India-Are subsidies boon or a bane

India- Are subsidies boon or a bane?

In the last two weeks, there has been a lot of cry about the raise in oil prices. Prime Minister Dr. Manmohan Singh has admitted that there is a growing fiscal deficit in the country and a slowing down of the economy.

The root cause behind this is the trend of Indian government announcing and maintaining numerous subsidies.

So much so, that a 2005 article by International Herald Tribune stated that subsidies amounted to 14% of GDP. On the other hand, according to the UNESCO, India has the lowest public expenditure on higher education per student in the world. Amount of emergency infrastructure investments is still much lower. We face the brunt of it- 90% of train accidents are due to poor track maintenance rather than negligence. Our airports run on primitive forecasting systems- hence, monitoring fogs and diverting air routes is still a distant dream. India pays lowest minimum on higher education per student. The result is that we have innumerable students with a Masters degree but with limited hands- on practical experience.

A report on Central Government Subsidies, released in 2004, maintains the following objectives behind allocating the subsidies-

- remove economic distortions, thereby improving economic efficiency and growth;

- achieve redistributive objective;

- reduce budgetary burden and release precious resources; and

- improve the environment by realigning the incentive structure to favour

environmentally sound practices.

Let us then see, how well these objectives have been met with.

Removing economic Distortions- In recent times, there is the paradox of mounting stocks of foodgrains and reported starvation deaths. Foodstocks reached a peak of 63 million tonnes. in July 2002, more than two-and-a-half times the norm of 24 million tonnes. By April 2004, the stocks were down to 20 milliontonnes, still higher than the norm of 16 million tonnes for April.

Large stocks of foodgrains raise the subsidy bill through increased handling and

carrying costs along with the losses. Besides, withdrawing such large quantities from the market also results in rising open market prices of foodgrains, neutralizing much of the consumer benefits that the subsidy provides. There are severe regional imbalances in the operation of the entire food subsidy scheme, as FCI’s purchase operations are mainly confined to five areas – Punjab, Haryana, Western Uttar Pradesh, Andhra Pradesh and now Chhattisgarh. The implication for the present policy of purchase is that farmers of only a few States get the entire farmers’ subsidy. A large percentage of these farmers are not even poor.

This scenario is related to the third objective as well- Improving the environment- Due to the over emphasis on rice and wheat in subsidy schemes, the regional and local crop diversification is at its minimum. Hence, even in a drought prone area like Telengana, instead of growing drought resisting crops, farmers are forcing themselves to grow these water- guzzling crops like cotton, wheat and rice. The result- In the ten year period between 1997 and 2006 as many as 166,304 farmers committed suicide in India. If we consider the 12 year period from 1995 to 2006 the figure is close to 200,000.

The rising farmer suicide rate has a direct link with social as well as economic factors in the region. Small and marginal farmers make up a chunk of the farmer population that has got no benefits from the government.

Now comes another major chunk in India’s budget allocation- Apart from food, fertilizer and petroleum subsidy, which are directly incurred and administered by the Central Government, there are numerous poverty alleviation schemes funded by the Centre but administered

through lower level governments. These are Centrally Sponsored Schemes (CSS). They are

not necessarily commodity-specific, but involve subsidized loans to vulnerable sections for specific purposes or projects benefiting the poor.

Four major programmes, namely Sampoorna Grameen Rozgar Yojana (SGRY), Swaranjayanti Gram Swarozgar Yojana (SGSY), Pradhan Mantri Gram Sadak Yojana (PMGSY) and Rural Housing Scheme (RHS) account for 98 per cent of the budgetary allocation on the six CSS of the Ministry of Rural Development in the current financial year.

Majority of the backward States, where the CSS of Ministry of Rural Development are most needed,  have performed relatively poorly in terms of the three criteria. This includes Assam, Bihar, Jharkhand, and Uttar Pradesh.

I now present some statistics, according to UNICEF for “mera Bharat mahan:

1. Under 5 mortality rate in 2010 is 63/1000

2. Total literacy is 63%

3. % orf population using improved sanitation facilities- urban and rural stands at 54 and 21 respectively.

4. % of central government expenditure 2000-2009 allocated to health is a meager 2%.

5. % of central government expenditure 2000-2009 allocated to education  is only  3%.

India is ranked at 134 in Human Development Index. Vietnam, Iraq, Indonesia is placed at 132, 128 and 124 respectively.

The argument as given by the government is that it has to bear the burden of the social debt to subsidize the basic necessities and also spend more on social projects as no private sector would do anything in non profitable options. But the question remains that why, even after 52 years, such enormous subsidies would be required. In any country, there is always an effort by the government to honor the deadline set for such subsidies. They are supposed to be an incentive to becoming self-sufficient. In India, the ground reality is very different- here, subsidies spawn corrupt, decadent generation after generation whose objective remains same- to remain poor as it is more lucrative because this constitutes the “vote bank” that our politicians exploit in every election.  These subsidies should be targeted at the poor people and in improvement of village economy. But statistics prove otherwise. Agriculture and allied sectors like forestry, logging and fishing employed 60% of the total workforce in 2007, whereas they accounted for only 16.6% of the GDP (same year). The two most important areas of human development index- health and education- both suffers due to lack of fund.

The economic crisis escalated by such subsidies is- The projected fiscal deficit of 2009 has been put at 10.3% of our GDP. The consolidated debt-GDP ratio is estimated at 76.6 per cent in 2009-10 compared to 61.0 per cent in 1995-96 and 70.6 per cent in 2000-01. Remember Greece- if we follow that crisis, we should all be on red alert- most of all our “populist” government- “garibon ka sarkar.

It is high time that the administrators and policy makers accepted a paradigm shift in their policies. Frankly, 52 years of populist policies and vast gap between implementation and allocation of funds have, in fact, crippled India. Indian politicians and those in government now have a dual responsibility- one to its country and another to its international commitments. India has long been lobbying for entry into Security Council along with Brazil. However, both these countries have put impediments to global development. In 2007, a high-level meeting aimed at salvaging sputtering global trade talks collapsed on Thursday as the United States and the European Union fell out with India and Brazil over plans to slash agricultural subsidies and tariffs. The failure of the talks appears to have defeated the strategy of bringing together the United States, Europe, Brazil and India - a grouping known as the G-4 - to resolve major differences before turning to the entire membership of the WTO, which comprises 150 countries. Even though, I do not assume that U.S.A is a benevolent God distributing wellness for the world, I do believe that if you wish for leadership, then you have to set examples to follow. Sadly, in India, there is no longer any true leader – all are petty politicians looking after their own objectives. So the development of the country ends at slogans like “India rising”, “ Mera Bharat Mahan” etc.