Populist, popular, welfare in context of subsidy

The issue of subsidy has gained immediate attention because of substantial subsidy for electricity to the poorer sections and several other subsidies given recently by the Delhi government, which has attracted criticism on the ground that it is a populist measure to gain votes. I am not writing exactly on the issue of what the Delhi government has done. I am writing on the theoretical aspect of how to judge subsidies as populist or popular or welfare measures.
 

Any theoretical approach to the issue of subsidy has to begin with what goes in the name of Pigouvian subsidy. British economist Arthur Pigou developed in the early 20th century a concept in favour of the government intervening in tax activities that harm the economy as a whole and subsidising activities that help society as a whole. The theory of Pigou is what came to be known later as dirigisme. This view is opposite to the concept of neutrality of tax, which means that tax leaves unaltered different allocations of resources, such as between labour and capital and choices for consumers (Allan Tait - International Practice and Problems, 1988 p.220). The VAT is theoretically a neutral tax if there are no exemptions. However, a completely neutral tax is only a theoretical possibility, which can be prevalent in a country where the population is of roughly the same economic standard, like Australia, New Zealand, and Japan. In a country like India, which has a very large proportion of poor and very poor people, and also a large proportion of lower middle class, there is a role for subsidy to bridge the inequality of income and making basic amenities available to them.

In the above context, we have to measure the role of subsidies as to whether they are populist, popular or for welfare. Subsidies can be put to bad use, as well as to good use. The examples of bad use are: Giving free bus rides to women, free tirth yatra, exempting lady handbags, bindis, writing ink, etc. The use of writing ink is so little in a pen or ballpoint pen that exempting it from a tax of 10% would only give about one paisa benefit in the cost of production for a pen selling worth Rs 10. Therefore, these measures are perverse subsidies and are of no real worth. They are meant for pleasing the crowd and, therefore, are populist. Populist and popular are quite different. Populist is a fake of popular.

Popular and welfare are almost the same. Examples of popular (welfare) subsidies are for promoting solar power, water conservation, electric vehicle, health care, education, cheaper/cleaner water for the poor, subsidised Metro journey by exempting the original huge cost for laying down the track and buying the passenger bogies, etc. For the Konkan Railway and Metro Railways, huge subsidies have been given in the form of exemptions. Since they were hidden subsidies, nobody criticised them. A transparent subsidy is better. Putting cash subsidy in Jan Dhan Accounts was recommended by Nobel laureate Abhijit Banerjee for increasing effective demand to counter the slowdown in the economy. Petrol subsidy is often criticised as a subsidy to the rich, but all petrol is not used by the rich only. On balance, the government policy to reduce the subsidy to petrol is correct. Subsidy to urea is necessary to boost agriculture. But this subsidy also needs to be reduced gradually to make agriculture stand on its own feet. Food subsidy given through the Food Corporation of India is meant for the welfare of the poor but it has become a virtual scam because of huge losses and corruption. Therefore, substituting it by direct cash subsidy could be much better. Subsidy to farmers by giving free electricity has also proved to be a wasteful expenditure and does not merit continuation.

The conclusion is that subsidy has to be there, where there is the poor class or lower middle class which have to be helped to make basic necessities affordable to them and also to bridge the inequality of income. Subsidy has to be there also where we need to promote certain things like electric vehicles, solar electricity, and metro rail. We have to examine each type of subsidy on its own merit. 

The writer is member, Central Board of Excise & Customs (retired)

Email: smukher2000@yahoo.com