The Hindu Business Line : Burgeoning subsidies, poor targeting

There is clearly a need for a hard look at the burgeoning subsidies, both direct as well as indirect, notwithstanding the stiff political opposition to pruning them drastically. While continuing the subsidies that are really merited, the same should be targeted more effectively to the really poor and vulnerable sections by ensuring better governance and efficient delivery mechanisms, argues S. D. NAIK.

In addition to explicit subsidies on power, food, fertilisers and petro products, there are several higher hidden subsidies shown in the Budget documents.

With the Department of Fertilisers reaching out its hand last week for a Rs 50,000-crore top-up of the fertiliser subsidy, Prime Minister, Dr Manmohan Singh, and the Finance Ministry may have to rework the subsidy bill that was likely to exceed Rs 100,000 crore this fiscal, according to earlier estimates. Evidently, some policy-makers in New Delhi so not seem to share his view that, “We spend far too much money funding subsidies in the name of equity, with neither th e equity objective nor the efficiency objective being met.”

Just how the Finance Minister reacts to the plea will become clear when he presents his budget end February. But published figures do not fully measure the cost the nation bears for subsidies that are not working the way they ought to.

HIDDEN SUBSIDIES

In addition to explicit subsidies on items such as food, fertilisers and petroleum products, there are several hidden subsidies which are much higher than the explicit subsidies that are shown in the Budget documents. In the case of the Centre alone, the former are much higher than the latter, which were of the order of Rs 53,463 crore in 2006-07 and projected at over Rs 100,000 crore during the current fiscal.

Hidden subsidies include subsidised user charges for the various services provided by the Government and the bonds issued by the Government to oil marketing companies, the Food Corporation of India and the fertiliser companies. Similarly, the under-pricing of such petroleum products as petrol, diesel, LPG and PDS kerosene, is also an example of hidden subsidies. The Economic Advisory Council to the Prime Minister has estimated the off-Budget liabilities of the Central Government at around two per cent of GDP.

At the State level also, the uncovered subsidies are huge. In the case of power alone it is in the region of Rs 21,500 crore while in the irrigation sector, water charges cover only a fraction of even the operation and maintenance costs.

LEAKAGES AND DISTORTIONS

While some of the subsidies are needed to protect the interests of weaker sections, they have failed to serve the intended purpose because of poor delivery, massive corruption and total failure of governance. The leakages and distortions in the delivery of services to the intended target groups now seem to have reached scandalous proportions.

For instance, the public distribution system (PDS) is in a shambles. Recent disclosures reveal that in the last three years alone, Rs 31,586 crore worth of wheat and rice meant for the poor was siphoned off and sold in the open market illegally.

This is nothing short of a criminal loot of public money by politicians, bureaucrats and unscrupulous shopkeepers in the name of providing food security to poor and vulnerable sections of society.

A recent study has put the number of “ghost” ration cards at a staggering 2.3 crore, while as many as 1.21 crore deserving poor have been left out of the food security umbrella. This is not a new finding. Several studies over the past decade have revealed huge leakages and corruption in the country’s public distribution system without any effective measures to improve the situation.

The worst offenders are said to be Uttar Pradesh, West Bengal, Madhya Pradesh, Assam, Rajasthan and Maharashtra. The entire North-Eastern region, comprising Sikkim, Meghalaya, Manipur, Mizoram, Nagaland and Assam, is found to be the worst hit, with not a single grain of PDS reaching it. In fact, it is believed that the grains meant for the North-East are siphoned off in Delhi itself.

Similar is the case with the PDS kerosene meant for the poor. A very large proportion of it finds its way to the open market, where it is sold at around Rs 25 per litre against the controlled price of Rs 11 per litre. It is also mixed with petrol and diesel because of the huge price differential between the two fuels. In particular, the problem of adulteration of diesel with kerosene is a longstanding one.

As for fertiliser subsidies, which are expected to zoom to Rs 45,000 crore this fiscal, they have mostly benefited the fertiliser companies and rich farmers. Small and marginal farmers, whose number is much larger, have been left out. What is worse, high levels of subsidies on urea that have been persisting for decades because of vested interests and political populism, have led to overuse and adversely affected the soil fertility in many regions of the country.

PETROLEUM PRODUCTS

The under-pricing of petroleum products is another case of costly distortions. With global crude prices on the boil, continued dithering on the part of the government to pass on the burden to final consumers will have serious consequences for the entire economy.

According to reports, with crude prices hovering around $97-98 per barrel, the country’s oil marketing companies have been losing Rs 240 crore a day. During the current year, about 42.7 per cent of the under-recoveries (retail losses) of oil companies — estimated at Rs 54,935 crore — are expected to be met by oil bonds issued by the oil marketing companies to partially compensate them for charging consumers less than the market price on petroleum products such as petrol, diesel, LPG and kerosene.

However, since their losses are much higher, the oil companies are also forced to resort to heavy borrowings from banks and financial institutions to meet their working capital requirements. The Indian Oil Corporation for instance, had already borrowed Rs 28,000 crore by last November, as compared with Rs 27,000 crore during the whole of the last financial year.

Such heavy borrowings imply diverting funds from investment purposes to finance consumption subsidies. Hence, the Reserve Bank of India has expressed serious concern from time to time over the meagre pass-through of the burden of rising international crude prices to the domestic consumers of petroleum products.

Such under-pricing fails to send the right price signals in the economy that can trigger the much-needed moves towards fuel substitution and promote the energy efficiency.

WAY FORWARD

So what is the way forward? There is clearly a need for a hard look at the burgeoning subsidies, both direct as well as indirect, notwithstanding the stiff opposition of the Left and the other Opposition parties to prune them drastically.

While continuing the subsidies that are really merited, the same should be targeted more effectively to the really poor and vulnerable sections by ensuring better governance and efficient delivery mechanisms.

The mounting subsidies year after year have been eating into the much-needed developmental expenditure of the government. Hence, there is a need for a wider debate to create public awareness about the adverse consequences of unmerited and counter-productive subsidies.

The opposition to subsidy cuts could be blunted considerably by explicitly mentioning in the Budget that the entire amount saved on subsidies would be used to raise public investment in agriculture and social sectors such as health and education.