Dr. M.N. Buch
Visiting Fellow, VIF
There is unemployment in India? There is poverty? The economy is
stagnating? What is causing all this? Obviously the only villain on the
scene is a gentleman called Mr. Subsidy. Because the State gives
subsidies it causes the budget to imbalance, raises the fiscal deficit
and prevents our patriotic, people-friendly businessmen from accessing
capital with which they can promote industry and create new jobs.
Abolish subsidies and India will be prosperous.
What exactly is India? Is it a largely middle class nation in which
the poor are marginal? Rajiv Gandhi and his admirers such as Mani
Shankar Aiyer talked of a hundred million middle class consumers who
form the backbone of our society and economy. Because the population of
India then was eight hundred million, that still left seven hundred
million outside the pale of that section of society which had the money
to buy goods and services. Government and its policies were aimed at
promoting the consumerist elements of society and the question which I
asked Rajiv then was whether the government no longer existed for the
seven hundred million people who could not afford to consume and were
living at the subsistence level. Our intelligentsia, our press and
electronic media were so engrossed in highlighting the achievements of
middle class India and the business houses which serve it that the
reality of India was lost sight of. The reality of India is that of
our five and a half lakh villagers at least half has no access to road
communications, very large parts of the country are cut off during the
monsoon, have poor bus connectivity, highly unsatisfactory power
supply, with very little scope for employment except that which is
directly linked with agriculture and allied activities. There is very
poor schooling, not even minimum health care and certainly very few
urban amenities available. It is this India which lies outside the
consumerist society.
Almost all our small and medium towns are bereft of even basic
sanitation and the villagers are only slightly better off because here
open defecation takes place in fields rather than along roadsides. For
mere survival rural India and small town India, which is only one slot
above the totally rural society, are heavily dependent upon government
for infrastructural improvement, basic social infrastructure and the
type of investment which will bring about marginal improvement in the
economy. To give an understanding of this India let me give one
example. My institution was doing work on watershed management in
Ghodadongri Block of Betul District. Though the area lies within the
Tawa Basin it has very little irrigation, the land is undulating and
hilly, there are very few roads and many villages lie outside the reach
of motor transport. The watershed management programme has brought
about improvement in ground water and has also provided fodder and fuel
to the villagers through the afforestation programme. Part of the
programme includes promotion of horticulture, including planting and
nurturing of fruit bearing trees. The villagers told us that they did
not need papaya and guava plants because the fruit bruises easily, with
the condition of roads it is difficult to transport this fruit to market
and, therefore, the villagers preferred more hardy fruits of the citrus
variety which could be transported over rough terrain. To develop this
region one needs to build roads and if the cost benefit analysis were
to be done on a commercial basis we would not be able to justify any
roads. However, if we add the social benefit flowing to people and,
over a period of time the economic benefits that would follow, the roads
would be justified. Private business looks at the gestation period of a
project and, therefore, would not touch rural roads with a barge pole.
The State has to step in and the expenditure on the roads could be
interpreted as a form of subsidy to rural areas. Should government stop
building rural roads?
Before the nation adopts a particular stance on the subject of
subsidies it might be worth considering what exactly is meant by a
subsidy regime. In the United States, by no stretch of imagination a
socialist country, the Federal Government has accepted as a matter of
policy that social security, including pensions, will be made available
to elderly people who have retired. There will be medical coverage but
through a process of insurance, war veterans will be looked after by the
State in the matter of health care, the unemployed will be helped to
find jobs and in the meanwhile will be paid an adequate unemployment
grant to keep body and soul together, education up to the school leaving
level will be State funded and food stamps and unemployment insurance
to pay rent for accommodation will be available to the poor and
unemployed. Forty-seven percent of the population of the United States
does not pay income tax because of the above welfare subsidies. How are
subsidies paid? In a recent article published in The Guardian and
reproduced in the Hindustan Times, Michael Cohen points out that first
and foremost there is a basic social contract in the United States
between the citizens and the State and health care, food, housing,
unemployment benefits, etc., are all a part of this social contract.
Senior citizens who have pension benefits have spent years when they
were employed in paying social security fees and taxes and that what
they are getting after retirement is only a deferred payment for what
they have already contributed. Those who are unemployed and are
receiving unemployment benefits are the very persons who, when they were
employed, paid taxes and such social security fees, etc., as are
prescribed and that these and taxes paid by the more fortunate citizens
enable government to provide social security coverage to the less
fortunately placed. In other words, subsidy in this case comes out of
payment made in the past or payment made today because in the ultimate
analysis even a capitalist State such as the United States of America
has a clear understanding of its welfare role and its social
responsibility to its citizens. Instead of looking at this as a subsidy
it should be treated as a deferred payment for past taxes received and a
financial accommodation temporarily for those who lost their jobs and
are in immediate need of help. Similarly, State funding of education
ensures that there is universal coverage up to the school leaving level
and this represents an investment by the State in the future citizens of
the country. This, too, is not really a subsidy because it is an
investment the dividend of which is declared later but on which no
quantifiable value can be estimated because the benefits flowing from an
educated citizenry are virtually limitless.
Let us take three other areas of State concern. Unemployment benefits
ensure that a person passing through difficult times does not starve
and is able to either retrain himself to increase his employability
quotient, or is able to arrange for an appropriate job without loss of
dignity. Food subsidy by way of encashable food stamps prevents
malnutrition and promotes health. This is equally true of medi-care,
because ultimately speaking a healthy population is always a national
asset. Of course Britain and most European countries carry the concept
of social security much farther than do the Americans, but there is also
the concept that a citizen with a substantial income base is
responsible for looking after his less fortunate brethren who, in turn,
by becoming part of labour force with a potential for high productivity,
contribute to national prosperity through the employment that they get
in due course. To call such a regime a subsidy regime is ridiculous.
There is another fallacy of a free market economy that it allows
market forces to work and as a result of this the State does not need to
provide subsidies. Market forces are largely a function of supply and
demand and even the economies which pride themselves on being market
based use the power of the State to influence or even manipulate the
market. This is done in many ways, including by manipulating interest
rates whereby the equivalent of the Reserve Bank of India regulates
money supply by making money more expensive, thus reducing consumption
and operating as deflationary measure. However, when money supply
reduces because there are no takers it can lead to unemployment and
unhealthy deflation. At this stage the Central Bank once again steps
in and by reducing the interest rate it brings more money into the
market. Why should administered interest rates be allowed to exist?
Why should interest also not follow a demand and supply model, that is,
if the demand for money increases the interest rates would naturally
rise, but when this makes money too expensive and demand falls the
interest rate would also decline. But that is not how the system
functions because every government would like to ensure financial
stability and not permit wild fluctuations based entirely on an
unregulated market.
Let us take another case. About forty years ago the world faced a
severe oil crisis because the oil producing countries deliberately
reduced production. Petroleum prices rose exponentially, but countries
such as the United States immediately intervened in the following ways:-
- Diplomatic pressure on OPEC countries with a veiled threat of force hovering in the background.
- Reduction in the demand of petroleum products through high taxes,
severe speed limits so that consumption could be reduced and, in many
countries, the promotion of public transport and a scaling down of
privately owned people movers.
- Release of petroleum stocks from reserves, especially in the United
States. How should one view these measures? They were aimed at keeping
petroleum prices under control, thus protecting the consumer. Does this
not also form part of a subsidy regime?
Let us take another example, which is of agriculture in the United
States. Every year the Department of Agriculture makes forecast about
production, not only in the United States but worldwide. On this demand
models of the consumption of various agricultural commodities are
prepared and calculations made of the quantum of product available and
its effect on prices. If glut of a particular commodity is estimated,
then farmers are encouraged to reduce the area under that particular
crop, with a specific target being assigned for such reduction and a
State subsidy is given for not producing that crop and heavy taxes
imposed for growing it. When a shortage of a particular product is
forecast the process is reversed and tax concessions given for bringing
more area under cultivation of that particular crop and heavy taxes
levied for not growing that crop. Is this interventionist regime also
not part of a subsidy regime in which there are positive subsidies and
also negative subsidies by way of taxes?
We have talked about countries which have a relatively high GDP and
per capita income. Let us come to India, where our per capita income is
well below the level of the more developed countries. There are vast
numbers of poor people and whereas various calculations have been made
about those who are Below the Poverty Line (BPL) it would be safe to say
that at least thirty percent of Indians live below any rationally
calculated poverty line. Then there are a large number of people who
are just marginally above the poverty line, which means that they are
able to survive a little above the margin, but whose capacity and
propensity to consume does not go beyond the bare essentials. By any
civilised standard these people also will be deemed to be below the
poverty line. That rules out about fifty percent of the population of
India from being capable of consumption of items beyond the bare
minimum. Actually when Rajiv Gandhi was Prime Minister he and his
cohorts trumpeted the fact that India had one hundred million consumers,
which still left seven hundred million people. The then population of
India was eight hundred million. Even today barely fifteen percent of
the people of India are in a position to consume commodities beyond the
bare essentials and though fifteen percent of one thousand two hundred
million people, that is, one hundred sixty five million people, is a
sizable number of consumers, there are more than one thousand million
people who, if they are to be made a part of the consumerist society,
would need either a direct boost of income or some form subsidy to
give them at least a minimum standard of living.
The vast majority of Indians cannot afford health care and are
heavily dependent on medical facilities provided by government. We have
allowed our government medical institutions to run down, thus forcing
people into the arms of private medical institutions. We have a scenario
in which people have no affordable medical facilities and the high fees
of private medical care either deprives people of any health care or
forces them to pay medical bills by cutting down fees on absolutely
essential items. How can any sensible person oppose either State funded
medical insurance for these people or a major investment by the State
in medical facilities which takes health care to the poor?
Let us take the case of education. Our best institutions of education
in the field of technology, management and medical education are now
virtually beyond the means of a child coming from an ordinary Indian
home. Murli Manohar Joshi, as Education Minister, had advised the
Indian Institutes of Management that they should not make their fees so
high that a middle class Indian cannot afford to educate his child
there. He promised to make available a level of state funding to the
IIsM which would enable them to operate at a level equivalent to that of
the best business schools in the world. Unfortunately the IIsM did not
agree, with the result that today a high fees paying student has only
one objective in mind, which is to improve his employability to a level
where he can command a high salary on passing out from the institute so
that he can repay the loan that he had taken. Research, fundamental or
applied, becomes the casualty.
Let us come to school education. Most State run schools are of such
miserable quality that they are hardly able to impart even literacy,
much less education to their children. A suggestion that the government
should create ten thousand new Navodaya Schools, which would be
rural-based, to upgrade the level of education met considerable
opposition in government, but eventually six thousand such schools were
approved because of the Prime Minister’s intervention. But the Planning
Commission and the HRD Ministry wanted them to be in the Public-Private
Participation Mode and, therefore, the scheme is almost stillborn. Had
these schools been set up would it be a subsidy or would it be an
investment in our future? If affordability were the sole criteria for
creation of infrastructure, no city infrastructure could ever be built.
The entire Jawaharlal Nehru National Urban Renewal Mission is based on a
policy of upgrading urban infrastructure and for this providing
adequate funds, largely by way of grants but also by way of loans for
assets which benefit individuals, such as social housing. A certain
basic urban infrastructure improves the efficiency of cities and an
efficient urban settlement also one to which employment generating
businesses and industries are attracted. In turn this expands the
employment base in that particular town, generates income for
individuals, the enterprise, local government and the State and Central
governments. Again, is this a subsidy or is it an investment?
One of the very successful examples of a healthy subsidy regime is
the mid-day meals programme of Tamil Nadu and the provision of highly
subsidised rice to the poor in the same State. These two programmes
were considered as political gimmicks, but because the programmes have
been administered efficiently and relatively honestly they have improved
the levels of nutrition of school children, increased enrolment and
reduced the drop out rate, while giving access to grain to the very
poor who otherwise would not have been able to buy it. Whatever the
cost, the social benefits of these two programmes have been universally
accepted and most States are trying to replicate them. What marks out
the Tamil Nadu programmes is the efficiency of delivery and
unfortunately this is not universally replicated.
Another area of subsidies is the free or very cheap electric power to
farmers. Electricity is the energy which moves a prime mover, the motor
and pump which lifts water. Water is a direct input into agriculture
and where irrigation is extended the farmers’ productivity undergoes a
dramatic change. Unfortunately this is one area where the economics of
subsidised power was not worked out, with the result that most
Electricity Boards are bankrupt, transmission lines are not well
maintained, there is erratic power supply and commensurate benefit has
not flowed to the farmers. The present government of Gujarat moved
swiftly to separate the agricultural feeder from the normal feeder,
guarantee ten hours of three phase supply at constant voltage to the
farmers and also guarantee twenty-four hours supply at full tariff to
every village. Every village in Gujarat is covered by this scheme, the
Electricity Board has shown a dramatic increase in revenue and because
it is now surplus in financial terms, it has added generating capacity
to the system and line maintenance has shown significant improvement.
Because power supply is guaranteed for twenty-four hours many small
scale industries and businesses have come up in villages throughout
Gujarat. In this case what is needed is efficiency and guaranteed
supply of power, which completely obviates the need for a subsidy.
The list would be endless, but I would like to close this paper by
discussing two areas of subsidised supply of a commodity, LPG and
diesel. Government has increased the cost of an LPC cylinder in excess
of six cylinders a year by approximately Rs. 350 per cylinder. Gas is
supplied in Madhya Pradesh for Rs. 452 per cylinder, which will now go
up to Rs. 798 per cylinder. That represents a seventy-six percent
increase in the cost of L.P.G at one go. In the case of diesel the
price has gone up by Rs. 5 per litre, but when taxes are added this come
almost to Rs. 6 per litre. Even this represents an increase of
approximately fourteen percent. Diesel is the fuel for all major prime
movers in the field of transportation. The percentage of diesel used by
car owners is about six to seven percent of the total. The balance is
used by goods vehicles and by public transport such as buses. Some
diesel is used by railways and a substantial amount is used in rural
areas as tractor fuel, fuel for diesel pump sets, etc. In other words,
over ninety percent of diesel is used a fuel for prime movers which
serve the ordinary citizen of India. A person who drives a diesel
engined Mercedes car would use an aircraft for long distance travel, the
fuel of which could be aviation kerosene and not diesel. It is the poor
and lower middle class citizens who travel by bus and must of the goods
carriage vehicles actually transport commodities which are not luxury
items. The bulk of commodities would come within the definition of
essentials or a level or two above essentials. The fourteen percent
increase in fuel cost would automatically lead to upward revision of
tariff and this would be reflected in commodity prices in the retail
market. A person living at or only slightly above the level of
subsistence just cannot afford to pay this additional impost. By raising
diesel prices government has hit the poor hardest of all.
The philosophy behind introduction of LPG into India was that this is
a nonpolluting fuel, it is an excellent substitute for all other fossil
fuels such as soft coal, firewood, etc., and it is cleaner than the
kerosene used for cooking. Government as a matter of policy gave
subsidised gas cylinders to people living in hill areas so that they
would refrain from cutting down trees for fuel. LPG then became the
symbol of the movement for saving our forests. By increasing the price
of LPG by over seventy percent government is forcing people to revert to
some of the fossil fuels they burnt in the past, thus jeopardising our
forests, increasing pollution levels and making it virtually impossible
for an urban household to afford even a minimum quantity of fuel for the
purpose of cooking food. This is an atrocious decision of government
and if a cost benefit analysis is done of the carbon foot print that
would be enhanced as fossil fuels replace nonpolluting gas, the cost of
forests chopped down for fuel wood and the health hazards that would
follow the burning of fuels which emit smoke, one would probably find
that the entire amount saved by reducing or eliminating subsidy is in
fact totally negated by the costs mentioned above. Worst of all the
totally precipitate increase in the cost of two absolute essential
commodities will leave average India poorer than before, more unhealthy
than before and less well fed than before.
I cannot claim to be an economist though, I have studied the subject
for seven years in Delhi University, Cambridge University and Princeton
University. Therefore, I am not always able to understand the logic of
the World Bank trained economists who now seem to dominate the corridors
of power in Delhi. The argument advanced is that subsidies have
increased the fiscal deficit and imbalanced the budget, which prevents
government from making investment in the future of this country and,
therefore, if we eliminate subsidies there would be more money with
government for useful work, investor confidence would strengthen and
employment opportunities for the poor would flood the market. The
question is, how? The National Rural Employment Guarantee Scheme costs
the exchequer something like Rs. 65,000 cores per year and it is
estimated that leakages in the scheme drain away approximately seventy
percent of the funds. That amounts to Rs. 45,500 cores per year. If
leakages are plugged either the programme could be made seventy percent
larger or approximately Rs. 45,000 crores would be available to the
public exchequer for more development work or for maintenance of
existing levels of subsidy. Blocking a leakage is more difficult than
abolishing the subsidy and, therefore, in this nation of lotus eaters,
of whom the largest number are in government, our rulers have taken the
easy way out and opted for abolition of subsidies. In the process they
have imposed an almost unbearable burden not only on the poor but even
on the middle class. What sort of economics is this? Connected to this
whole line of thinking is the opening up of our markets to Foreign
Direct Investment (FDI). This paper is already quite long and I shall
leave the question of FDI in retail trade and in civil aviation for
discussion on another day. However, the stand taken on subsidies and on
FDI are both negative and representative of a mindset which is so
utterly divorced from the ground realities of India that one wonders how
we tolerate such absolute arrant nonsense.
