Subsidies: Plug subsidy leaks to help fiscal consolidation

Conventional subsidy bill of Rs 2.44 lakh crore, or 1.7 per cent of GDP, in 2015-16

If lower tax rate is equivalent to subsidising, the National Democratic Alliance government is clearly targeting the 'well-off' segment of the population. Unlike the previous years, the Economic Survey 2015-16 has dealt with the issue of subsidy by giving only a box on petroleum subsidies, while devoting a chapter with nine-and-a-half pages to 'Bounties for the Well-Off'.

"The Rs 1 lakh crore of subsidy going to the better-off merely on account of six commodities - kerosene, railways, electricity, LPG (liquid petroleum gas), gold and ATF (aviation turbine fuel) - plus the small savings schemes represent a substantial leakage from the government's kitty and an opportunity foregone to help the truly deserving," notes the Survey.

The conventional subsidy bill - which includes fertiliser, food and petroleum subsidy - would be Rs 2.44 lakh crore or 1.7 per cent of GDP in 2015-16. "The rationalisation and re-priortisation of subsidies through better targeting would play a vital role in fiscal consolidation and in targeting expenditure towards inclusive development," says the Survey.

Deregulation of petrol and diesel prices and direct benefit transfer of subsidy to domestic LPG customers, along with the decline in global crude oil prices, helped in containing petroleum subsidy bill at Rs 30,000 crore, compared with Rs 57,769 crore in 2014-15.

Total subsidy bill as a proportion of GDP has been declining since 2012-13 and is expected to be below two per cent of GDP.

For the better-off, the Survey has gone into the details of Public Provident Fund (PPF) scheme and tax-free bonds. While stating that both of these were not actually small saving schemes, it has spelt out the implicit subsidy in PPF at Rs 11,900 crore while that on tax-free bonds at Rs 111 crore. "India should move, in a phased manner, to the EET (exempt, exempt, tax) method of taxation on savings," the Survey suggests.

In other bounties category, the Survey interestingly takes note of the low tax on gold. It says gold is only taxed at about 1-1.6 per cent, compared with tax of about 26 per cent for normal goods. "There is a huge subsidy of 25 percentage points on gold. About 98 per cent of this subsidy accrues to the better-off."

Similarly, for electricity, the Survey says given the magnitude of relative power consumption (84 per cent) of the better-off in the total consumption, they appropriate a substantial amount of total subsidy. Among the six commodities, the highest implicit subsidy for the better-off section comes from LPG at Rs 40,151 crore.