Events & Issues

New Delhi, 29 December 2014

Pruning Subsidies

ECONOMIC-POLITICAL CHALLENGE

By Dr S Saraswathi

(Former Director, ICSSR, New Delhi)

Finance Minister Arun Jaitley has assured India Inc. of the Government’s commitment to go ahead with economic reforms. He also announced that more steps would be taken to rationalize subsidies which presently dominate the economics of the nation. A commission is already set up by the Union Government to examine the problem of fiscal deficit and to make recommendations to reduce subsidies. Some interim steps may be coming soon.

This follows the approval of the WTO General Council after protracted discussions on continuing what is known as the “peace clause” in the WTO Agreement on Agriculture which enables the Government to stick to its domestic support and protective measures and its policy of extending export subsidies. For the general public, it means primarily that the Government can procure and stock foodgrains necessary for running its ambitious food security programme.

Reserve Bank Governor Raghuram Rajan has also raised doubts about the effectiveness of loan waiver schemes of some State governments. He has stated that some studies typically show that they have been ineffective and have restricted credit flow to farmers. 

He has raised concern over utilization of farm credit – whether it is put to right use or only lead to over-indebtedness and bad investments.   Speaking at a conference, he stated that the UPA Government announced the Agricultural Debt Waiver and Debt Relief Scheme in 2008 under which 3.69 crore small and marginal farmers and 60 lakh other farmers were given Rs.52,516 crore in debt relief.

India is facing a difficult challenge caught between the problems of promoting the nation’s economy and protecting individual citizen’s minimum needs. It is not in a position to stop subsidies for various goods and services. At the same time, it has to start earnestly to lessen people’s dependence on subsidies.

Since independence, the Government of India has been giving subsidies to various industries. Even loss making industries are run with government subsidies.  

Evidently, the country is not yet fully ready to embark on  the next stage of economic reforms due partly to the reality of  poor economic conditions of large sections of the population and partly to the common human  tendency to stick to unearned benefits if and when available.  The latter is true of even well-to-do sections clinging to subsidies in the form of concessions, and privileges as a matter of right and eligibility.

Subsidy is generally understood as a direct or indirect payment, economic concession, or privilege granted by a government to private firms, households, or other government units in order to promote a public objective. It is given in a variety of forms. 

Budget deficit is a chronic problem in India and must be addressed by both raising the resources and by reducing expenditure. In the latter domain are ways of reducing unproductive subsidies and separation of “haves” and “have not’s” to eliminate the former from the benefits of subsidies. It is easy to recommend that measure, but difficult to adopt for any government. Common citizens who play mass politics have no idea of the need for economic reforms.

The Government must be well aware that providing subsidies is not a purely economic proposition, but that it has more politics. Therefore, it is really a challenge for the Government to rise beyond short-term political advantage and muster courage to look at long-term economic compulsions for the welfare of the nation.

Subsidies are of two types – explicit and implicit. Food and fertilizer subsidies are examples of explicit subsidies. Implicit subsidies are those going to economic services like transport, communications, irrigation, power, salaries and so on. Consequences of cut in any of the two will fall on producers and then on consumers.  The apparent result will be rise in prices of commodities and services for the common man to whom bridging the budgetary gap has no relevance to his daily existence.

Governments have found it almost impossible to cut explicit subsidies even when they had massive majority in Parliament as in the mid-1980s. Indian electorate responds to populist politics and political parties are quick to specialize in that politics and outscore one another.  Subsidies and freebies are equated and understood as marks of a benevolent government.

Indeed, it is purposeless to argue against subsidies intended to ensure a certain minimum standard of living to the underprivileged sections however strong may be the economic reason. There is a tacit agreement on this in the country.

If economic reforms are to benefit the rich and poor equally, we have to adopt some fundamental principles. While conceding the right of the poor to a minimum standard of living, we have to eliminate lavish and unsustainable lifestyle on the other side.  Unproductive and wasteful expenditure on extravagant ceremonial events needs to be eliminated altogether and investments on health, education and skill training must be enhanced. Thrift is not something to be preached, but to be practised.

The present attitude of extending patronage must give place to genuine partnership. The concept of identifying target groups should give place to the concept of inclusive growth which will definitely result in promoting a sense of partnership. Basic to all these is “good governance” – not just as a catchy slogan, but also as the lifetime principle of those in the seat of power.

It is a mistaken notion that only developing countries indulge in providing subsidies and developed countries face market forces without aid. In the US, for instance, subsidies are given in the form of “tax breaks”, cash payments, favourable loan terms, public services at discount rates, etc. Both federal and State governments offer subsidies.

Political parties are paid subsidies directly by the government to fund some or all its political activities in many democracies. Routine as well as election campaign costs are covered by government subsidies. The main object is to check corrupt and illegal funding of parties and their election campaigns.  Party subsidies have been introduced in many countries since the 1960s including the US, UK, Canada, France, Japan and a number of European countries.  Notable exceptions are India and Switzerland.

The Finance Minister’s proposal to prune subsidies is not for fighting corruption, but as an economic measure to cope with the dictates of globalization.

The Public Distribution System (PDS) – the main instrument through which food security is guaranteed at the family level in India – seems to be the largest distribution network of its kind in the world today. It is very well organized in some States. In Tamil Nadu, all ration card holders are eligible to obtain many commodities at subsidized price. Tampering with this network in the name of pruning subsidies will be politically unwise whatever economics may say.

What needs to be done urgently is making the system accountable and transparent. Corruption and leakages help diversion of resources to black market. Pruning promised by Jaitley must start with cleaning implementation of programmes including redrawing eligibility criteria and plugging the loopholes. ---INFA 

(Copyright, India News and Feature Alliance)