One man’s fiscal problem is another man’s lifeline. Bureaucrats and economists may love shooting down subsidies because it bloats the fiscal deficit and burdens the government but the fact is that in a 1.2-billion nation, in which nearly one in every three live below the poverty line, one needs an efficient method through which tax payers can support the poor. Last week Prime Minister Narendra Modi urged rich Indians to give up their cooking gas subsidies to help the government contain its expenses. The money thus saved will aid better targeting of handouts and also help the energy-starved poor access clean fuel.
Having freed diesel prices from State-control last year, the government is now focusing its attention on cooking fuel subsidies. The government sees an opportunity in the low crude oil prices over the last several months in pushing through the more difficult bit of India’s fuel economics: Introducing a two-part subsidy system where those who can afford cannot claim State-funded entitlements. Market-determined fuel prices free of administrative control for the rich would cut subsidies and help cut taxes on petroleum and other products. This will help offset the shocks when global crude oil prices shoot up and inflation begins to climb.
For India’s policymakers varying estimates of poverty muddy the picture as does a perverse fiscal incentive of claiming inflated incidence. The World Bank reckons more than 400 million Indians live on less than $1.25 a day. Indian estimates of poverty range from 270 million to 450 million people. If our policymakers zero in on one figure and manage to issue all of them identity numbers within a reasonable time-frame they will still have to figure out how to get subsidised food to them. Similarly, seen through the prism of ‘welfare economics’ the subsidy regime in fuel is also far more complex. There is a strand of thought that in India the incomes of most consumers remain far below the global average, and, therefore, it is the government’s responsibility to pay for those who cannot afford. Appealing to the conscience of the affluent is a good beginning. But finally, it will be about creating a robust, leak-proof and equitable system of subsidy management.