White Paper Scores Politically

The discussion paper on subsidies seeks to serve two purposes provoke a debate on subsidies and also show how big the subsidy bill is by counting both the explicit and hidden subsidies. Judging by the initial political reactions, the government act is likely to eminently serve the first purpose but the actual content of the 20-page paper, inclusive of five pages of tables, does not seem to be earthshakingly new.

There will be an immediate debate on the issue as the paper has acted precisely like the red rag that it was supposed to be to large sections of the political class. The BJPs opposition to the reduction of subsidies is obviously related to the exigencies of opposition politics, but the dialogue of the government with the Left will be of greater interest. Particularly interesting is the polemical point on how in many cases subsidies supposedly meant for the poor hardly reach them. Not just higher education and health, even the food subsidy does not get to most of the poor, particularly the rural poor, most of the time. It will be worth watching how the Left, which is supposedly for the very poor, justifies its defence of what is good largely for the middle class. The Left can hardly desert the vested interests there, least of all the public sector employees, but has to rationalise how the middle class can be allowed to get away with the cream.

 

The decision to release the paper now also makes sense in terms of the overall reform strategy. Clever outflanking action can be one way of bringing about the fall of the enemy. Another way can be hard and time consuming but more assured through continuous onslaught. The anti-reform groups which were gleeful after the presentation of the earlier (1996 July) budget have first been hit by the latest budget. Then has come the volley from the new monetary and credit policy, and now arrives the subsidy paper. The side which subjects the enemy to a continuous battering has the advantage of taking the initiative. The opponent, in such cases, has only time to react to one onslaught before the next one hits it. A formation that is supposed to be at the vanguard of historical progress is thus reduced to only reacting.

But winning political debates or having the advantage in the game of one-upmanship can serve only a limited purpose. Core issues still have to be addressed and sorted out if they are to be solved. The paper makes a neat classification between public goods, which have to be paid for by the exchequer, merit goods which have large externalities and, therefore, deserve to be subsidised and non-merit goods for which the market is able to fetch an adequate price and so do not need subsidising. The reality, however, is that many rationalise subsidies on the ground that India is a poor country and subsidising essential items which are consumed by all or definitely the poorer sections helps reduce the burden of poverty. Such measures go down particularly well with politicians because they are thereby able to show concrete action in aid of the poor.

The more difficult argument to get across in a public debate is that subsidising kerosene or PDS food does not really help the poor. Other than the fact that most of the subsidised stuff does not reach those who deserve them the most, the subsidy via the deficit financing and inflation route comes back to hit the poor harder as they are the most vulnerable to inflation. In the ultimate analysis, the subsidies are here in such a big way because they benefit the middle class which is the most vocal. The only way to rescue the poor from the exploitation of the middle class is to spread literacy and elementary education and bring about social mobilisation to make them conscious of their rights. The dilemma is that the attack on subsidies cannot wait for that to happen.

The debate on subsidies should ideally touch on another point they are mostly bad because they distort prices, do not aid identification of actual costs and provide a major smoke-screen behind which hide a whole set of inefficiencies and illegitimate beneficiaries. But such issues are somewhat abstract for debate at the popular level. The educated classes should be interested in such arguments but their class interests prevent them from facing the issue honestly. The classic case is the nexus between politicians, bureaucrats and most educated parents who would hate to see medical and engineering colleges charge market-related tuition fees.

Now to come to the actual contents of the paper. At the end of the day it says very little that is not already known. The quantification, classification and aggregation of explicit subsidies has been undertaken. But not much headway has been made in unearthing hidden subsidies, which is one of the declared objectives of the paper. It emphasises on how reducing subsidies will bring down the fiscal deficit which will be good for everybody. True enough. But there is a separate section on the petroleum sector which does not receive any budgetary subsidy at all. The missing argument is that cross-subsidies affect operating margins of the enterprises and reduce taxable income.

A substantial study on subsidies should be able to give precise measures of how, say, the railways, state airlines, department of telecommunications and financial institutions are subsidising one section by charging another more. These organisations put out their own figures but rigorous outside scrutiny is needed to test them. With such cross-subsidy data, a proper discussion could follow on whether subsidising unreserved second class rail fares really helps the poor or who should pay the bill for subsidising a section of Indian Airlines routes (the airline or the government) or how long is it necessary to subsidise rural basic telephony to open up interiors. A measure of the financial subsidy, which the banks are asked to foot through their low interest priority sector loans, would also help unearth the inefficiencies in the banking system which are sought to be hidden under the fig leaf of priority sector lending. For example, if banks are reimbursed their total deficit on account of priority sector

lending, they could be forced to lower spreads. But for that the total cost of such lending by banks has to be calculated by someone other than the banks themselves. A discussion paper, which does not take the statistical state-of-the-art very much further, is somewhat inadequate, no matter how good it may be as a political gambit.