Vested interests too strong to reform urea subsidy: Arvind Virmani

The formal Fiscal Responsibility and Budget Management (FRBM) Act technically expired in 2008, but has been informally maintained since then. A comprehensive review, updating and legal reiteration of the framework is overdue. In my view, the first best policy would be to stick to the fiscal targets for 2016-17 and reduce the repo rates by 75 basis points. As this is unlikely to happen, given the financial markets focus on nominal (instead of real) rates, the second best policy may be to postpone fiscal deficit targets, while holding on to the revenue deficit targets.

The mid-term review had in 2015 estimated growth rate for 2015-16 at 7 to 7.5 per cent. This means that the Economic Survey predicts a rise of 0.25 per cent points at the top end. My own forecast of growth is an acceleration of about 0.2 percentage points in 2016-17 over the growth rate that we get for 2015-16 (which is projected by the Central Statistical Office at 7.6 per cent).


I have nothing to add to Survey's estimate of Rs 1 lakh crore subsidies going to the better-off, as I haven't done my own estimate.

Some of us have been arguing that subsidies should be targeted. This was why I had suggested a unique identification number (UID)- based multi-application smart card that would bring all subsidies under one roof. I have also subsequently suggested allowing a mobile-based cash payment system, which connects the cell number to the UID.

The opening of bank accounts for the poor has definitely facilitated direct payments. The key common element is the use of the unique identification number/Aadhaar number and a payment channel that is accessible to beneficiaries. Forcing the administrators to open accounts for the poor before making payment can accelerate the spread of accounts.

As far as urea subsidy reforms are concerned, the vested interests are too strong to be easily disrupted. The current period, when the prices of oil refinery products used in urea production are low, provides a good opportunity for complete decontrol, combined with targeted subsidy. In the past, the share of the subsidy going to producers (versus farmers) has fluctuated between 100 per cent and 0 per cent.

The Survey's advice to go for World Trade Organization (WTO)-compliant measures for protection is something I agree with completely, with one caveat. China is a non-market economy exporting deflation through state-owned and party-sponsored enterprises. So, in the short term (say, during 2016), other temporary protective measures may be justified.

The chief economic advisor said imports (of India and its foreign trade agreement partners) have increased in proportion to the reduction in tariffs due to the agreement. So, India's imports from Asean have gone up more what is going out because India, with higher tariffs, reduced the rates more in percentage points.

The Survey said providing food security entails making food available at affordable prices at all times. I had first analysed this issue in a 2002 paper and suggested a three-tier approach. In urban areas where competitive food supply is available, we should switch to some form of food credit cards. In remote or hilly areas where there may not be many suppliers, we should continue with the full public distribution system (PDS) system. In other areas, a combination of food credit card and competing PDS outlets could be used.

I am very happy that the child nutrition problem has received attention. I had argued that sewage, sanitation and public toilets were the most important cause of this problem in India. However, I think more research needs to be done to determine the other critical elements.

Arvind Virmani
Former chief economic advisor

Note: Compiled from comments given by Arvind Virmani in response to questions posed by Business Standard