The Hindu Business Line : The subsidy paradox

It is time the Government, which has a mandate to manage the country, decides to do away with subsidies, or at least rationalise and curtail them, and use the released funds for far more important and essential projects.

Arun Bewoor

With India recording a continuous high (8 per cent plus) growth in GDP, there is a tendency to feel satisfied with financial management and increasing revenues. A sense of euphoria prevails as the fiscal deficit will be within stipulated limits. Inflation rate is at the forecasted level (well below 4.5 per cent) and the savings rate is expected to reach 40 per cent. Yet, there is a sense of despair if one takes note of the statements made by the Prime Minister, Dr Manmoh an Singh, and the Finance Minister, Mr P. Chidambaram.

The concern apparently stems from the fact that despite a clear mandate from the Indian people that they are prepared for revolutionary changes in economic thinking, achievements at the ground level still reveal a sense of hesitation, needless caution and a hesitation to strike out with radical and innovative thinking. Inclusiveness is conspicuously absent.

Indians are denied contemporary products in terms of risk coverage and mitigation by the Government’s inability to allow FDI beyond 26 per cent in the insurance business. The Congress Party has not been able to convince its allies about Provident Fund management with equity investment — an opportunity the capital market offers due to unprecedented growth in all the indices.

Another shortcoming is the reluctance to delink pensions from the responsibility of the Centre, though such funds can be better managed in a more contemporary manner.

Sense of despondency

Another significant feature is to rationally explain the liability being created by unviable and inefficient subsidies on food, fertilisers and fuel. A recent announcement by the Prime Minister that the Government may have to balance books for Rs 100,000 crore creates a major sense of despondency for economic planners and Indians at large. Given the magnitude of subsidies, it is not surprising to witness the helplessness when expressions over further plans become a subject of debate. The proper method of management would be to confront the liability head on. Procrastination on such an issue seldom yields any result. And this is exactly what is evident in the continued subsidies, which are bound to cause severe damage to strategic projects and plans that need to be urgently implemented.

Items under PDS

Coming specifically to subsidies, it is universally accepted that expense of consumption must be borne by consumers. There is no justification to postpone issues that have emerged due to escalating fuel prices. Every month’s delay implies an additional interest cost and the fact that it has to be borne by a community which never derived benefits from the intended subsidies.

Similarly, in food, there is no reason why items under the public distribution system (PDS) should be subsidised, when it is well-recognised by administrators that PDS is out of reach to card holders who are not recognisable. And the ones who are recognisable are definitely above the poverty line and do not deserve this subsidy. Instances are replete where PDS food-grains are diverted through nefarious means for external sale or patronage. It is time to put an end to these practices, especially when one considers the astronomical sums involved.

Subsidy on fertilisers

The third issue, subsidy on fertilisers, deserves no sympathy either. On the one hand, the claim is made that fertilisers cannot be afforded by small and marginal farmers and, hence, needed to be subsidised. On the other, powerful cultivators demand a support price, which means all their expenses are subsidised for use of fertilisers.

Simultaneously, manufacturers of fertilisers desire support. They clamour for subsidies to meet the costs of production of their manufacturing units in India; and, strangely enough, to cover the inefficiencies of the units abroad, where they have a stake. Hence, it is not surprising to see the share price of these companies rise with the ballooning of the fertiliser subsidy! It is a well-contrived paradox, perhaps not found anywhere else in the world.

Electoral promises

It is urgent that an objective assessment be carried out of the continuance of such ‘worthless and costly’ practices. Their legitimacy ceased to exist long ago, if at all it ever did in the heyday of socialism and ‘controlling the commanding heights of the economy’. One is tempted to discount these acts on the premise that they are key electoral promises as they ensure vote-banks. Time and again, the electorate has voted on the anti-incumbency factor, which rejects past practices. It is time the Government, which has a mandate to manage the country, decides to do away or, at best, severely rationalise and curtail subsidies and use the released funds for far more important and essential projects. The buoyant revenues and tax receipts provide a great opportunity which must not be passed up.

(The author is President, The Madras Chamber of Commerce & Industry.)