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Populism or prudence

Publication Date : 20-08-2014


India’s national and regional parties are engaged in competitive populism, which is gradually driving the country towards a financial and political abyss. Mindless populism has led to mass madness of greed and entitlement. Subsidies are always tempting; they guarantee instant pay-offs for political parties, and this has been especially true since the 1980s when Indian politics became more turbulent.

Elections are virtually defined by promises of subsidy. A significant percentage of federal and state revenues are allocated as subsidies whose objectives have not been met on account of poor governance and rampant corruption. The handling of subsidies has come to be marked by theft and leakages.

Given the alarming fiscal deficit, rising inflation and the dire fiscal condition of several states, questions are being raised as to whether India is fast approaching a tipping point and whether subsidies, if unchecked, will irreversibly damage the country’s rise as a rapidly emerging economic power. As the Finance Minister has pointed out: “India has to make a choice between mindless populism and fiscal prudence.”

While certain subsidies are explicit in the budget, others are hidden. The second category includes subsidies on interest rates, in the provisions made for social and

economic services, notably health care and education. Subsidies on food, fertiliser and fuel (kerosene and LPG) are prominent and constitute the largest chunk -

totalling around 2.5 lakh crore rupees (US$40.97 billion) or around 2.5 per cent of the GDP.

The amount of food subsidy has increased significantly in the post-reforms period and has reached a record level of Rs 1,30,000 crore in 2013-14 to cover expenditure on food security. India has one of the largest food subsidy programmes in the world; it has created a relatively effective social safety net but has also been criticised for the budget deficits, economic inefficiency, poor targeting and huge leakages.

The increase in the food subsidy bill has been attributed to the rise in procurement prices and other incidental charges that have to be borne to build up a buffer stock of foodgrain for the sake of food security. As it turns out, the government is the biggest hoarder of foodgrain because of the sharp annual ratcheting up of the Minimum Support Price (MSP) since the mid-Nineties.

The waste in government runs parallel to widespread hunger. One estimate suggests that a one per cent increase in MSP leads to a 0.3 per cent rise in the consumer price index. The MSP was originally meant to be a safety mechanism to insulate farmers from the vagaries of the open market. The support price is one way to placate the vote-banks.

The Targeted Public Distribution System (TPDS) has been far from effective. A large quantity of subsidised foodgrain gets diverted and resold to procuring agencies of the government. In 2013, the Planning Commission reported that almost 40 per cent of the foodgrain, allocated under the TPDS, did not reach the intended beneficiaries.
Agriculture is the main prop of the Indian economy; it provides sustenance and livelihood to more than 70 per cent of the rural populace.

Free electricity has been used by medium and large landowners to extract groundwater (GW) throughout the year to such an extent that aquifer levels have dropped sharply in several states. In certain regions, the depletion is alarmingly close to 90 per cent. The presence of arsenic in GW has been reported in West Bengal, Bihar, Jharkhand, Chhattisgarh, UP and Assam.

The subsidy on chemical and synthetic fertilisers has increased exponentially from a mere 60 crore during 1976-77 to an astronomical amount - 67,971 crore in  2013-14. According to the Economic Survey of 2013-14, indiscriminate use of chemical fertilisers has led to the imbalanced use of soil nutrients in Punjab and Haryana - the granary of India. As a result, the quality of the soil has declined.

The biggest challenge is the burden of subsidies on petroleum products. Kerosene for the PDS, domestic LPG and diesel are sold at rates that are far less than international market prices. The argument for providing subsidies on LPG is totally irrational as cooking gas is used by the rich and the middle class.

Studies show  that 40 - 50 per cent of kerosene, supposedly meant for the poor, is diverted for other purposes, mostly for adulterating diesel. Two bright young officers of a public sector oil company were killed for spilling the beans. Adulterated diesel can damage vehicles and aggravate pollution. Use of kerosene can lead to respiratory diseases. It is almost as if the government is subsidising pollution, fuel adulteration, congestion and chest ailments.

Another expression of populism is the ‘loan mela’ or the practice of writing off of debts of the poor. Subsidies are directed at various sections of society to assist

the poor economically. But the benefits are hijacked by those who are powerful. The poor have to make do with the minimum share of both visible and hidden subsidies.

“We are basically a subsidy-driven economy and that has to change,” Amartya Sen had once remarked. This is not to suggest that subsidies are wholly undesirable. To subsidise the vulnerable segments of the population is the core of any economic policy, not only in India but all over the world.

The transfer of subsidies to the poor and without leakage can lessen their constraints and induce them to improve their capabilities and attain their own potentialities. The objectives of subsidies can be achieved if they are judiciously devised, properly targeted, transparent and accompanied by official data that can enable the intended beneficiaries to claim the welfare handouts as a matter of right.
($1= 61.02 rupees)
(The writer is a retired IAS officer)


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