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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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