At present, tens of millions persons [including undeserving] are getting a variety of subsidies from the government. These cost hundreds of thousand crore seriously impairing its ability to maintain fiscal deficit [excess of total expenditure over total revenue] within the target range mandated by the Fiscal Responsibility and Budget Management [FRBM] Act.
The manner of administering these subsidies is marked by ‘adhocism’ and ‘arbitrariness’. It leads to mis-allocation of resources, promotes inefficiency in production, distribution and use, encourages misuse of funds, makes way for controls through the backdoor, enables bureaucrats to meddle in the affairs of the industry and creates fertile ground for nepotism and corruption.
Even as Modi – government has vowed to make India a US$ 5 trillion economy by 2024-25, the extant subsidy mechanisms could act as a major speed breaker.
Almost all subsidies are routed through manufacturers and agencies of the state such as Food Corporation of India [FCI]. The government directs them to sell items such as fertilizers, food, fuel, power etc to intended beneficiaries at a low price and reimburses the excess of production/procurement, handling and distribution cost over it as subsidy. This lies at the root of vested interests pursuing their own agenda in the name of subsidies to the poor.
Knowing that the government will reimburse the excess of cost over the selling price as subsidy, the manufacturers have no incentive to improve efficiency and cut cost. Far from that, they have an incentive to inflate cost and then, work with bureaucrats to get reimbursement. Even the suppliers of raw materials such as phosphoric acid, ammonia, potash, LNG [liquefied natural gas] used in the making of fertilizers get away with charging high price from fertilizer manufacturers who readily pay as input costs are pass-through under the subsidy regime. No wonder, the Economic Survey for 2015-16 says that “24% of fertilizer subsidy goes to inefficient producers”.
The Food Corporation of India [FCI] which procures, handles and distributes food grains under the National Food Security Act [NFSA] claims expenses on these operations on ‘actual’ basis. This allows cover up for its inefficiencies, cost padding and even for quantities which may have disappeared from the warehouses of the agency. It also includes fat salaries given to infamous loaders.
In the power sector, distribution companies [DISCOMs] claim reimbursement for the loss they incur on supplies to farmers and poor households at subsidized rate. The generators leverage this to charge inflated cost-based tariff from DISCOMs. The suppliers of fuel such as Coal India Limited [CIL] too merrily charge high price from generators who offer no resistance as fuel cost is pass-through under power purchase agreement [PPA].
The oil marketing companies [OMCs] in the public sector viz. Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL] get reimbursement on sale of subsidized LPG and kerosene based on inflated price which is determined by taking a mix of import parity and export parity in 80:20 ratio [this gives them fortuitous benefit of customs duty and port handling charges not incurred on throughput from refineries].
The availability of low price [albeit subsidized] fertilizers, food and fuel in the market place gives a huge temptation to dubious characters to divert them [away from the purpose these are meant for] making a huge personal gain. So, we have large-scale diversion of urea by as much as 40% of total supplies and leakage of food from the public distribution system [PDS] which in some states could be a high of 50%. The administrative measures such as neem coating of urea have failed to make a dent on these leakages.
The extant arrangement of making these essentials available at a ‘uniform’ low price leads everyone to assume that subsidy is meant for him/her. For instance, even a rich farmer with more than 10 hectare or owner of say huge tea plantations is also enjoying the benefit of subsidy on fertilizers. This may not be the intent of the policy makers but it is all going by default.
Modi is undoubtedly a clean leader and successfully implemented measures to stem the rot in various areas of governance including reduction of leakages in delivery of financial assistance using direct benefit transfer [DBT] platform. But, when the systems are prone to wrong-doings and misuse, administrative measure howsoever precise and foolproof won’t work.
The way forward is to dismantle these systems, let market forces guide actions of all stakeholders viz. manufacturers/suppliers [including input suppliers], distributors, retailers/traders and farmers. The subsidy should be given directly to the beneficiaries using DBT mode. This way alone, the government can stem the rot, unleash entrepreneurial spirit, inject competition, improve efficiency and reduce cost for the benefit of all consumers.
Our policy makers should also consider merging all subsidies into a composite support say ‘X’. The beneficiary should have the freedom to use it for buying either fertilizers, other agricultural inputs, food, fuel, LPG etc depending on the need. For instance, a household doing subsistence farming [unable to meet food needs even for the self] may use it partly for fertilizers and partly for food. Another producing marketable surplus may spend most of it on fertilizers.
Within fertilizers, the household may distribute the money on purchase of nutrients viz. nitrogen, phosphate, potash or micro-nutrient depending on which one the soil needs more. An entity latched on to organic farming [or ‘zero budget’ to use the phrase mentioned in FM’s budget speech] therefore, not using fertilizer, pesticide etc may use it for better management of farm waste and animal care. At another level, a farm worker or contract laborer who survives on meager wage or someone in petty occupation [blacksmith, cobbler, plumber, rural artisan etc] earning less may use the subsidy mostly for buying food.
The government should identify a non-deserving category which should be excluded from the composite subsidy. This will bring about significant savings which can be used for increasing the support to deserving within the available resources.
This approach will help in achieving maximum deliverable in terms of boosting the income of poor with minimum resource and at the same time, help the government move towards its goal of US$ 5 trillion economy [via giving a fillip to aggregate private consumption] with macro-economic stability.