The Burden Of Subsidies
The government should be congratulated for having stood its ground on subsidies. Subsidies affect government budget in two ways. The explicit subsidies require outlay of expenditures and thus have to be provided for in the budget. In addition there are implicit subsidies when the goods or services are provided at below cost. These reflect foregone revenue. We should be equally concerned for both types of subsidies. Their costs to the society are the same.
Not all subsidies, I should add, are bad. The government should provide subsidies for what are called merit goods. These are goods that we want people to consume whether they are able to pay for them or not.
For example, elementary education. When a person is educated, her sense of self-worth, her independence and her productivity increase. The society benefits from this as less need to be provided for poverty relief etc. Thus, such merit goods should be subsidised. These subsidies increase the wellbeing of the society.
The government has continued to provide such subsidies for social services such as elementary education, public health, nutrition programmes, research, soil and water conservation, ecological and environmental preservation, roads and bridges, atomic energy, space research, etc.. In fact, allocation for these have been increased.
Unfortunately, we also provide large amount of non-merit subsidies for which no argument of economic efficiency or of social welfare can be given. These include subsidies for health services and higher education to those who can afford it, subsidies to inefficient industries, subsidies on LPG which goes mainly to the better-off classes, subsidies on urban transport (some of it may be justified as it is environmentally-friendly compared to private transport by cars and scooters) subsidies on irrigation water and so on.
Moreover these subsidies have increased to such levels that it severely restricts government's ability to undertake much needed measures for the country, its poor and the disadvantaged. The continuation of these non-merit subsidies has become counter-productive as much of these subsidies accrue to the not-so-poor and even those for whose benefit they were originally introduced are hurt by them.
In 1994-95, the net explicit and implicit subsidies in the central budget on non-merit goods were estimated to be Rs 38,446 crore of which explicit subsidies were Rs 12,932 crore. In the revised estimate of 1999-2000, the explicit subsidies had increased to Rs 25,692 crore. The implicit subsidies must have increased but even if we neglect these increases, the total explicit and implicit subsidies of the central government in 1999-2000 were around Rs 50,000 crore. In the budget for 2000-01, a modest reduction of only Rs 3,001 crore in the explicit subsidies is proposed.
The states also provide similar levels of subsidies. In 1993-94, the implicit and explicit subsidies for non-merit goods provided by 15 selected states were estimated to be Rs 69,335 crore. These must have grown further. The power subsidy alone has grown from Rs 5,957 crore in 1993-94 to Rs 14,517 crore in 1998-99. Thus the total of non-merit subsidies provided by the Centre and the states today exceeds Rs 1,30,000 crore. This is more than 6 per cent of our GDP.
To get some idea of how large is this amount, consider this:If this amount of money is put in Rs 100 notes end to end, it will circle the earth 52 times, or it can make two round trips to moon from earth.
Even if you were to put rupee coins on top of each other, you can make three towers that reach the moon.
If we just think what we can do with this money for the poor and the disadvantaged, we would surely see the need to reduce these subsidies.
If all of this is invested, the growth rate of the economy would increase by 2 percentage points. This will create many jobs and could itself be an effective anti-poverty measure.
If this amount can be distributed to the poorest 300 million persons in the country, each of them would get more than Rs 4,000 per year.
We can increase plan allocation for social services of education, medical and public health services, family welfare, housing, urban development and other social services many-fold. The total plan outlay for 1998-99 was only Rs 37,400 crore on these.
We can see that every child of school going age is in a school of good quality. Quality of schools has a major impact upon enrolment rates. The experience of many voluntary agencies and field surveys has shown that the poorest of parents are eager to send children to school, once good quality schools exist in the neighbourhood.
My colleague, Madhura Swaminathan has estimated that total annual expenditure required for universal primary schooling is of the order of Rs 281 billion, i.e. about 2.8 per cent of GDP annually to provide adequate quantity and quality of primary schooling compared to current expenditure of 1.5 per cent on primary education. If we rationalise many non-merit subsidies, we would have all the money that we need to do this and much more.
If this is distributed to some 5,00,000 panchayats in the country, each will get more than Rs 25 lakh every year.
Only a small fraction of the present subsidies reach the poor. The poorest 60 per cent of the households cultivate less than 20 per cent of the land. We also know that on a per hectare basis, small and large farmers use more or less the same level of fertiliser input. As a proportion of land owned, tube-well irrigation is more likely to be higher for larger farmers. Thus the share of small and marginal farmers in fertiliser and power subsidies is less than 20 per cent.
Even the benefits of public food distribution system largely accrue to the not so poor. On an average, 35 per cent of the food distributed through the public distribution system (PDS) leaks out and does not reach the consumers through ration shops. What reaches the consumers is more or less evenly distributed to the bottom 80 to 85 per cent of the population. If we consider the bottom 30 per cent as poor who need PDS support, then from every rupee spent, only 20 paise reach the poor. The targeted PDS, if targeting is effective, should do better. However, experience of targeting in Andhra Pradesh had been very poor. The total number of special cards reserved for poor exceeded the total population.
Many of these subsidies not only are ineffective, they are also counter-productive. Consider the subsidy on agricultural power. This subsidy is intended to help farmers. But as I had pointed out in an earlier column, agricultural power subsidy and also pilferage of power have made our state electricity boards (SEBs) financially sick. They are unable to supply assured power to farmers. Farmers get electricity only for some hours and often at night.
The fluctuating voltage burns up their motors and what they save in electricity they spend in repairing motors. If power were available round the clock, a farmer would be able to sell surplus water to his neighbour and make much more money than what he would pay for power. SEBs' incomes would go up by Rs 14,000 crore if subsidies are removed. With this additional revenue leveraged in the financial market, they would be able to set up 10,000 mw of additional capacity every year and our power shortages would disappear. Restructuring our subsidies is critical for the progress of the country and the welfare of its people.