Many things are a fraction of the size they were 10 years ago. From computers to music players to cellphones… all have shrunk in size. But what about the Indian government? Two recent moves have prompted the question — the fertiliser subsidy being cut by R 3,000 crore by moving to a (smarter, better for the soil) nutrient-based regime and the Kirit Parikh committee-recommended fuel-price deregulation, both leading to a reduction in the government's subsidy bill.
By pegging domestic petrol prices to the international market, losses at the nation's oil marketing companies (estimated at R 45,571 crore for 2009-10 by the committee) will reduce.
These measures are meant to gradually dismantle one of the edifices of economic policy in India — government subsidies, meant to protect consumers from the volatility of the market by providing goods and services below cost.
In 2008-09 fertiliser subsidies were R 75,849 crore, which represented a five-fold increase from the figure for 2004-05. The Accountability Initiative, a think tank in Delhi, reports that there has been more than a two-fold increase in food subsidy since 2004-05.
Given the burgeoning fiscal deficit (6.6 per cent for the 2009-10) in the post-economic downturn period, this is unsustainable. Economists have called the cuts better for the long-term health of the government's finances.
Pronab Sen, former chief statistician of India, says: "The idea behind cutting subsidies has not been shrinkage, but making them more rational. The fuel subsidy was asymmetric, delaying the effects of a rise in international crude prices on the consumer, while passing on the benefits of a fall in them."
Experts for years have said: cut, baby, cut. "UPA II has a less problematic coalition and can pass through bold efforts. Also, there is a better understanding at academic and policy levels about the real costs of subsidies as a drag on growth," says N R Bhanumurthy, professor at the National Institute of Public Finance & Policy.
Better targeting, not cuts
Cutting subsidies was arguably easier than gaining from a more efficient system that targets them at those genuinely in need. Free electricity has been doled out to farmers in Punjab, causing a financial mess at the state electricity board. Malnourishment has grown despite increase in food subsidies. An Oxford University report reveals that there are more poor people in a group of eight Indian states than in the 26 countries of sub-Saharan Africa. Clearly, the subsidy-system is badly managed and does not effectively reach those it is intended to help.
"Forty per cent of grains in the public distribution system (PDS) disappear and go out of the system. Scrapping the system altogether is not possible, but to make a difference, you need to plug all the leakages," says Matthew Joseph, senior consultant at the Indian Council for Research on International Economic Relations.
UPA II, déjà vu?
Successive governments have reduced subsidies in different sectors. Disinvestment under Arun Shourie was the NDA's weapon of choice. The recent cuts in subsidy come with a strong sense of déjà vu — are we seeing, under Pranab Mukherjee, a philosophical return to the fiscal prudence practiced by Manmohan Singh as finance minister in the 1990s?
Joseph is sceptical.
"The government has been lucky with its cuts. For the next two years, they can keep subsidies down due to favourable factors — oil prices are not expected to rise much and the 3G spectrum auction has brought in huge revenues, taking the pressure off the deficit."
Consumers (and opposition parties) have cried foul. They have got so used to inexpensive petrol and a host of amenities that they now think they have a right to them. After all, fertiliser prices, fuel prices and electricity prices, among others, have all gone only in one direction. Macro-economically the cuts are rational decisions, but policy has to account for its effect on citizens.
Even if the government is not shrinking, a smarter subsidy programme could definitely make this behemoth a wee-bit leaner and efficient — and lead to a more optimal use of tax revenues.