax earnings are spent in collection, which is too high. However, the Ministry argues that since it earns it could spend too. This is akin to a father saying that since he is the breadwinner he needn’t take care of the family needs. Instead, if he wishes he could simply drink it all!


But the Finance Ministry should start thinking about judicious spending. It needs to especially prune its staff strength in the tax collection departments. A complex tax calculation and realisation system has not helped it at all. The compulsory filing of income tax papers by all, insisting on pan card and other similar systems has not helped it realise much of the taxes rather it has burdened it with high avoidable expenditure.


In 2010-11, the Government collected about Rs 8 lakh crore in taxes and almost half of it was spent on the Finance Ministry itself.  It is time that it initiates a drastic step to downsizing itself if it wants the country to develop. The question it should ask itself is: Is it not a massive subsidy to sustain an inefficient system?


Finance Minister Pranab Mukherjee has recently stated that the fertiliser subsidy is going to be raised by more than 50 per cent, i.e. Rs 90,000 crore as against the projected Rs 40,000 crore. Similarly, food subsidies will too increase. The net increment would be roughly not less than Rs 80,000 crore or may be Rs 1 lakh crore, is his estimate. This is passed on for publicity purposes as farm subsidy. But is it the truth? As is well known, the farmers do not get any of it. The food subsidy is actually passed on to the Food Corporation of India, which is supposed to purchase foodgrains from the farmers and give them the minimum support price (MSP). Shockingly, the FCI often pays much less than even the MSP.


The FCI is supposed to maintain a buffer stock of 82 lakh tonnes of wheat and 118 lakh tonnes of rice whereas it maintains a stock of 230 lakh tonnes of the former and a stock of 242 lakh tonnes of the latter, which is more than double the requirement. Unfortunately, the Corporation has been allowed to function in the most in ubiquitous way. It has the power to purchase, allow at least 30 per cent of its stocks to rot and help increase prices in the market.


This must change. Its functioning needs a commercial approach. It should act like a market interventionist agency to maintain prices and only then would it be able to generate its own revenue. However, large market functionaries do not allow this to happen. Similarly, fertiliser subsidies have not helped the farmers. These go to the companies instead to keep them inefficient and extract high prices.


Hence, the entire subsidy regime needs a review and be reoriented to benefit the targeted people. The expenditure on Government departments and their unwieldy structure needs a cut and not development projects. However, it is a fact that expense cut is often restricted to plan projects.


Unfortunately, the Government is seized of using rhetoric. If it is seriously concerned about high subsidies, it needs to do an honest review as to who are being paid these subsidies. The country does not need to pay any money either to the OMCs, the fertilizer companies or the FCI. If only they are allowed to function like any other marketing organisation, they could not only recover their costs but perhaps even pay a dividend to the Government. In addition, the Finance Ministry needs to do cost cutting on itself. It may spare almost Rs 5 lakh crore needed for education, health and other social welfare schemes and eventually find out that subsidy is what its meant to be--people oriented.---INFA


(Copyright, India News and Feature Alliance)

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