Wasting it all in the name of the poor

The tussle between the Employees Provident Fund Organisation (EPFO) and the trade unions over interest rates to be paid on PF is an example of how subsidies in our country tend to be hijacked by the middle class. The EPFO has decided to lower the interest rate on PF to 8.5% from the 9.5% paid over the last three years. This is progress and ideally, the rate should be 8% or lower. Meeting the trade unions demand of 9.5% would have meant subsidisation from the budget of around Rs 1,200 crore per annum.

The aim of any subsidy should be reduction of poverty through creation of economic opportunities for the poor. But most of subsidies get hijacked and fail to serve this goal. The majority of the millions of rural landless labour that live below the poverty line do not have PF accounts, water supply or power connections. Neither do they use kerosene or cooking gas or send their children to government colleges. All such subsidies obviously help the non-poor. The poor are best served by investments that accelerate growth to creates jobs and provide health and education services to create sustainable livelihoods. The Prime Minister has said that we aim at 10% GDP growth. If achieved, this would be the best instrument to banish poverty. But this cannot happen unless resources guzzled by subsidies are not diverted to productive investment. The trade-off between subsidies and investments for higher growth stands as the biggest boulder on the road to poverty alleviation.

Over the past two decades, most attempts to curb subsidies have failed and the mountain of subsidies that sits on budgets at both the Centre and the states has continued to expand, year after year. Indeed, in some states the problem has worsened, as governments there have once again resorted to free sale of power to farmers, ignoring the bitter lessons of similar episodes in the past. More recently, the Centre has sought to deal with the problem of subsidised sale of some petroleum products, not by passing the impact of the global surge in oil prices on to consumers but by administering prices below cost, thus forcing public sector oil companies to incur losses.

A simple calculation would show that the bulk of our subsidies are misdirected and bring little benefit to the poor. Various studies by the government have shown that all direct and indirect subsidies doled out by Centre and states tot up to as much as 15% of GDP. Even if one accepts 10% of GDP that should help only the poor, the current total public expenditure on subsidies would be in the region of (hold your breath) Rs 3,00,000 crore ($70 billion). If all this money were given directly to the 250 million poor in the country, the per capita cash injection works out to Rs 10,400 per person yearly, or Rs 52,000 a year for a family of five. It is plain that if this amount were directly given to all poor households in the country, it would be enough to raise their consumption to levels above the poverty line.

It is plain that cash injections for current consumption will not create sustainable livelihoods. The above calculation is simply to illustrate that failure to serve the poor has got nothing to do with shortage of resources. It has everything to do with misallocation or inefficient use of resources. It is a case of bad economics. If Rs 3,00,000 crore spent on subsidies is diverted to productive causes, the rate of investment in the economy can jump from the present 25% to 35%, enough to sustain around 10% growth yearly. Of course, this growth would have to percolate to the poorest regions and districts of India, concentrated in the states of Bihar, Madhya Pradesh, Orissa, Jharkhand, Chhattisgarh, Uttar Pradesh and the Northeast.

The argument presented here is, no doubt, simplistic. Yet, it gets to the core of the development debate in the country. It is time we mobilised Parliament and the National Development Council to discuss how subsidies are misdirected and we need a new approach to prevent the vocal middle class from hijacking resources that ought to reach the poor. A basic principle of economics is that one policy instrument should be deployed only to achieve one objective. Prices should be used only for allocating resources and all controls on these to meet poverty objectives should be done away with. Thus, price controls on petroleum products should be removed and food distribution at controlled prices should be jettisoned. Price support for farm produce should be used only for price stabilisation and not mixed up with rations at controlled prices. Similarly, all price distortions on water and power should be removed.

The poor should be served through one universal scheme. The Employment Guarantee Scheme has the potential for being one such scheme. All support schemes for the poor should be merged into the EGS. The EGS would serve the goal better if it creates assets for enhancing the growth potential of the area in which it is implemented. Since the bulk of the poor are concentrated in dryland areas, a singular focus on water would deliver the best results. We have needlessly complicated our approach to development and poverty. It is time we simplified it to get better and quicker results.

The writer is an advisor to Ficci. These are his personal views