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Living with subsidies

india Updated: Dec 18, 2007 22:35 IST

The Prime Minister’s statement last weekend, expressing scepticism about whether subsidies are serving their purpose of helping the weaker sections of the society, is not a new one. But the timing is significant as are the details of the current economic scenario. The economic reforms programme that began in 1991 under an agenda monitored by the International Monetary Fund and the World Bank was dictated by pressures resulting from a balance of payments crisis and came in the backdrop of profligate government spending in the 1980s. That had resulted in a measure of discipline of subsidies. But now, the hold of the IMF and the Bank are less; the country is awash with an influx of foreign funds and the chief patrons of pro-poor subsidies, the Left parties, are part of the government’s political entourage.

We can understand Manmohan Singh being upset that far too much money is being spent on subsidies in the name of equity. With Rs 100,000 crore estimated to be spent this year on subsidies linked to food, fertilisers and petroleum products, the concerns are genuine. But politics has reached a point where slogans and packaging seem to matter a lot, and subsidies have a nice populist ring about them. What, then, is the way out? For one, the government needs to prepare public opinion on the most glaring of inequities in the subsidy process itself. Pray, what benefit does the government get by subsidising diesel and petrol for luxury cars in the name of protecting kerosene prices and overall inflation? A wiser strategy may lie in protecting the overall budgets of the poor. For instance, the government could charge market prices for petroleum products, but try to subsidise other products that the poor may consume. Food subsidies could be addressed through food coupons or by systematically lowering the coverage of the public distribution system. Fertilisers are tricky, involving both food prices and a powerful farmers lobby.

The best course is for the government to evangelise economic growth and aid urban infrastructure across the nation to help localised migration. A structure that aids an even spread of the gains of growth could generate tax revenues to plug government deficits, which, in the deeper analysis are the real problem. A better enforced service and sales tax regime could also be of help.