During his first term [2014-19], Modi had focused on governance reforms, cutting bureaucratic red tape, simplifying procedures, expediting approvals and improving the ease of doing business. The government also spent its energy on effective implementation of welfare schemes ensuring that the assistance reaches the beneficiaries in full vide the direct benefit transfer [DBT] to their bank accounts using the JAM [Jan Dhan – Aadhaar – Mobile] platform.
Now, that the public has given him a resounding mandate to rule for another term in the just concluded general elections, he should use the opportunity to crack the whip on long pending reforms. The key sectors crying for immediate attention including food, fertilizers, oil, gas, power, irrigation, credit etc. At present, all these sectors are excessively regulated covering all important aspects viz. production, imports, transportation, marketing, distribution, pricing etc.
Several committees have recommended dismantling of these controls, allowing inter-play of market forces for guiding resource allocation, production/supply, distribution and pricing. They have also proposed giving subsidy directly to the target group such as small and marginal farmers, poor households etc.
Thus far, no political dispensation [Modi included] has shown the gumption to act on the above recommendations. There are three critical pressure points [call them vested interests or extreme vulnerabilities] which have scared away successive governments from making the necessary moves in this direction.
First, implementation of market based supply and pricing means that the beneficiaries of subsidy will have to pay much higher price than what they are paying at present. For instance, the households currently getting wheat at Rs 2 per kg will have to pay 10 times more or above Rs 20 per kg. A farmer paying Rs 268/- for a bag of urea [50 kg] will have to pay at least twice as much or Rs 536/-. Likewise, he/she will have to spend at least Rs 5/- per unit of electricity up from the current just about 50 paise.
True, the beneficiary will get the extra amount [say, Rs 18 per kg in case of wheat or Rs 268/- a bag for urea] as reimbursement in his/her account. Hence, effectively he/she will continue to pay the same as previously i.e. Rs 2 per kg/Rs 268/- a bag. Why then, should there be any reason to worry?
Unlike, the present scenario wherein, he/she pays the subsidized price in the very first place, under the new system, he will have to first pay the higher market based price and then, wait for the reimbursement of subsidy to come to his/her account. He may not have the patience to wait. What if, the wait gets longer – inevitable in a situation of the budget allocation being far short of the requirement [very likely]?
Second, at present, millions of undeserving persons get the benefit of subsidy just because of the manner of administering the system. For instance, urea is sold to ‘all’ farmers at a uniform low [subsidized] price. Even a large/rich farmer [land holding > 10 hectare] into commercial farming gets it at the same price as charged to a marginal/small farmer [land holding size < 1 hectare/1-2 hectare]. For the former, this is fortuitous.
Under the new system of every user having to pay higher price, the government will have the discretion of transferring subsidy only to the account of deserving beneficiary i.e. small and marginal farmers only. But, this is bound to be resisted by large/rich farmers who are used to enjoying the subsidy for generations.
It is one thing to ask the existing beneficiaries to ‘voluntarily’ give up claim to subsidy as Modi did in the case of LPG [liquefied petroleum gas] subsidy which yielded a good response [about 15 million persons gave up]. But, things will be altogether different if the political brass takes a policy decision to deny subsidy to a particular category say, farmers having land holding size in excess of 10 hectares.
Will Modi act tough or otherwise? This may be gauged by looking at his approach to PM Kisan Samman Nidhi or PM – KISAN. Under the scheme announced in the interim budget for 2019-20, the government decided to give Rs 6000/- every year [in three installments of Rs 2000/- each] to small and marginal farmers only. But, in its manifesto in the run up to general elections, the BJP promised to extend the benefit to all farmers including large/rich farmers.
Third, under the existing system of routing subsidy through manufacturers or government agencies [such as Food Corporation of India (FCI)], several of them have got used to claiming inflated expenses [to cover up inefficiency in their operations or even ‘bogus bills’ passing muster with full support of corrupt officials] as subsidy. In fertilizers, some public sector undertakings [PSUs] stay afloat largely because their high production cost gets fully reimbursed under the pricing and subsidy mechanism.
With the existing systems remaining in place for over 4-5 decades, the vested interests have got deeply entrenched. They are bound to put up strong resistance to any change that involves dismantling of these systems and their replacement by market-driven forces. Even PSUs are sure to resist as then, their very survival would be at stake [unless the government gives them budget support].
For Modi to move forward on the reforms, he will have to address the aforementioned three pressure points which afflict all crucial sectors. Will he succeed or not? The outcome will depend on his ability to build political consensus within NDA [the conglomeration of parties viz. BJP et al that Modi heads] as also with opposition parties and withstand pressure from the vested interests.