The Hindu Business Line : A new blueprint on subsidies

THE National Common Minimum Programme of the United Progressive Alliance (UPA), in general, and the first Budget of the Government by the Finance Minister Mr P. Chidambaram, in particular, dwelt on the compelling necessity to target all subsidies at the poor and the truly needy. It was also promised that the National Institute of Public Finance and Policy (NIPFP) would draw a blueprint before long on this issue and accordingly, on the last day of the winter session of Parliament on Thursday, a report titled Central Government Subsidies in India was laid in the House.

It may be recalled that the NIPFP had in May 1997 circulated a discussion paper at the behest of the then Finance Minister, also Mr Chidambaram, which had wanted a two-way classification of subsidies, into merit and non-merit ones.

But now the Institute, after revisiting its own dissertation, has proposed a three-tier hierarchy of government, social and economic services, classifying them into Merit-I comprising elementary education, primary health-care, prevention and control of diseases, social welfare and nutrition, soil and water conservation, ecology and environment; Merit-II including education (other than elementary), sport and youth services, family welfare, urban development and a whole host of public goods; and Non-Merit, covering the rest of the areas.

The crux of the issue touched by the NIPEP in both these papers pertain to the fact that subsidies are different from transfer payments, which are straight income transfer to individuals, who are normally the poor and the vulnerable.

Hence, the benefits of subsidies can be maximised when they are "transparent, well targeted and suitably designed for effective implementation without any leakage". It is incontrovertibly demonstrated by many an evaluation report, from both official and non-governmental organisations, that leakage and wastage characterise all the subsidies the government provides, with the implicit admission that the deservingly needy people to whom they are purported to serve remain barely touched.

It is disturbing to note that total Central government subsidies as a proportion of gross domestic product (GDP) amounted to 4.25 per cent in 2002-03 and 4.18 per cent in 2003-04.

Such subsidies, after sliding from a peak of 4.92 per cent in 1992-93 to 3.49 per cent in 1996-97, spurted in recent years because of three reasons.

First, subsidies in the petroleum sector, which were off Budget, have been explicitly incorporated in the Central government's budget from 2002-03.

Second, there has been an increase in the share of explicit subsidies. Such subsidies, mainly on food, fertiliser and petroleum, account for 38 per cent of total government subsidies.

Third, with input costs recovery rates have not gone up commensurately.

In rupee terms, explicit and implicit subsidies are estimated at Rs 1,04,913 crore for 2002-03 and Rs 1,15,824 crore for 2003-04.

As a proportion of net revenue receipts, they are estimated at 45.27 per cent and 44.04 per cent respectively.

The new document maintains that subsidy reforms should aim at reducing their volume relative to revenue receipts, limiting these to only Merit-I and Merit-II categories while doing away with the non-merit subsidies, administering subsidies more directly to the targeted beneficiaries, thereby ending input subsides and focusing more on transfers rather than subsidies, making these subsidies transparent by showing them in the Budget and avoiding multiple subsidies to serve the same policy objective as in the case of many a Centrally Sponsored Scheme (CSS). The fact that in the coalition governance experiment, that has been the hallmark of our democracy since the end of single-party government in 1996, pork barrel politics rules the roost, with pampering of one section or the other taking precedence over hard economics.

Will the UPA Government, with enough critics inside and those supporting it from outside, dare to recastthe subvention and subsidy system it had fashioned over the years painstakingly to keep its vote bank safe?

Even after dismantling the administered pricing mechanism (APM) in the petroleum sector, the government of the day remained in concert with national oil marketing companies not to rub the consumer the wrong way even as international crude prices were going through the roof.

But no one can question the unassailable logic of the latest subsidy paper that high costs of service provision and low or negligible recoveries through user charges are the twin factors leading to high subsidies. Hence, it says that costs need to be pared down by eliminating producer inefficiencies.

Probably, and as wisely put by the latest paper, a scheme focussing on services where there is considerable scope for higher recovery in the non-merit category might constitute the first step.

This leaves the reform of other crucial Merit-I and Merit-II subsidies with the political leadership which, as it constitutes now and here, is unable to tie its own hands.

In sum, what is highlighted in the latest report is only the plethora of subsidies of the Central government, while the State governments with their penchant for provision of free water and electricity and other inefficient allocation of scarce resources constitute a separate saga of defiance of financial sense.