By Jayashree Jakhade

Let not one make a virtue out of necessity. If the government has finally opened its eyes to the spectre of subsidies, its not plain commonsense that is making it do it.

It’s because of the realisation that if the ballooning subsidy bill is not curbed, the entire macro economic functioning will go haywire. The results are there for all to see: for the first time, the government made a conscious effort in the Budget -- however small a beginning -- in bringing in harsh measures to fight obstacles on all fronts.Fiscal deficit which is rising is on the top of the agenda and all efforts both on revenue and expenditure fronts are being looked into so as to tackle the problem.

Its another issue altogether that nothing very concrete has yet been done.It was two years ago that the government first committed that it would try and phase out the subsidy burden gradually within the next couple of years. But even today, subsidies as a percentage of GDP are still rising.It is only now that with international investors and trading bodies criticising the government’s budgetary achievements that the government has realised that this sluggish approach will not work.

The first steps
In spite of this, the first signs of progress are very much there. For the first time, in this Budget, a conscious attempt has been made at actually finding out where the fault lies. The result: this has re-inforced the perception that it is the rising subsidies that are eating into the revenue earnings of the government. To give definite signals that it means business, the government has not just announced policies but gone ahead with the first few steps, as well.

A fact that has been largely underplayed is that the battle against subsidies first started with the Railway Budget 1999-2000, where the revenue earnings of the railways have shown a fall. This was because there was a fall in traffic movement last year as there was no industrial activity.What did the railway minister do? First, the tariff costs of carrying goods was increased to bring in the necessary funds and secondly, handling charges and subsidy on fertiliser and urea and other items was reduced. This would automatically result in a price increase. In the case of fertilisers, the railway ministry has scrapped the Rs 367 per tonne freight subsidy which would amount to a huge Rs 3000 crore saving for the government.

Again, the Public Distribution System (PDS) will be revamped and made more transparent and its distribution network will be looked into.Today, food subsidy favours more of the urban classes than the rural ones where it is most required.

The government has realised that if the maximum benefits have to be derived, it will have to work out a mechanism where there has to be a proper identification made of the income classes who should benefit from the PDS. Introducing ration cards of various colours is the first attempt towards this.But this will not be enough.

Food subsidy, which is around 25-30 percent of the entire subsidy expenditure, would still suffer from various other leakages with the result that it would not reach the target groups.

As agriculture production has been quite encouraging and food grain buffer stocks are rising, there is a reduced burden of importing food grains and taking all this into account the government has hiked the price of foodgrains and sugar on the PDS.

Price of sugar on the PDS for 1999-2000 season has been increased by 60 paise to Rs 11.10 per kg.This is in line with the government hiking the central issue price of sugar under PDS by Rs.1 to Rs 13 a kg.This measure will help reduce the subsidy burden by about Rs.500 crore to just Rs 200 crore.Last year, the food subsidy was around Rs 9,200 crore, while for the next year, the budget provision is only for only Rs 8,100 crore.

The whole issue of subsidies is that both implicit and explicit subsidies are political holy cows. Even an announcement of a hike in procurement prices, an increase in user inputs or a cut in subsidy sends shivers down the spine of those in the opposition benches.

Where we seem to have made progress is that unlike earlier occasions,the opposition benches were relatively silent and there were no rollbacks this time around. Part of this was possible because Yashwant Sinha, the finance minister, played his cards well.

A tactful move
What he did this time was instead of hitting out directly by reducing the subsidy burden on fertilisers, he retained the subsidy on fertiliser production but scrapped the payout that the government makes on behalf of fertiliser companies for dealer margins.This meant the decontrol of fertiliser distribution.

There would no longer be fixed quotas for states, and companies would be free to sell their produce wherever.In return for this freedom, the government would no longer pay the companies Rs 180 per tonne by way of dealer margins. For selling fertilisers to co-operatives and state run outlets the margin is as high as Rs 200 per tonne.

This is a win-win situation for all: the subsidy burden is well under control, distribution is fairly competitive and producers and consumers are happy, too.

Then, the finance minister this time has taken hard hitting measures on the food front, too. Sugar has been completely removed from the PDS for income tax payers who number 1.5 million .This would result in huge savings and targeting the group would be more effective. The price of sugar on the PDS has also been hiked, which would cut wasteful consumption and reduce hoarding.

On the oil pool front, the government is committed to the phasing out of the kerosene subsidy which is as high as 20 per cent of the entire subsidy. Sticking to its target, it has hiked the price of kerosene and diesel. The price of diesel has risen by around 35-37 percent in the past few months. LPG is another component which imposes a huge subsidy on the government.

According to government estimates, each cylinder is subsidised by around Rs 125, the cost of which is borne by the government. Keeping in view that this cannot go on progressively it was last month that the government announced a hike of Rs.50 per cylinder across the board in all states.This would result in a huge a saving which will help bring down the oil pool deficit.

The price of petrol has also been hiked, but this is being done gradually as it would have a direct cascading effect on the inflation rate.Comparatively, inflation has been scaling low for the past one year around 2-3 percent and has been static in the past few weeks but has pepped up again to a little above 4 percent as price hikes in petroleum products have been announced.

The government says that this will not have such a detrimental effect as inflation is well under control and other macro economic indicators are faring well. Although there has been a dip in the international prices of crude, the government will not bring down the domestic prices as the subsidy burden is quite high.

This is a Catch 22 situation. If it raises prices consumers are unhappy, and if it reduces them producers complain.

So, whom does the government please ? In line with the WTO commitment, the government has announced a 20 percent tax on export income in the 1999-2000 budget. This tax existed till 1996-97 but was scrapped later.If India has to become internationally competitive, it will have to reduce the protectionist attitude which will make it more competitive to withstand international pressure.

Although the exporter lobby is not very happy with this move today, India is very comfortable with its export growth which is 9-10 percent and forex earning at $40 million.Export promotion measures are not a very substantial package in the subsidy burden, but over a period of time the government will phase out the incentives that are attached to exports so that India moves closer to a open market mechanism where there are flexible exits in terms of both inward and outward trade.

There is no doubt that subsidies, if well-targeted, can help enhance the welfare of the nation and are a justified social need.

But in India, strong political lobbies and trade unions dilute these benefits and what the government should really do is to revamp the entire distribution and administrative system so that even if the allocated subsidy burden rises, it adds to the tax base and thus brings in the required revenue which can be used towards building roads, ports, and social infrastructure which are essentials for a healthy growth of the economy.

But the point is that they have to be properly targeted. The government has carried on with its commitment of curtailing fiscal deficit to below 4 per cent of GDP and has realised that for it to retain its prestige it will have to curtail subsidies as these are proving to be an expensive exercise.

As India is committed towards WTO it has taken a bold initiative in taxing 20 per cent of export income.This is a bold step which the finance minister took despite having to face a lobby of disappointed industrialists and business groups. In this budget we can see that the government has taken bold steps and is committed towards achieving a high growth rate with a qualitative improvement in the fiscal situation.

In India, the allocation for non merit subsidies is more than the merit subsidies which have a higher growth contributing factor and better visibility and benefit the needy classes.