The Hindu Business Line : Do away with non-merit subsidies, says report

IN what could be a pointer to the 2005-06 Union Budget, a report tabled by the Finance Minister, Mr P. Chidambaram, on the last day of Parliament's winter session has suggested dispensing with the current open-ended system of grain procurement by the Food Corporation of India (FCI), putting in place a mechanism for increasing the farm-gate price of urea `at regular intervals' and `substantially restricting' the subsidy on LPG.

The report, titled Central Government Subsidies in India and prepared with the `assistance' of the National Institute of Public Finance & Policy, does not, however, set out any detailed road-map or yearly targets for achieving its stated objective of eliminating `non-merit' subsidies. All it spells out is the broad direction in which subsidy rationalisation is to be carried out and restricted to only the targeted beneficiaries.

In the case of food subsidies, the report has recommended that FCI should fix procurement targets before every season and "suspend purchase operations once targets are achieved". To take care of farmers who are unable to sell their surplus grains at the official support price because of the close-ended purchase regime, it has proposed that a system of price insurance be developed on the lines of the recently introduced Farm Income Insurance Programme and operate in conjunction with FCI's procurement operations.

The report has also endorsed the Abhijit Sen Committee's recommendation to fix the minimum support price of grains to just cover `C-2' cultivation costs, which includes the farmer's cash outgo and imputed value of family labour. And to induce efficiency in FCI's operations, it has suggested re-imbursement of its costs based on normative unit costs and quantity involved on and not on an actual basis.

Significantly, the report has not advocated any increase in the Central Issue Price of grains sold through the public distribution system (PDS), even while favouring a return to uniform pricing. The report has proposed that both above poverty line (APL) as well as below poverty line (BPL) consumers pay the same price for the grains issued in the PDS outlets. The additional subsidy to the BPL segment should be given in the form of food coupons, so as to prevent leakages inherent in the existing dual-price system. Again, the report is silent on the time frame for implementing its suggestions.

The same is the case with its recommendations on fertiliser subsidy. While advocating a system of effecting hikes in farm gate urea price at `regular intervals', the report has refrained from indicating how much and when. The only concrete suggestion it has made is to decanalise urea imports and introduce a flat-rate subsidy system, with two different rates being set for domestic producers and importers in the short-run and a single rate in the medium-term. At the same time, it is not clear what specific period constitutes `short-run' and `medium-term'.

On petroleum subsidies, too, the report has said the domestic LPG subsidy be `gradually reduced' or at least `substantially restricted', while in the case of PDS kerosene, a `more cautious approach' be pursued.

The report has estimated the Centre's total subsidy bill during 2003-04 at Rs 1,15,824.37 crore, which includes both explicit as well as implicit subsidies. While the former includes only Rs 46,869 crore monies provided in the Budget, the latter pertains to the unrecovered costs of public provision of goods and services not classified as public goods.