Column : Look where these subsidies go

Written by P Raghavan | Updated: Jul 10 2010, 03:46am hrs
The partial reduction of fertiliser and petroleum goods subsidies and the moves to improve the targeting of food subsidies have raised hopes that the government will firm up its resolve to cut wasteful spending and restore the fiscal discipline, essential for bringing down government borrowings, the money supply and inflation. Unfortunately, most political parties in the Opposition continue to blindly resist these moves. Their main grouse is that the reduction of subsidies will push up prices, reduce purchasing power and thereby consumption by the poor, who have borne the brunt of the spike in inflation.

While it is true that some of the food subsidies do bring relief to the poor in parts of the country, the evidence is that most of the petroleum product and fertiliser subsidies flow to the most undeserving areas. This is brought out by a study on the flow of central subsidies to the states by the National Institute of Public Finance and Policy titled Interstate distribution of central expenditure and subsidies.

The study shows that the per capita subsidies on petroleum, food and fertilisers averaged Rs 919 per person in the 29 major states and union territories in the second half of the decade. Western India, one of the most affluent in the country, benefited most from these subsides, with their per capita subsidy averaging Rs 1,067 annually. In sharp contrast, the per capita subsidy flows to the northeast, one of the poorest regions in the country, was almost a third lower at Rs 733, while the flows to the other regions were within these two outliers.

The disparities in the distribution of central subsidies on petroleum products, food and fertiliser becomes even more glaring when one looks at the state level flows. The numbers show that the average per capita subsidy on these three products were the highest in the richest states. Goa had the highest per capita subsidy of Rs 1,759, followed by Punjab (Rs 1,652), Haryana (Rs 1,537) and Tamil Nadu (Rs 1,215). In contrast, the poorest states received the lowest per capita subsidiesManipur (Rs 562), Nagaland (Rs 560), Jharkhand (Rs 521) and Bihar (Rs 444).

But the overall picture hides the sharp variations in the flow of subsidies across products, regions and states. For instance, the western region benefited most from subsidies on petroleum products, the northeastern from the food and the northern region from fertilisers.

While the per capita subsidy on petroleum products in the western region was Rs 715, the benefits from the petroleum subsidies was least in the northeast region, where the per capita benefit was just Rs 394, less than half of that in the more affluent western part.

The regional distribution of food subsidies is in sharp contrast to that of petroleum products. Here, the western region is the smallest beneficiary and the northeastern region is the biggest gainer. The gains to the northeastern states, where the annual per capita food subsidy was Rs 308, was more than three times higher than the western region, where the average per capita food subsidy was only Rs 141. The region with the second highest average per capita food subsidy was the south at Rs 280, followed by the east and north at Rs 225 and Rs 159, respectively.

But what is most striking about the food subsidies is the wide disparities across the states. The numbers show that the biggest gainers from the food subsidies were in the far-flung northeast, with Sikkim leading the pack. Their annual per capita subsidy was Rs 439, followed by Tamil Nadu and Mizoram. In contrast, the lowest food subsidy was in the rich states of Haryana, Goa and Punjab, with the per capita food subsidy in the last at only Rs 18, just 4% of the per capita food subsidy in Sikkim.

The ranking of the beneficiary regions varies sharply, once again, when it comes to fertiliser subsidies. The biggest gainers were the northern states, followed by the southern, western, eastern and the northeastern regions. And the biggest gainer of the fertiliser subsidy was Punjab, with a per capita benefit of Rs 791, a hundred times larger than of the fertiliser subsidy in Nagaland, where the benefit was a meagre Re 0.22 per capita.

So by trying to defend the these lopsided fertiliser and petroleum subsidies, cornered by the most affluent states, the biggest loser is the Opposition group. A better campaign would have focused on targeting subsidies to the most deserving, while pruning wasteful spending by the government.

p.raghavan@expressindia.com