Cure for FM's insomnia

Nearly twenty years ago, just around the time the Harshad Mehta stock scam broke out, the Prime Minister, Dr Manmohan Singh, who then handled the Finance portfolio, declared that he would not lose sleep over what happened in the markets. This week, it was the Finance Minister, Mr Pranab Mukherjee's turn, though to voice the opposite on a different subject: “When I think of subsidies, I lose sleep”. Such extreme sentiments – from supreme detachment to overt anxiety – are probably not the best suited to dealing with either the markets or subsidies. The Centre's subsidy outgo on the three Fs – food, fertiliser and fuel – was budgeted at Rs 134,210.85 crore for 2011-12, making up almost 11 per cent of its entire expenditures. If one includes the additional provision of Rs 46,076.45 crore made through supplementary demands for grants and further allocations likely towards the fiscal-end, the total bill might well cross Rs 200,000 crore. That certainly is cause for concern, but not something which is beyond fixing with some imagination and political will.

A cool-headed approach towards subsidy would, at the outset, entail looking at the composition of the beneficiaries. From this follows the second step of how to deliver it. It should be clear that there can be no question of granting a subsidy to the population as a whole; its benefits should be limited only to those who genuinely cannot afford to pay the market rate on an essential product. That would straightway deny the usage of subsidised diesel by car-owners, just as urea cannot be priced the same for a five-acre farmer and someone with 50 acres. The ideal way to implement this is for everyone to pay the market rate initially, which would then be followed by the government making a cash transfer to the intended beneficiary. This, of course, requires two things – a mechanism to authenticate the identity of a beneficiary and a bank account to which the transfer can be made. The good news here is that the Aadhaar project, aiming at giving every Indian resident a unique identity number linked to their biometrics, is proceeding at a fast pace. This, along with the ongoing efforts at ensuring everyone has at least a no-frills or mobile-based bank account that is Aadhaar-enabled, could result in cash transfers becoming a significant mode of subsidy delivery across the country in the next 2-3 years.

In the meantime, the Centre can also undertake in a phased manner, the long overdue process of rationalisation of prices of diesel and LPG (within fuels), urea (fertiliser) and grains for above-poverty-line consumers (food). The objective here is not just subsidy reduction, but also correcting for consumption distortions arising from the huge price differentials between petrol and diesel or urea vis-à-vis other fertilisers. This twin-strategy of creating a seamless cash transfer technology platform and phased price rationalisation, undertaken in parallel, is politically as well as economically feasible.

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