In its maiden budget presented on July 10, 2014, NDA-government has announced setting up of an expenditure reforms commission (ERC) that will examine all subsidies viz., food, fuel, fertilizers and come up with a road map for restructuring them.
Further castigating existing dispensation as one that does not target beneficiaries (read poor) and leads to ever rising ‘un-quantifiable’ subsidies, it has promised to switch over to a scheme of direct cash transfer (DCT) to poor in a focused and transparent manner.
Since then, it is close to a month and ERC has not been constituted as yet. At this pace, we can’t expect its recommendations before end of current year. Therefore, any major restructuring may have to wait at least until next budget.
Why do we have to wait that long? Why is there any need for ERC? What is it expected to do? What stuff it will bring to the table in addition to what is already there? Why can’t government get cracking right away?
Currently, all subsidies are administered through a mechanism of selling concerned product at low price to consumers and compensating authorized agencies/manufacturers for excess of cost incurred by them in procuring/producing and distributing over this low price.
This mechanism suffers from serious flaws. It fails to differentiate between rich and poor. It keeps prices out of sync with cost and distorts resource allocation. It protects inefficiencies in the supply and distribution chain. It is prone to unprecedented leakages/misuse.
Thus, urea is available to all farmers – irrespective of holding size, location, crop, irrigated or rain-fed, soil quality – at a highly subsidized uniform price (current MRP of Rs 5360 per ton against minimum cost 3 times high is ‘laughable’).
A businessman who has been bequeathed farmland by his forefathers and grows agriculture produce for merely adding to his riches and would be too willing to pay market price, is also beneficiary of this dispensation – by default though!
Big corporate who buy rice or wheat for export running in to tens and thousands of crores are also recipients of subsidy albeit indirectly. This also holds for a host of traders and intermediaries who cater to exporters or sell in domestic market.
Nearly 40% of subsidized urea gets diverted for non-agricultural use or smuggled to neighboring countries where market price is much higher. That is clear waste of around Rs 15,000–20,000 crores of tax payers money.
Non-urea fertilizers viz., DAP/complexes, MOP etc are also subsidized. Since, subsidy on these is much less than on urea, this has resulted in their selling price 3-4 times higher. This has led to imbalance in nutrient use affecting crop yield and soil health.
According to Economic Survey, only 0.07 per cent of LPG subsidy in rural areas went to poorest 20 per cent households. In urban areas, 8.2 per cent of subsidies went to poorest 20 per cent households. Clearly, bulk of subsidy is cornered by well-to-do sections.
Nearly 20 million LPG connections are fake. Subsidy paid on these about ₹17,500 crore is cornered by dubious operators and commercial establishments. Bulk of subsidized kerosene, given in the name of poor is siphoned off for adulteration with diesel.
Under Food Security Act (FSA), food is supplied at close to zero prices Rs 1/2/3 per kg for coarse grains, wheat and rice respectively. Consequently, scope for diversion – estimated at around 50% under extant public distribution system (PDS) – will increase manifold. Even @ 50%, food subsidy likely to be embezzled could reach a mammoth Rs100,000 crore annually.
The existing mechanism needs to be disbanded and replaced by a scheme of direct cash transfer (DCT) in to bank account of the poor. It can result in saving of more than 50% of current subsidy bill besides yielding a host of other benefits.
Yet, UPA dispensation did little to take the idea forward. When DCT was launched in January, 2013, food and fertilizers – most crucial sectors crying for reforms – were kept out. In LPG, the scheme was rolled out in June, 2013 only to be rolled back within 6 months by January, 2014. During this period, only 15% of consumers were covered in 180 districts. So, it is virtual non-starter!
UPA had certain ideas on how to implement DCT for food. In early 2013, food ministry had prepared a draft model scheme to be tested in six union territories (UT) and any state willing to implement it from April, 2013 (this never took off).
Under this model scheme, FCI will issue food grain to states/UTs at economic price (purchase price plus handling and distribution cost). They in turn, will arrange for sale to consumers through fair price shops (FPS) at price equal to economic price plus dealer’s commission. The excess of this over target price will be credited in bank account of consumers, a month in advance of purchase.
In case, it is found that a consumer has not drawn food grain from FPS for 2 successive months (old & handicapped persons are exempt), he will no longer be entitled to benefit.
Though a good move to address problem of leakage/diversion, the proposal failed to countenance other ills of inefficiencies and high cost. This is because state would continue to be involved in procurement, handling and distribution with assurance of full reimbursement of cost to FCI and other agencies.
Besides, a draconian sword will hang on poor consumers! There could be several reasons for their inability to lift food from FPS beyond control. Delayed credit of money in to their account could be one. Untimely revision of subsidy to offset increase in economic cost could be another.
With FCI and other agencies continuing to take away major slice of food production, open market would remain stifled. The much needed freedom of operation and competition would remain a distant cry. And, the promise of lower prices through cost cutting and improved efficiency will remain un-fulfilled.
To realize full benefits of DCT, government should liberate the food sector from controls. Its agencies should procure only to meet requirements under Antodaya, mid-day meals and other essential schemes for the very poor besides strategic buffer to meet emergency situations.
All other consumers APL (above poverty line) or BPL (below poverty line) should be allowed to buy food grain from any shop of their choice. The state patronage of FPS must end. Subsidy credit should be without riders. This will enable consumers utilize money in a manner they deem fit. They must have freedom to pick food of his choice.
A similar dispensation should be put in place for fertilizers. Government should remove control on selling price of urea (non-urea fertilizers are already free from price control). It should stop giving subsidy to manufacturers who will charge from farmers price based on economic cost. Subsidy will be directly credited in to the account of poor farmers. Likewise, DCT schemes should be implemented for LPG and kerosene.
For diesel, thanks to a calibrated road map for monthly increase in price by 50 paise per litre since January 2013, already the gap between price and cost has narrowed to around Rs 2 per litre. This is an opportune time to say good bye to subsidy on diesel. Government should go in for its total decontrol and allow private sector to come in so that consumers get full benefit of competition.
DCT should not be viewed merely as a new mechanism of giving subsidy. It must be used as a harbinger of overhauling the manner in which the three most crucial sectors viz., food, fertilizers and fuel are run on principles of cost effectiveness and high standards of efficiency. Indeed, this can come about only by liberating them from archaic controls and injecting intense competition.
This will be an acid test for Modi and an opportunity for him to demonstrate that he is different from UPA. Like in other areas, here also he needs to work in the spirit of T-20 cricket match (borrowing from Nitin Gadkari who used this phrase to characterize functioning of NDA-government)