Prime minister Narendra Modi’s speech at the Airtel-Economic Times Global Business Summit, comparing tax incentives to India Inc with subsidies to farmers may have gone down well at a political rally, but at a gathering of business leaders, it just sent shivers down their spines, more so since it was inept. At a fundamental level, a tax incentive is ‘given’ only once there is an investment —an SEZ may get a tax break but only after several thousands of crores of investment is made and, as a result, several thousand jobs are created. In the case of farm subsidies, there is no such relationship; the subsidy is given for being poor or not being wealthy enough.
If the same farm subsidy was linked to actual production, it would be quite different. Indeed, the problem with subsidies is that they distort production and consumption. Given Indian fertiliser costs more than imports, the subsidy doesn’t go to farmers, it goes to inefficient local producers; given that urea is heavily subsidised, farmers ruin their soil by excessive use—it is to fix precisely this that Modi introduced soil health cards. Kerosene subsidies made the fuel so cheap, it is used to adulterate petrol, damaging engines of cars apart from polluting the environment; when diesel was subsidised heavily, firms stopped burning the vastly inferior furnace oil and used diesel instead. Over half the food subsidy doesn’t reach the targeted audience and, given how it is so focused on wheat/rice and is run through a hugely inefficient FCI, this has distorted cropping patterns in such a manner that has even destroyed the health of the soil in states like Punjab and Haryana—that is the reason why the Shanta Kumar committee recommended disbanding FCI; the money saved could be used to give direct cash transfers to benefit all farmers across the country, not just the 6% who sell wheat/rice to FCI. Irrigation subsidies are a great idea since they can clearly incentivise crop production, but a lot depends upon whether the money is used to create irrigation—Maharashtra, for instance, spent R81,206 crore in the 2000s to increase irrigation from 3.9 million hectares to just 4.1 million while Gujarat spent R39,369 crore and increased irrigation from 3.3 million hectares to 5.6 million.
The prime minister’ speech signals the government is in no hurry to phase out wasteful and, more important, harmful subsidies. Second, the major reason for tax incentives is not to subsidise anyone, it is to compensate investors for poor infrastructure and associated costs in the country, including higher taxes—that is the reason why finance minister Arun Jaitley is removing tax incentives while reducing the corporate tax rate to levels similar to other countries. And while the prime minister may think exempting dividends and shares from long-term capital gains tax is not a good idea, he would do well to keep in mind that the Sensex will crash if these are taken away—FIIs will find it more profitable to invest in other countries—and investments remain poor when the mood is not bullish. For a government which is trying to woo investors, there couldn’t be more serious miscommunication.