Union Budget 2014-2015: Breathing Time to Evolve Long Term Economic Policy

Dr M N Buch, 

Dean, Centre for Governance and Political Studies, VIF

The Economic Times published on 11^th July, 2014 carries the headlines “Narendra Modi aims for goal, hits crossbar”. This newspaper and some others, not to mention the Opposition have referred to the budget presented to Parliament by Arun Jaitley, the Finance Minister, as not containing anything radical which would signal a complete departure from the policies of the previous government. One newspaper describes the budget as “Chidambaram’s budget with saffron lipstick”. Whereas there is a cautious welcome of the budget by a cross section of people, there is also a sense of disappointment that the budget is not particularly radical. Of course it is recognised by everyone that the budget does hold out hope for the future, but in itself it is a form of continuation of the previous government’s financial policy.

Under Article 112 of the Constitution, the President is required to lay before both Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year. Article 112 (2) gives the two main components of the annual financial statement and it reads, “The estimates of expenditure embodied in the financial statement shall show separately – (a) The sums required to meet expenditure described by this Constitution as expenditure charged upon the Consolidated Fund of India; and (b) The sums required to meet other expenditure proposed to be made from the Consolidated Fund of India”. Article 112 (2) (b) has to be read with Article 113, which says that every estimate which relates to expenditure, other than charged expenditure, shall be presented to Parliament in the form of demands for grants and the House of the People may assent, refuse to assent or assent after reduction in the demand for grant. Under Article 114 all the demands for grants which have the assent of the House of the People are put together in the form of an Appropriation Bill, which is to be presented to the House of the People. This Bill has to be passed in toto by the House of the People because Article 114 does not permit any amendment after the grants have been individually approved. That is why if the Appropriation Bill fails, then this amounts to a vote of no confidence and government falls. Government can spend money from the Consolidated Fund of India only after the Appropriation Bill is passed into law. This slightly detailed reference to the provisions of the Constitution regarding the annual financial statement has become necessary to really understand the purport of what is popularly called the budget.

To further simplify the above statement, it is clarified that the budget gives the entire programme of government for which government is seeking the approval of Parliament in the matter of funds. It is when grants are being discussed that every individual scheme of government comes under parliamentary scrutiny and in the budget government charts out the direction in which the entire programme of government will be driven. Of course the revenue portion of the budget states how government intends to raise the funds for meeting proposed expenditure. This means that the taxation policy of government also forms a part of the budget and when the budget is read as a whole it really gives the ideology, the political philosophy and the programme of the party in power and tells the people in which direction the country will move. That is the real importance of the budget and that is why Modi and his Finance Minister are being subjected to judgemental scrutiny.

The present government succeeded a government led by a party which claims to have fundamental ideological differences with the present party in power. Its successive budgets, therefore, reflected that party’s philosophy and programme. The change of government in India has come through a democratic process which has two components, the first being continuity and the second being change. Change is a process in which there is also continuity and has to be evolutionary, which means that if the incoming government wants to have different priorities from the previous one, or different programmes, it has to achieve the change over a period of time and not overnight through total radicalisation. Change of government in a democracy is not a Bolshevik revolution of the Soviet model. In Russia, Lenin and the Marxists overthrew the Tsar and his government by armed revolution and stated that the objective of the revolution was to completely destroy the old political and social order. Earlier the French Revolution also had the same aim and in both cases royal regimes and everything that they represented were destroyed lock, stock and barrel. That is not the way of democratic change. In this context, let us examine what chance the new government had of immediate radical departures from the past. For example, Narendra Modi has held out for “minimum government, maximum governance”. Did he have the choice in the budget presented within forty-five days of coming to power to say that he would immediately reduce the number of government servants by ten percent, a quarter or perhaps half? Part XIV of the Constitution would have to be scrapped if this were to be achieved. Any such attempt would have caused blood to flow on the streets as unemployed government servants would have revolted against it. Would Modi’s own Members of Parliament have found this acceptable? What “big bang”, to which irresponsible journalists and TV commentators refer, was possible for government in this behalf?

Let us take another issue, which is the National Rural Employment Guarantee Scheme. The previous government had a huge programme of providing hundred days of employment per person in rural areas and for this a very substantial budgetary provision had been made. Could the new government have abandoned the scheme overnight, creating almost universal rural unrest? Therefore, not only has the government budgeted for the scheme but has also proposed enhancement of the allocation of the funds but with a specific rider that government would review the contents of the programme and would move away from just an employment objective into a more productive programme of creating permanent village assets. To those who really understand rural India, this one simple statement contains a message virtually of revolution. NREGS as at present administered is entirely a muster roll based programme and, as is well known, it is not possible to run a muster based programme honestly. If the objective is the same, that is, providing employment in rural areas, a programme aimed at creating permanent assets would radically change it because now employment activity would be sharply focused and at the end of the day the village would acquire a long term asset. The old integrated watershed management programme, of which the Congress government in Madhya Pradesh made a great success, was invaluable because it resulted in improving the water regime of thousands of villages, led to soil and water conservation and a sharp increase in the availability of fuel and fodder. Its abandonment on the insistence of the National Advisory Council and conversion into a populist muster based employment programme was a disaster. The present budget which gives the determination of government to provide rural employment, but to do it productively is, therefore, a big bang.

The leaders of the present government had promised at the time of election that skill development, employment generation and creation of a climate in which investment would flow in would have high priority. Does the present budget reflect this? There is no specific mantra which would make this happen, but the budget has made provision for skill development, it has assured the corporate world that in the future the tax regime would be simplified and an environment would be created which would facilitate investment and, by proposing a venture capital fund for Rs. 10,000 crores, the government has certainly signalled that it wants new enterprises to be created. Specifics can be provided only in the next budget because in the coming year the government would be able to fine-tune the policies which would lead to achievement of pronounced goals in the matter of investment, economic growth and employment generation.

Let us take the question of taxation. For the average tax payer, the budget proposals are on the one hand cautiously welcome and on the other an indicator that the tax regime in future will be liberal, aimed at maximising government revenues but not unduly burdensome to the tax payer. Where it misses out is in the matter of taxes to be paid by business and corporations which could be designed to encourage corporations to invest in major infrastructure projects, whether in terms of capital investment or in investment for maintenance and upgradation. Some of the sectors in which government have chosen to go on the Public-Private Partnership (PPP) model could be chosen for long term involvement of the private sector through an appropriate tax regime. Education which is universal and leaves out no one on account of affordability, health care which reaches down to the least fortunate, transportation corridors such as roads and railway tracks, power systems , in fact everything which gives the basics for development, creation of and management of rural assets are all areas in which we need to attract corporate investment, not because they will give direct returns on the money invested but rather because of tax incentives which attract the corporate world to invest in infrastructure which serves people at large. If PPP mode development and tax incentives for private investment are seen as one, then we may find that in the future private investment in public infrastructure could show a sharp increase. Perhaps there was not enough time to do any real thinking in this behalf, but by the time the budget of the year 2015-16 is presented , the Finance Minister, as a part of government, must come up with very specific, doable proposals for radically changing how the Indian economy functions. One word of caution. Using taxation as an inventive would be restricted to long term private investment in useful projects, but could not be used to cover corporate social responsibility.

The present budget talks about a disinvestment programme in which government gradually moves out of selected public sector undertakings and encourages privatisation. Even though it might reflect a continuation of the British obsession on the one hand with the Great Game and on the other the means of rapid troop movement to deal with another mutiny, the fact remains that the Indian Railways have an enormous strategic role to play in joining the country together. Therefore, public ownership of the railways is a necessity dictated by strategic and tactical requirements, but equally by the fact that this is the common man’s main mode of transport. Total commercialisation of the Railways would hit the average citizen very hard. With this as a constant factor, government has to ensure a much higher investment level in maintaining the Railways, improving them and extending them. In the United States, Railways were always in the private sector and it is only when competitive modes of transport such as roads and air traffic began to affect the profitability of the private railway companies and the railway system was on the verge of collapse that that U.S. Government created AMTRAC, a public sector organisation which took over strategic railway lines. AMTRAC has been criticised for not always being very efficient, but it has at least kept the railways alive in America.

We, while continuing to have the Indian Railways as a public sector organisation, need to identify those schemes of the railways which can be run through the corporate sector. Tata Motors started as the Tata Engineering and Locomotive Company (TELCO), which manufactured steam engines for the Indian Railways very successfully. Why should the railways themselves run the Chittaranjan Locomotives Works? Why can they not privatise the manufacture of locomotives, rolling stock and the maintenance of the existing stock? This is an area which the railways need to explore so that they can concentrate on efficient operation of the railways. There is enough money for both the corporate world and the public sector for running the railways and a partnership mode in which the dominant position is that of government can certainly make the railways an organisation which is profitable but which does not become burdensome to the average traveller. The next budget must go beyond generalities about FDI in the railways and must come up with specific proposals which can be implemented within three years.

There is one very tricky area which cannot be ignored but which can probably also not be instantly cured and that is agriculture. All our efforts at agricultural development tend to be compartmentalised and segmented. There are a number of players in the agricultural scene which, incidentally, is and must remain the largest single employer. In China, ten percent of the land is arable, but in India sixty percent of the land is arable. With such a huge area available to us for agriculture why should this sector not get the highest priority? There is a whole coterie of people who feel that if India is to progress it must draw people from rural areas and put them into urban employment. This, mind you, in a country which is largely ryotwari and in which the cultivator is the bhoomiswami or the owner of the land. In China, the cultivator was a serf, a tenant at will and, therefore, leaving the land and seeking a job elsewhere was not a great hardship. In India, people who want to follow the Chinese model want to replicate China in the matter of migration from rural areas to urban areas. Because of this attitude there is no wholehearted attempt to bring about that qualitative improvement in agriculture which makes it a truly profitable vocation.

As stated earlier, agriculture has a number of players, of which the primary one is land. Then there is the owner of the land. For cultivation land needs water and for high yields it needs manure. Manure can be natural, for which we need animal dung and agricultural waste, or it can be synthetic, that is, chemical fertilisers. With water and nutrients, the land can be made productive and by selecting the correct cropping pattern productivity can be optimised. In those areas where this has been done, for example, the catchment of the Punjab Agriculture University at Ludhiana, the results are spectacular. This needs to be replicated throughout India, but in the context of local soil conditions, water availability and climate. That is why the next budget must give greater importance to developing of agriculture universities in India to the level of the Punjab Agriculture University. Today, for example, two fine agriculture universities in Madhya Pradesh, at Jabalpur and Gwalior, are being strangulated for want of funds. This must not be allowed to happen.

The producer grows a product, but the product has to be marketed. For this one needs roads for transportation and develop mandies or market towns for marketing of the product, value addition through processing and the backward linkages for providing services to agriculture, such as finance. There is need for warehousing and cold storage so that by releasing product in the market in a steady stream there is price stabilisation throughout the year. During the season of glut, tomatoes and onions sometimes have to be thrown away, but at certain times when there is no fresh inflow and there is no supply stabilisation through release from appropriate storage facilities, prices rise very high and this creates a crisis for government. No agriculture policy, no price stablisation policy can succeed unless government intervention ensurs that storages gives a fair price to the farmer because there is a median price which prevails throughout the year, whilst at the same time ensuring steady release into the market so that there is constant inflow which stabilises prices. In fact this is so important that it must form the core of agricultural policy and the price stabilisation policy. Will the 2015-16 budget reflect this? In other words, the budget can be an instrument in ensuring that there is long term agricultural policy which is stable and there is no need for knee jerk reaction to an emergent situation.

One welcome signal that can be read is that the Human Resource Development Ministry is considering a review of the PPP mode policy for six thousand new model schools. School education is the responsibility of government, the Navodaya Schools have proved that if good quality schools are established in rural areas there can be significant improvement in education and in any case unless we improve the level of school education, all our universities and Indian Institutes of Technology, Science Education and Research, Information Technology and Management will be worthless pimples on our fair face. The new government, in future budgets, must make so much of funds available for school education that in one cycle of schooling we completely transform the education picture. If everyone, the disempowered, the socially ostracised, the backward and even the socially advanced are all given equally good education they would all become equal in every sense, able to compete with their peers and no longer in need of the support of reservations. In fact education can be the main instrument of making India a casteless society in which everyone is equal in terms of opportunity to acquire knowledge and skills. This is much more important than providing sops to the corporate world, reservation to the deprived or subsidies which provide only immediate relief.

Are subsidies justified? Europe and America shamelessly use subsidies in areas of interest to them, especially agriculture. The entire social security programme is a form of taking from the rich and giving to the poor but as a balanced programme, aimed at levelling out inequalities by raising tax revenue to meet the cost of subsidies. In India, unfortunately, deficit financing is generally used not to kick-start a flagging economy on the Keynesian model, but to distribute largesse ad infinitum. The budget must quickly visit this situation, remedy it and make subsidies part of a self sustaining regime.

This paper is not an analysis of every scheme of the budget. But it is a kind of report of what, under the circumstances, can be considered to be a good, workable budget which gives government the breathing time to evolve its long term economy policy. Mr.Modi has neither scored a goal nor hit the crossbar. He has, however, started to evolve a kind of field strategy which would enable him to repeat what Dhyanchand achieved in the 1936 Berlin Olympics, that is, proved that Hitler’s theory of so called Aryan superiority was a complete myth and that it is Indians who are true Aryans.

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Published Date: 24^th July 2014, Image source: http://currentaffairs.nirdeshak.com

Down With Subsidies, Up With Reforms

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:-

1. Diplomatic pressure on OPEC countries with a veiled threat of force hovering in the background.
2. 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.
3. 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.