The black side of whiteÎThe White Paper on subsidies seems more black than white.By Jayashree Jakhade
In 1996-97, P Chidambaram,the then finance minister, placed before Parliament a White Paper on subsidies. Although there were sporadic discussions on the subsidy burden in political circles before the paper came out, the contents hit all those who read it with resounding force. For the first time, the actual magnitude of mismanagement of the subsidy route was clearly brought out.
The basic focus of the paper was to provide a comprehensive estimate of budget based subsidies in which both explicit and implicit subsidies are covered.The entire paper discussed in detail both the visible and hidden subsidies. Says a Mumbai-based economist:-- The whole intention was to raise an informal debate in the house, raise awareness about the overall level of subsidies as a percentage of GDP and whip up some consensus about optimal targets.--
This the Paper did.Today, the paper seems almost prophetic and clairvoyant in its contents. The fiscal situation is totally out of control -- much more than what it was when the White Paper was released -- and there is no proper management of fiscal resources.Fiscal deficit has been on the rise year after year and the finance minister has been left with no option but to wake up and raise the prices of foodgrains, kerosene, LPG which is the right move as subsidies amount to a major chunk of the outgo of the government.
The exercise has begun with prices of kerosene, LPG, diesel, petrol, urea all being hiked so as to reduce outflows from the exchequers’ kitty so that the fiscal deficit, which is rising by leaps and bounds is kept in place.
If today there is any awareness about fiscal responsibility, it was this paper that really made the government sit up and open its eyes and realise for the first time that there was something very wrong with the system.
Staggering subsidies
A very shocking revelation in the paper was that the aggregate level of subsidy in 1994-95 for all services provided by the central and state governments is placed at Rs.137,338 crore and constituted 14.4 per cent of GDP. The break up shows that central subsidies amounted to Rs.43,048 crore and state subsidies were nearly double at Rs 94,290 crore.
Furthermore, central subsidy on social and economic services excluding those on identified merit goods were Rs.36,125 crore which is 3.8 per cent of GDP.Subsidies by the central government on merit goods account for Rs.6923 crore and formed less than 1 per cent of GDP.
Even if merit subsidies are set aside, the remaining non merit subsidies alone amount to 10.7 per cent of GDP. Specifically, it comprised 3.8 per cent and 6.9 per cent of GDP per- taining to central and state subsidies respectively.The basic lacuna is that the average all India recovery rate for these non merit subsidies is just 10.3 per cent, implying a subsidy rate of almost 90 per cent, which is the staggering burden that the government has to bear.
Missing the mark
A look at the subsidy chart will show that many subsidies are introduced through inputs, eg., feedstock of fertiliser, fertiliser, electricity, diesel and irrigation.Just as the cascading effect is an undesirable feature in the case of taxation,similarly, if the distribution network does not target the needy groups effectively enough, the entire subsidisation exercise becomes meaningless.In the case of the public distribution system, the targeting is very poor and the interim leakages are extensive.
The case of fertiliser subsidy is not very different, either, as it ends up benefiting the producers/suppliers rather than farmers.In the case of higher education also, a significant portion of subsidies is appropriated by the middle to higher income groups because the ceiling of seats in this sector is cleared by a quality based screening in the shape of entrance examinations, interviews, group discussions etc, where the poorer sections of society are not in a position to compete.
A similar pro rich bias is seen in the case of health subsidies , which results in the target group of rural and economically weaker section beneficiaries losing out. This goes to show that our subsidy regime is not effective.
What is more worrisome is that our subsidies are inducing a wastage of scarce resources thus promoting inefficiency. Extremely low recovery rates in sectors relating to irrigation , water, electricity and diesel lead to their wasteful use.
The loss has a multiplier effect since these resources are typically those which have been drawn away from other sectors in which their marginal productivity would have been higher.But that is not happening and significant and increasing portion of food subsidies do not filter through to consumers but are absorbed in increasing costs of handling and storing food grains.
Ways to get better
So, what does the White Paper prescribe to make subsidies more revenue earning and more of a fruitful exercise?
Reforms should focus on:
reducing the overall scale of subsidies
making subsidies as transparent as possible
using subsidies for well-defined economic objectives
focussing on final goods and services so as to maximise their impact on the target population at minimum cost
instituting system for periodic review of subsidies
setting clear limits on duration of any new subsidy scheme.This is a very crucial element in the entire exercise. Otherwise the subsidies get carried over for years which makes them unproductive.What the government should do is to try and fasten the recovery mechanism primarily through a phased increase in user charges.The current recovery rates are very low. This is the case even for non merit services which are just over 10 per cent for al India with a slightly higher rate of 12.1 per cent for central government and only 9.3 per cet for states.
Another way of making the statistics more hard hitting is to say that the combined centre- state subsidies for non merit goods is nearly 90 per cent, which is a very heavy burden and should be scaled down to 50 per cent.If this happens, subsidies on non merit good/services would drop from 10.7 per cent of GDP to about 6 per cent of GDP, that is a decline of 4.7 per cent points of GDP.
It has been seen that there is a very high correlation between burgeoning fiscal deficit and the subsidy level.Even in 1996-97, the combined fiscal deficit of the centre and states was 6.5 per cent of GDP. If the subsidy rate is reduced to 50 per cent, it would automatically result in the fiscal deficit shrinking to 2 per cent from a high of 6.5 per cent.
Today, the fiscal deficit figures are even more alarming.It stands at around 7 per cent of GDP which the government admits is beyond its control. That makes a very strong case for a serious beginning into scaling down subsidies, taking a more focussed approach and propping up the recovery rate. This should help immensely in curbing the fiscal deficit.
Today the entire exercise of subsidies is more a politically drawn issue than mere economics.If there is an increase in urea prices or kerosene and diesel subsidy is brought down, the entire opposition is up in arms, which culminates in the threat of the budget not being passed. What has to be analysed is whether all the money that is actually being spent on subsidisation is actually getting the required benefits? Money that can otherwise be channelised into more productive channels like building infrastructure which is the stepping stone to attract foreign investment and a foundation for fuelling future growth is lagging behind because India does not have the required funds.
After all this burden, if the required results are not being achieved from the subsidy regime, then the whole exercise is a failure and should either be scrapped or a proper administrative authority should be set up to look into the proper distributive aspects.
Internationally also, subsidies are given but they do not attract leakages and are more focussed and target groups are well defined. In India subsidies cannot be classified and there is a lack of accountability.
This leads to double counting or subsidies not being administered for correct use. It will take a while till the entire system gets cleaned up and subsidies become more productive.For this, not only the government at the Centre but also the state governments will have to play an active role to enhance the scope of the subsidy regime.
If subsidies are well targeted they are actually a boon to the entire nation as they enhance the welfare of the nation and improve standards of living of the masses.