Recently, Arvind Kejriwal, Chief Minister, Delhi vehemently opposed the hike in fare for travel by Metro Rail and even offered to sharing the financial burden equally with union government to ensure that commuters are not penalized. About 3 years back, he had decided to give heavily subsidized power to households consuming up to 400 units a month. Then, also he vowed to bear its financial burden from the state government budget.
Kejriwal is not alone in giving freebies using tax payers money. During the last 5 decades of governance – be it at the center or states – successive political establishments have built a super-structure of subsidies such as on fertilizers, food, kerosene, LPG, irrigation, power, credit, seeds etc.
When given initially, these were justified in terms of helping the poor but, progressively their reach has been extended to cover majority of the population. At present, all 140 million farm households [including the rich & very rich] are eligible for fertilizer subsidy. 2/3rd of Indians qualify for heavily subsidized food under the National Food Security Act [NFSA]. LPG subsidy is given to at around 145 million which includes a large number of better-offs.
The subsidized credit though meant for poor farmers only, is also appropriated by better-off/rich farmers. There are instances of latter on-lending to former at much higher rates and making money on ‘arbitrage’. Likewise, subsidies on power have increased leaps and bounds, much of this is pilfered. The story of subsidy on other items such as irrigation, seeds etc are no different.
The number of such subsidies and their ever expanding reach [embracing even non-poor] clearly shows that they have a lot to do with vote bank politics. By giving more subsidies, the incumbent governments enhance their chances of retaining power. On the other hand, even a whisper of reducing these causes them jitters. And, since reforms inevitably involve subsidy reduction, no party wants to touch them even with a pole.
Take fertilizer subsidy. Way back in 1991, when economic reforms were initiated, then government had given a commitment to IMF/World Bank that this would be eliminated within 3 years i.e. by 1994. It is more than 20 years since, and we still have fertilizer subsidy guzzling about Rs 70,000 crores [budget allocation for 2017-18].
During the last one-and-a-half decade or so, none of the ruling parties had the gumption to increase MRP of urea [sans a mere 10% hike in 2010] – most widely used nitrogenous fertilizer. In 2015, Modi – government decided to freeze the price at its existing level for 4 years. As a result, fertilizer subsidy won’t see any reduction from current Rs 70,000 crores till 2019-20 – as per medium-term expenditure framework statement [MTEF].
In food, successive dispensations have only harped on reducing the price at which food is made available to beneficiaries – consistently ignoring steep increase in the cost of supply. Thus, one shudders to fathom that under the NFSA, a mammoth 800 million people are eligible to get food at throw-away rates of Rs 1/2/3 per kg for coarse grain, wheat and rice. No wonder, then annual budget of union government alone for food subsidy is Rs 145,000 crores [2017-18]. This is set to increase to Rs 200,000 crores in 2019-20.
Likewise, in the power sector, states compete with each other in supplying electricity at either nil or heavily subsidized tariff. This results in huge shortfall in realization of state electricity boards [SEBs]/power distribution companies [PDCs] vis-à-vis cost leading to pile up of loss of over Rs 400,000 crores now being given relief under UDAY [Ujwal Discom Assurance Yojna].
Persistence with low prices, no matter how high the cost is, imposes a huge cost on the economy by increasing subsidy and fiscal deficit. This in turn, leads to high government borrowings [attendant increase in interest rate] besides being inflationary. The resulting low sovereign rating [invariably, international agencies viz. Moody, Standard and Poor etc give India just above junk rating] affects our ability to raise funds from global markets apart from higher cost.
Then, there is a hidden cost by way of affecting the viability of industries/utilities through whom subsidies are routed. The payment of subsidy to fertilizer manufacturers is delayed [at times even denied] if only to rein in payments during any given year. Likewise, SEBs/PDCs are made to suffer losses which affect their ability to make timely payments to power generation companies. The profitability of banks comes under stress as they are forced to lend at subsidized rate. Delhi Metro Rail will suffer if fare hike is disallowed and Delhi government also does not pick up the tab.
There was nothing unusual about it under the erstwhile UPA – dispensation for whom reform was not important at all. But, for Modi – government which is deeply committed to it and has demonstrated its intent through concrete action in a host of other areas even at the cost of triggering adverse reaction [e.g. demonetization and GST], this is unusual. That the benefit of low price continues to be cornered by better-off sections – contrary to Modi’s philosophy of restricting it only to the poor – makes it even more anomalous.
What makes Modi helpless? All the more, when he has zero tolerance for corruption and nepotism, evils which are natural concomitants of controls and subsidies. The sole reason for this is elections every now and then. Be it fertilizers, food, power, credit etc these are all items whose low price has got identified with a government that does ‘GOOD’ to people at large. Any party which goes for a hike howsoever strongly justified by reforms, is perceived to be ‘BAD’. So, even Modi is unwilling to take any risk!
If, elections to Lok Sabha and all state assemblies can happen at the same time, then we can have political stability for full 5 years thereby creating the right ambience for reforms even in these most sensitive areas. Or else, it will be business as usual.