Direct cash subsidy to poor to serve purpose

Subsidy: Use of new technologies such as biometric identification could help

The Economic Survey on Wednesday said the government should move away from price-distorting subsidy schemes and directly provide cash subsidy to households below poverty line. It suggested use of the technologies such as biometric identification and payment through mobile phones for facilitating this.

“Not all the money put into subsidy schemes reaches the poor. Programmes such as food subsidy have huge overhead costs. In other cases, such as the fertiliser subsidy, the expenditures generate a distorted resource allocation that hampers productivity… These (cash subsidy) would lead to a reduction in poverty at a lower cost when compared with the present subsidy programmes,” the Survey said.

For instance, urea prices are highly subsidised, with the farmer paying about Rs 5,360 a tonne and the government paying Rs 11,760 a tonne. Since subsidy of other fertilisers is capped, it leads to disproportionate use of urea by farmers, as it is cheaper. The purchase of urea, beyond what is required, works out to roughly 50,00,000 tonnes. So, farmers and the government are wastefully spending Rs 2,680 crore and Rs 5,860 crore, respectively, for this. These costs are ultimately paid by the consumers as higher food prices and higher taxes, in return for a zero or negative impact upon agricultural output.  

“Subsidy programmes are particularly problematic when they hamper changes in prices and the consequent shifts in resource allocation which must take place,” the Survey added.

An International Monetary Fund working paper found fuel subsidies in India to be badly targeted, with the richest 10 per cent of households benefiting seven times more than the poorest 10 per cent.

According to the provisional actual figures of the Controller General of Accounts, major subsidies amounted to Rs 2,47,596 crore in 2013-14. There has been a sharp increase in total subsidies from 1.42 per cent of gross domestic product (GDP) in 2007-08 to 2.56 per cent in 2012-13, and 2.26 per cent of GDP in 2013-14 (RE).

The Economic Survey said the food subsidy has been increasing due to the widening gap between the economic cost of procurement by the Food Corporation of India and the central issue prices fixed for cereals under the public distribution system (PDS). The Performance Evaluation Report of the Planning Commission on targeted PDS (2005) stated for every kg of grains delivered to the poor, the government released 2.4 kg from the central pool.

In the case of fuel subsidy, petrol prices have been decontrolled and diesel prices are subjected to monthly increases of 0.50 a litre. The cap set on the number of subsidized LPG cylinders per annum per family was increased from 9 to 12 from April 2014. In addition, leakages contribute substantially to the overall increase in subsidy burden. The under-recoveries of the oil marketing companies (OMCs) have been rising in tandem with international oil prices. The under-recoveries have increased from Rs 77,123 crore in 2007-08 to Rs 1,39,869 crore in 2013-14.