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 ‘ad-hocism’ 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, “24% of fertilizer subsidy goes to inefficient producers” [Economic Survey for 2015-16]
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 heavily 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 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 making a huge personal gain. We have large-scale diversion of urea by as much as 30% 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 tea plantations or orchards is also enjoying the benefit of subsidy on fertilizers.
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 direct benefit transfer [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. What then, stops it from cracking the whip?
The most crucial factor has to do with art of winning elections which all political parties are glued to. Winning elections is hooked to making items of mass consumption/use available at low price or even free. These items include fertilizers in particular, urea [this gets easily identified with farmers], food, electricity, LPG, kerosene etc.
Initially, the prices were kept low to make them affordable to the poor. Subsequently, successive regimes used this as a political tool to win elections pushing concern for the poor to the back-burner. Even when the need to rein in fiscal deficit by pruning subsidies required that the price be increased, the government of the day would think 10 times before going ahead.
For instance, way back in 1998 under the then NDA – government led by A B Vajpayee, in the budget for financial year 1998-99, the then finance minister, Yashwant Sinha proposed an increase of Rs 1000 per ton in the maximum retail price [MRP] of urea. However, in a bid to camouflage its harshness, in the speech, he presented this as ‘increase of Rs 1 per kg’. But, the minister was caught napping even as all members of parliament irrespective of their political affiliations protested forcing him to roll back 50% of the hike on the very next day and balance within a fortnight.
In early 90s, when under pressure from the International Monetary Fund [IMF] and World Bank to eliminate subsidies within three years, the then government under PV Narasimha Rao was forced to decontrol all phosphate [P] and potash [K] fertilizers and withdraw subsidy from August 25, 1992, it not only retained controls and subsidy on urea but also reduced its MRP by 10%. Further, even on P&K fertilizers, within 5 weeks of withdrawal, it resurrected subsidy under a new incarnation called ‘ad-hoc concession’. Since then, successive governments have continued with subsidy on all fertilizers sticking to the low selling price route all along. The obsession to use it for ‘vote bank’ politics is so intense that the current urea MRP is barely 10% more than what it was nearly two decades ago.
This obsession drives the political brass to keep the price of food, fuel and electricity low. How else can one explain wheat and rice being given to beneficiaries under NFSA @Rs 2/3 per kg even as the cost of supply is 12-15 times higher? Supply of free power to farmers is also driven by the same motive.
Even as we have elections round the clock, promising availability of items of mass consumption at throw-away price [or even free] has become a norm rather than an exception. In sharp contrast, meaningful reform – at its very core – requires abandonment of this populist approach. No wonder, the economy remains stuck in the logjam perpetually with no light at the end of the tunnel.