The Hindu Business Line : Have income, give subsidies

The fault lies not in providing subsidies to the poor and the needy but in not raising enough resources. The Government provides tax exemptions, which reduce legitimate tax revenues due to it, and the variety of subsidies and sops, says T. C. A. RAMANUJAM, exacerbates the economy's woes.

The Government provides tax exemptions, which reduce the legitimate tax revenues due to the Government.

Rice at Rs 2 per kg, colour TV sets to the needy, writing off loans due from farmers, LPG sets for rural homes. These lavish promises at election time should have made economists and policy framers sit up and give a deep thought to the question of government expenditure, especially its nature and direction.

Critics were quick to point out that these are wasteful expenditure of precious public revenues and the same can be better used for infrastructure development.

A similar criticism was voiced at the time the noon-meal scheme was launched nearly three decades ago. But the World Bank paid encomiums to Tamil Nadu Government, pointing out that the noon-meal scheme slowed school drops-outs in the rural areas and facilitated better nutritional development along with primary education for the under-privileged sections. Later, the scheme was extended to several other parts of India.

A State duty

Support to the needy and the downtrodden has been the foremost duty of any state committed to ensuring for all its citizens some minimum standard of living, including housing, education and medical services.

The absence of this objective, especially, in times of transition from the state to the market economy, can lead to externalities in the form of crime, poor public health and failure to become employable.

But critics point to the considerable cost, the adverse effects on incentives on both the taxes needed to pay for the benefits and the means used to limit them.

To take into account the failures of the market economy, the Government has to improve the incomes of consumers and producers through a properly devised scheme of subsidies.

Food subsidies allow consumers to pay less than the market price and have been adopted by many countries to increase farmer incomes and lower the cost of living for the poor who spend much of their incomes on food.

As a method of helping the poor, food subsidies may not be highly efficient as most of the benefits go to those who do not need them.

Many countries have used transfers, usually in the form of food subsidy, to reduce poverty levels. Where the number of poor is high, such transfers may not be the answer. Guarantee of food security is an important way to protect their living standard.

Some of the methods to ensure this can be the general food price subsidy, food rations, food stamps, food distribution policies and food supplementation schemes.

Safety net

These policies can be used to raise the real incomes of the direct beneficiaries and will provide a safety net against collapse of their real incomes. Brazil, China, Columbia, Egypt, Mexico, Pakistan, Thailand, Sri Lanka and other countries had operated general food price subsidy schemes. These schemes may have been expensive but succeeded in reaching out to the poor.

The World Development Report, 1990, refers to ration of subsidised food to households as an alternative to general subsidy.

These schemes are familiar all over India. They enable access to regular supply of basic staples at reasonable prices. The Sri Lankan general rice ration scheme had a big impact on poverty and the benefits to the poor were high.

In many parts of India, the benefits of the ration system went disproportionately to urban consumers though poverty is mainly a rural phenomenon. In 1979-80, Sri Lanka faced fiscal crisis and replaced the food subsidy and ration schemes with a food stamp programme.

Food stamps are like vouchers. Even the US issues food stamps to poor families to entitle them to obtain free or cut-price foodstuffs.

Cash and stamps

Cash subsidy can be used for any purpose and can be resorted to when there is dire need to help the poor as it happened last year at the time of the Tsunami and floods. In the case of food stamps, the administrative cost may be lower.

Sri Lanka's experience showed that the use of food stamps reduced the share of food subsidies in the GDP substantially.

Their share in total government expenditure fell from 15 per cent to 3per cent. The 1990 WDR points out that food stamps achieve a more progressive pattern of transfers than general food subsidies. The same was the experience in Jamaica.

Supplementary feeding programme can also be organised to reduce under-nutrition. As early as in 1817, the queen of Travancore had declared: "The State shall defray the entire cost of the education of its people in order that there may be no backwardness in the spread of enlightenment among them, that by diffusion of education, they become better subjects and public servants."

No buying power

As the WDR notes, public policy must play a leading role not just in education, but in social services also. The quality and quantity of public expenditure is highly relevant. A 10 per cent increase in income decreases the infant mortality by 1.1per cent. It is not that food availability is scarce.

The truth is that the vast majority of the rural folk do not have the requisite purchasing power to secure essential food items for day-to-day life.

The result has been that food stocks keep multiplying in godowns or are exported at prices less than the ration price within India, leading to suicide by farmers in Maharastra, Andhra Pradesh, Madya Pradesh and Orissa. Observers have noted that the food policy of the Tamil Nadu Government, in the last two decades ensured the absence of such suicide in this State.

As American President Franklin Roosevelt observed: " The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those have too little".

Every time there is a discussion about subsidies, successive Finance Ministers have taken the view that "we don't have adequate resources and there should be a distinction between merit and non-merit goods". However, the CMP of the UPA Government had declared: "All subsidies will be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor."

The misconception

There is a misconception that subsidies eat into the revenues of the government. The truth is that government expenditure by itself is not going up at all in India. It is around 15 per cent of GDP. Such expenditure in advanced countries would be around 25 per cent of GDP.

The fault lies not in providing subsidies to the poor and the needy but in not raising resources to the requisite level. As the Members of the Parliament pointed out, Rs 2 per kg of rice is a priority all over India. The Government provides tax exemptions, which reduce the legitimate tax revenues due to the Government.

As many as 162 exemptions built into the direct tax Acts cost the exchequer Rs 69,500 crore, working out to more than 50 per cent of the direct tax collections in 2004-05. But for the exemptions, corporate tax collections would have soared by 70per cent and personal income-tax by 24 per cent.

The exemptions limit under the indirect tax schemes can also be reviewed to enhance revenues. Any discussion about expenditure on subsidies will have to be linked to the problem of tax expenditure, which provides incentives for capital as against subsidies that provide incentives to the poor.

(The author is a former Chief Commissioner of Income-Tax.)

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