6-Point Plan To Reform Subsidy Regime

The government has suggested a six-point strategy for reforming the subsidies regime, which saw the Centre and state governments dole out an astronomical Rs 137,338 crore, or 14.4 per cent of the countrys gross domestic product, in 1994-95.

The share of the state governments amounted to Rs 94,000 crore, according to a white paper prepared by the finance ministry which was placed in Parliament yesterday. The paper, which was prepared on the basis of a study conducted by the National Institute of Public Finance, adds that subsidies on merit goods like elementary education and roads and bridges account for less than a third of the states subsidy bill.

 

The document has suggested an increase in user charges on non-merit goods like power, transport, irrigation, agriculture and higher education to enable the nation to halve the present subsidy rate of over 90 per cent. This is imperative if the government is to succeed in reducing the Centres fiscal deficit to 4 per cent of GDP in the next budget and usher in a moderate tax regime, points out the paper.

The macro-economic costs of unjustified subsidies are mirrored in persistently large fiscal deficits and consequently higher interest rates. In addition, unduly high levels of subsidisation reflected in corresponding low user charges produce serious macro-economic distortions, says the paper.

The combined fiscal deficit of the Centre and states in 1996-97 amounted to 6.5 per cent of the GDP, claims the paper. Thus, other things being equal, reducing the subsidy rate to 50 per cent would slash the fiscal deficit from 6.5 per cent to less than 2 per cent of GDP, maintains the document.

The key to reducing the scale of subsidies is through phased increases in user charges. The current recovery rates, even for non-merit services, are extremely low, just over 10 per cent for all-India, with a slightly higher rate of 12.1 per cent for the central government and only 9.3 per cent for the states, says the paper.

The low recovery rate results in wastage of scarce resources and their diversion from other, more productive sectors. The scheme of retention prices for the fertiliser and petroleum sectors is not suited to encourage efficiency. A significant and increasing portion of food subsidies does not filter through to consumers but is absorbed in increasing costs of handling and storing food grains, says the paper.

The paper adds that even subsidy on a final good like food is marred by poor targeting and extensive leakage. Similarly, nearly half the fertiliser subsidies, on average, are estimated to accrue to producers rather than farmers.

A significant portion of the subsidy on higher education is appropriated by the middle to high income groups, while health subsidies too exhibit a non-rural and pro-rich bias, adds the paper.

Petroleum subsidy doubled in 1996-97

Gujral to call UF steering panel meet on hike in petroleum prices

Pradeep Puri New Delhi

Prime Minister I K Gujral is expected to seek a meeting of the United Fronts Steering Committee in the capital to discuss the contentious issue of an increase in petroleum product prices. The meeting will probably be held on Saturday, when most of the Chief Ministers will be in Delhi to participate in the inter-state council meeting.

The Prime Minister, who also holds charge of the petroleum ministry, is reportedly keen to establish a consensus amongst all the constituents of the Front on the politically sensitive issue.

Most of the Fronts constituents are reportedly reconciled to the inevitability of a price hike, but differ widely on the quantum of the increase as well as the products which should be subjected to a hike.

Minister of state for petroleum and natural gas T R Baalu is opposing any increase in the prices of kerosene and diesel on the ground that this would hit the poor. Baalu has suggested that the finance ministry should return the Rs 4,000 crore taken out of the oil pool in 1991 to help reduce the current oil pool account deficit, which crossed Rs 15,500 crore on March 31, 1997.

The minister has also asked the finance ministry to reduce the import duty on petroleum products. His argument is that since the government is the sole importer of petroleum products, there is no need for it to impose import duty, which is normally resorted to in order to protect domestic industry.

The CPI (M) has already declared its opposition to the proposed price hike on the grounds that it would boost inflation and hit the poor and the working class.

However, petroleum ministry officials are convinced that there is a strong case for increasing the prices of kerosene, diesel and liquefied petroleum gas (LPG).

Pointing out that there is no difference in the prices of kerosene and diesel in Pakistan, Bangladesh and Sri Lanka, the officials argue that the artificial price differential in India results in a large quantity of kerosene being diverted for diesel adulteration. This means that the subsidised kerosene does not reach the target consumers.

The ministry has also been emphasising that the removal of subsidy on just one item, high speed diesel which crossed Rs 8,340 crore during 1996-97 will help reduce the oil pool account deficit considerably. The ministry has been citing regular freight increases by railways the latest being a 12 per cent hike in freight charges announced in the 1997-98 railway budget to support its contention that there is no justification for subsidising diesel prices.

The ministry has also been pointing out that diesel is being increasingly used for power generation rather than for fuelling transportation. The Delhi government has openly asked the public to depend upon diesel gensets for their power needs during the current summer season.

Similarly, the ministry says that many of the subsidised LPG cylinders, meant for domestic use, find their way to big hotels and industries. The total subsidy on domestic LPG during 1996-97 had touched Rs 1,950 crore.