Comment

The trend of rising subsidies is alarming

The economist in Prime Minister Manmohan Singh was to the fore when he took the podium at the golden jubilee celebrations of the Indian Institute of Economic Growth.

He was clear, forthright and truthful when he told the distinguished audience that, “we spend too much money funding subsidies in the name of equity, with neither the equity objective nor the efficiency objective being met”. He added that, if such subsidies do not reach the poor, they do not, in fact, address the objectives they are meant to.

Yes, the subsidy problem is serious and assumes more serious dimensions with each passing year. The Centre’s explicit subsidies have more than doubled in eight years and have risen by 12.5% in 2006-07. Though the budget for the current year has projected an increase of a mere 1.6% this year, it can be safely assumed that the estimate will be surpassed by a hefty margin as in all the three major areas - food, fertilisers and petroleum - events have overtaken the assumptions underlying the fiscal policy enunciated for 2007-08.

The published figures are a gross underestimate. There are several hidden subsidies that are accounted under economic, social services and the like in the budget. In the case of the Centre alone, they are much higher than the explicit subsidies which, in 2007-08, were of the order of Rs 53,463 crore.

At the state level, the uncovered subsidy on power alone was in the region of Rs 21,201 crore while, in the irrigation sector, the water charges cover a small fraction of even the operation and maintenance costs as underpricing is the norm.

What is the true magnitude of subsidy payments in the economy? If the national income estimates are to be relied upon, they were a mind-boggling Rs 1,16,623 crore during 2005-06 and had more than doubled in a matter of six years - the figure for 1999-00 being Rs 56,067 crore.

Beyond doubt, the trend in subsidies is alarming and as the prime minister has lamented, they suffer from poor targeting and the resultant leakages make this burden more onerous.

But, as a politician and head of a coalition government to boot, Singh is handicapped in many ways. Sometimes, the opposition from his allies is more vociferous than the Opposition parties on several issues, while when it comes to pandering to populism, there seems to be a national consensus. In this backdrop, economic considerations take a back seat and political compulsions dominate policy-making.

For example, in the case of procurement prices for various crops, an increase - more than recommended by the expert body, the Commission on Agricultural Costs and Prices - has become a hardy annual; but when it comes to a proportionate and immediate hike in the issue prices, the Centre is unable to act as it would be politically unpopular. The result is a bloated food subsidy bill.

The story is similar when it comes to fertilisers and petrogoods where market dynamics do not hold sway in the crafting of official policy.

As irony would have it, even the National Common Minimum Programme of the Central government - which is supposed to be the policy framework for the ruling coalition - was unequivocal when it came to dealing with subsidies. It observed that, “all subsidies will be targeted sharply at the truly needy, like small and marginal farmers, farm labour and the urban poor”.

This consensus exists only on paper as the parties that make up the government are up in arms whenever there is even a hint of action. The result is that the prime minister as a politician is unable to act even though as an economist, he is adept in diagnosing the problem and in prescribing remedial measures.

It is not that the government is handicapped in resolving the subsidy problem. It has two reports to bank on - the Discussion Paper on Subsidies, May 1997 and Central government subsidies in India, December 2004 — prepared at its behest by the National Institute of Public Finance and Policy.

Sad to say, both these reports are gathering dust as the political will is lacking to act on their recommendations. In the meanwhile, the outgo on account of subsidies appears to have an inexorable momentum.

Perhaps, there is a silver lining. By focusing on the subsidy problem afresh, the prime minister is preparing the nation - and the political establishment in particular - for a no-nonsense approach to this vexatious issue in the ensuing budget.