A Perspective on Subsidies in Our Economy _ Vivekananda International Foundation

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APerspectiveonSubsidiesinOurEconomy

DrMNBuch,Dean,CentreforGovernanceandPoliticalStudies,VIF

Oneof the favouritewhippingboysofeconomistswitha freemarketbias,neoliberals,businessmenandultraconservativerightwingpoliticiansisthequestionofsubsidies.ThewholeeconomicscenarioinIndiaissaidtobevitiatedbysubsidiesgivenbythegovernment,which iscausingthebudget tobeskewedandkeeping the fiscal deficit at a high level. According to them if subsidies are abolished the economy willsuddenlyreviveandIndiawillprosper.

Onebeginswith an assumption that even the socalledneoliberalswill concede that theGovernment ofIndiaanditspolicieswillconformtotheConstitution.ThePreamblemandatessocial,economicandpoliticaljusticeandArticle38directstheStatetosecureasocialorderforthepromotionofwelfareofthepeople.Article39directstheStatetoensurethatthematerialresourcesofthecommunityaredistributedasbesttosubserve the common good and that the operation of the economic system does not result in theconcentration of wealth and means of production to the common detriment. A social order aimed atpromoting thewelfare of people containswithin itself the principle of equity as the guiding star for oureconomicpolicies.IfproductionofwealthisoneofthemajorobjectivesofsocietyinIndia,thepromotionofequityisoneoftheprincipaldutiesofgovernment.It is inthiscontextthatthesubsidyregimehastobeviewed.ThewordsubsidyisdefinedintheChambers21stCenturyDictionaryasasumofmoneygiven,e.g., by a government to an industry, to helpwith running costs or to keepproduct prices low. It alsomeanshelporassistance,especiallytothosewhoneedsuchassistanceinordertoremainafloat.By itselfthewordsubsidy isneutral, that is, it isnotreally intrinsicallyeithergoodorbad.Quiteoftensubsidy ispaid foractivitiesor topersonswhoneedassistanceandcouldnothavesurvivedwithoutsuchhelp.TheentiresocialsecurityregimeintheUnitedStatesandmuchofWesternEuropeisbasedontheprinciplethattheStatemustprovideforthosewhoareunemployed,indigent,unabletoaffordbasichealthcareandareinneedofsocialsupport.Suchasystemisobviouslypredicatedontaxingthemoreprosperouscitizensandusingthismoneytosupportthoseinneed.

Onecansafelystatethatthereisnocountryintheworldwhichdoesnothaveoneformofsubsidyortheotherforaselectedgroupofpeople.Corruptionwhichistoleratedor,becauseofthepolicyoftherulers,isencouraged is itself a form of subsidising the rich and influential by looting the common man. Agovernmental system which facilitates corruption by its officials at the cost of citizens is a form ofsubsidising a group of persons in power. The entire sordid horsetrading in our Legislatures in order toobtainandretainpowerisaformofsubsidytothecorrupt.AssistancebytheUnitedStatestoIsraelaboveandbeyondthatcountrysminimumsecurityneeds isasubsidytoIsrael indirectlyat thecostof itsArabneighbours.Almosteverysingleproxywar is foughtonthebasisofsubsidies, includingthe low intensityconflictindulgedinbyPakistanagainstIndiathroughsurrogates.ArmsforthePakistanArmygivenbytheUnitedStatesandpartiallypassedontotheTalibanalso formpartof thesubsidyregime.Howare thesesubsidiesbetterthanasubsidygivenbytheIndianGovernmentondieselandLPGwhichwouldbenefitthefarmer,theworkerandthelowerandmiddleincomegrouppeopleofIndia?

LetuscometotheIndiancontext.Regardlessof thejuggleryof figuresbythePlanningCommissionandtheclaimbygovernmentthatIndiahasbeensuccessfullyabletomakeasubstantialdentinpoverty.Indiastillremainsacountrywithhugenumbersofpeoplewhoaresopoorastobeunabletosustainthemselves.One estimate is that anything between forty percent and fifty percent of children are under nourished.Malnutritionisnotafunctionoflackofknowledgeofwhatconstitutesahealthydiet.Malnutritionisadirectconsequenceoftheparentsnotbeingabletoaffordtofeedthechildand,therefore,thechildisperpetuallyhungryandphysicallyunderdeveloped,pronetodiseaseandcumulativelyliabletohaveseriousintellectualdeficiency.One cannot expect the brain of a child who is physically underdeveloped to reach a level ofgrowthofthebrainofawellnourishedchild.Malnutrition,therefore,seriouslyaffectsboththephysicalandmentalhealthofanentirenation.WhichState,whoseavowedobjective is thewelfareof thepeople,canafford to leave such vastmasses of its citizens to their owndevicewithout intervening strongly for theireconomicupliftment?WhichStatecanaffordtoallowitschildrentostarveorthepeopletodieofhunger?Certainlynot thedemocratic India inwhichwe live. Ideally theStatemustcreategainfulemployment for

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ZARBeAZB: An Evaluation ofPakistan Army's AntiTalibanOperations in North Waziristan

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themassesso thateveryone isable tomakea reasonable livingand feedhis children.However, till thathappydayarrivesdoesnottheStatehaveadutytomakeavailablethewherewithaltothepoortobeabletosurvive?Thiswouldbebywayofasubsidy,callitwhatyouwill.

Wearenotignorantofaffluence,whichiswhysomanyofourbusinessmenfigureineveryinternationallistof billionaires. Our Parliament and, following suit, our Legislatures have voted themselves substantialincreases inemolumentsat frequent intervals.Todaytheposition is thataMemberofParliamenthas thefollowingemolumentsandperquisites:

1. Salary:Rs.50,000permonth(increasedfromRs.16,000)

2. Dailyallowance for every sitting of Parliament or of a parliamentary committee, subject to anadditional threedaysallowance before and three days after a parliamentary session and two days before and after all the meetings of acommitteeRs.2,000perday.(IncreasedfromRs.1,000perday)

3. ConstituencyAllowance:Rs.45,000permonth

4. OfficeExpenses:Rs.45,000permonth

5. Travelfacilities:

a)ToattendasessionofParliament,meetingofacommitteeoranyotherdutyasamember:FirstclassA.C. for selfplusone first classandonesecondclassAC fare for rail travel,oroneandonefourthairfareifthetravelisbyairandRs.16perkilometreifthetravelisbyroad.

b)Additionalairtravelfacilities:EveryM.Pisentitledto34singleairjourneysinayearanywhereinIndia, together with a spouse and unlimited number of companions and relatives. If there is anunspentbalanceofairtravelitcanbecarriedovertothenextyear.

c) For rail travel aMP is allowed unlimited first class airconditioned travel for himself/herself andhis/herspouse,plusonecompanionwhowillbeaccommodatedinA.Ctwotier.

6. Accommodation:AMemberofParliamentisentitledtoofficialaccommodationinDelhiandtoannualsupplyoffortylakhlitresofwaterandfiftythousandunitsofelectricpowerfreeofcost.Thewaterandpowerallowancescanbecarriedovertothenextyear.Inaddition,theMPisentitledtopurchaseoffurnitureworthRs.60,000plusRs.15,000worthofnondurablefurnishingitems.Inaddition,everythreemonthsthecostofwashingofsofacoversandcurtainswillbebornebytheState.

7. Telephonefacilities:AMemberofParliamentisentitledtothreetelephonestobeinstalled.Heisentitledtoamobiletelephonealso,and1,50,000localcallsperyearandbroadbandinternetchargesofRs.1,500permonth

8. Medicalfacilities:OnpaymentofRs.500permonthaMemberofParliamentisentitledtocompleteCGHScoverage.

9. ExMembers: Every ExMember of Parliament is entitled to a pension of Rs. 20,000permonth and an additional Rs.1,500permonthforeveryyearinexcessoffiveyearsofmembership.Hisorherspousewouldbeentitledtofiftypercentofthepensionasfamilypension.RailtravelfacilitiesforanExMemberofParliamentwouldbeunlimitedfirstclassA.C.travelifhegoesaloneandtwosecondA.C.travelfacilitiesifheorshegoeswithacompanion.

TheaboveemolumentsandperquisitesoftheMPshavebeengivenindetailtoshowthatourMembersofParliamentareinthetopincomeearningbracketinIndia,atleastinthepublicsector.Withnodisrespecttoour legislators it is clear that they are well above the poverty level income recently prescribed by thePlanningCommissionasRs.28perdayinanurbanareaandRs.22perdayinaruralarea.Isthisnotaformofsubsidy?

Letustakeanotherformofsubsidies.Inacompletelyfreemarketeconomy(onedoesnotreferheretothevirtualeconomicpiracyofthebadolddaysofAmericancapitalismaspracticedbyHenryFord,VanderbiltorRockefeller) industry has to fend for itself in the matter of land, infrastructure, capital, labour, cost ofproductionandmarketing. TheStatewill not acquire land andmake it available at concessional rates toindustry. All our industry is located on land given free or very cheap by government through eitherallotmentofgovernmentlandwhoseopportunitycostisthusforegone,orbyacquiringitatlowratesfromfarmers.TheentirecostofinfrastructurehassofarbeenbornebytheStateandwillcontinuetobeborneby it. Power,water, communication connectivity and transport facilities have been provided by the Stateeitherfreeofcostorathighlyconcessionalrates,governmentgivestaxbreaksand,wheretheindustryisreally influential, then government frames policies which create semimonopolistic conditions in theindustry.Whenindustryturnssickgovernmentbailsitout.Manyindustriesaredefaultersinthematteroftaxesandusercharges.KingfisherAirlinesisonesuchanindustry.Veryoftenthepowerconnectionofanindustry isnotdiscontinuedbecauseofdefaultofpaymentofelectricitydues, theargumentbeingthat ifindustryclosesworkerswillbecomeunemployed.Inotherwords,theamountdue,bynotbeingrecovered,is a form of subsidy to that industry. One does not hear the neoliberal crying out in horror at suchsubsidies.

Theargumentgivenforconcessionsto industriesarethat it isonlywhen industriesaresetupthattherewillbe jobcreationand,therefore,any incentiveofferedto industry is in factawelfaremeasurebecausepeopletherebygainemployment.TheIndianbusinessmanbeingsuchaphilanthropist,onesupposesthathedrawsnobenefitfromthelargessegivenbygovernment!Theexactoppositeisinfactthetruth.Inmanyofthesocalledbackwardareasindustrialschemes,wherelargeindustrialestateswerecreated,mostofthe

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industries have closed. The industrialists took full advantage of the land, the tax breaks, the subsidisedloans and other facilities given by government, set up some token industries and when the period ofconcessions was completed, transferred the assets to their main units located in more traditional areaswhere there is an advantage of cluster. Malanpur in Bhind District, adjacent to Gwalior and virtually itssuburb,wasanindustrialareadevelopedunderthebackwardareasscheme.Todaymostoftheindustrieshavemovedaway,thelandscapeisoneofstrippedfactorieswhichlooklikethewreckageofawarzoneandthe industrialists, after enjoying subsidies, have moved elsewhere. Why is there no neoliberal outcryagainst this? The whole policy of industrial location through subsidies has just not worked. In fact theGujaratpolicy isbetter,where landandinfrastructureareavailable insuch inhospitableregionsasKutchand industry is invited to establish there. Now industrialists make an economic decision. The cost ofestablishing in Surat District is prohibitively high, whereas in Kutch it is relatively low. Becauseinfrastructure is available in Kutch the industrialists prefer to locate there. An industrialist is given nosubsidy,buthedoesfindthatitmakeseconomicsensetolocateinKutchratherthaninBaroda.Inawaythisisasubsidywhichdoesnotignoremarketforces.

Letus see theareas inwhich thepoorerhalf of India is subsidisedand that, too, very inefficiently. Thelargest,ofcourse,istheNationalRuralEmploymentGuaranteeScheme.Itisasubsidyinthatevenwhereitishonestlyadministered,which is almostnowhere, in termsof output the scheme isnot veryproductivebecauseithasnotbeendesignedasanassetscreationprogrammebutasonlyaprogrammeforprovidingemployment for a hundred days per year. Nevertheless, with all the corruption and inefficiency whichplaguethisscheme,ithasbroughtalittlemoremoneytotheverypoorinruralareas.OnepositiveeffectisthatithascreatedsomehopeinruralBiharsothatmigrationofcheaplabourtorichagriculturalareassuchas thePunjab issubstantially reduced.Thishas forced thePunjabi farmer topayattractivewages to theBihari labourtopersuadeittoworkinthePunjab.This isaformofsubsidywhichdoespromotewelfare.Tiedtothiswouldbetheentiresubsidyregimeforagriculture,whetheritisbywayofsubsidisedseedandfertilizer subsidisedwater rate for irrigation, subsidisedpowerandmoremoneybeingpumped into ruralinfrastructuresothatthereisbothemploymentcreationandgeneralupgradationoftheeconomicandsocialinfrastructureofruralareas.Herewhatweneedisnotlessofsubsidiesbutratheracompleteredesigningoftheadministrativesystemsothattheschemesofsubsidyarehonestlyandefficientlyadministered.

Wehaveasubsidyonpetroleumproducts.Petrolandaviationfuelareusedbyaffluentpeopleandbytheairlines foroperationof theiraircraft.This is fuel for the richandcanbe taxed.LPG is used for cookingpurposeacrossawidespectrumofsociety,includingthelowerincomegroupsandasubstantialnumberofpeopleoftheeconomicallyweakersections.Itissaidthatoneverycylinderofgastheoilcompaniestakeasubstantial lossandhavetobesubsidiedbygovernment.Similarly, it issaid thatheavy lossesarebeingincurredonaccountofdiesel.Dieselisthefuelforallourgoodstransportvehicles,thelocomotivesoftheIndianRailways onnonelectrified sections and it powers tractors andpump sets used in the agriculturesector.Everypaisaofadditionalcostaddedtodieselwouldpushupthecostoftransportand,therefore,theprice of goods that the average citizen uses. It also pushes up the cost of agriculture because cost ofrunningoftractorsandofnonelectrifiedpumpsetsincreases.Thispushesupthepriceoffoodgrainsandcontributestoinflation.IfLPGbecomemorecostlyandpeopleturntoalternativefuels,Godhelpourtreesbecausetheywouldbecutdowninincreasingnumberseveninurbanareas.Asubsidyonfuel,therefore,iffullyjustified.

Whyare fuel costshigh?Partially it is the cost of crude oil butmore importantly it is the taxes such asimport duty, excise duties, various types of sales tax and value added tax is what keep the price ofpetroleumproductshigh.Therevenueearnedfrompetroleumproductsiswhatispassedonbygovernmentassubsidy to theoil firms.Governmentwants tokeepearning that revenue,but itwants to transfer theburden of subsidies to the consumers, many of whom would have a major economic slide back andreduction in life style if the subsidy were withdrawn. Why is government not prepared to forego thatrevenuesothatfuelpricesmayremainaffordable?Shouldtheneoliberalsnotanswerthisquestion?

Letustakeeducationandhealthcare.UnderArticle47theStateisdirectedtoraisethelevelofnutritionandthestandardoflivingofitspeopleandtomakehealthcareamongstitsprimaryduties.InBritaintheNationalHealth Service gives health coverage to everyone living in theBritish Isles. In Indiamost StateGovernmentsareallowingthehealthfacilitiesinthepublicdomaintorundownsothattheprivatehealthcare facilities can prosper. Is this not a clear violation of the primary duty of the State? Similarly, ineducationitisthedutyoftheStatetoprovidefreeandcompulsoryschooleducation.Governmentseemstobewillingto investthousandsofcroresofrupees insettingupeightnewIndianInstitutesofTechnologyandsevennewIndianInstitutesofManagement.Schooleducation,however,iswoefullyneglected.Herethepublicprivate partnership mode is advocated by our dear Planning Commission, even though in theAmericawhich isbelovedof thePlanningCommission,schooleducation is firmly inthepublicdomain.Atthelowestendofthespectrumofeducationneglectofschooleducationhasresultedinourhavingoneoftheworstrunschoolsystemsintheworld.AtthetopofthisspectrumtheIndianInstitutesofManagementchargeanunrealisticallyhighfee,whichstudentscanaffordonlybytakingaheftyloan,thenightmareofwhoserepaymentloomslargebeforethem.Therefore,insteadofacquiringknowledgethestudentsonlytryandacquireahigheremployabilityprofilesothattheycanbeimmediatelyemployedonhighremuneration.



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Genuineeducation, researchanddevelopmentgoby theboard.Neglectatoneendandhigh feesat theotherhavegivenusexactly thesame result,a complete lackofgenuineeducation. Is thiswhat the freemarketeconomyisdesignedtodo?

Subsidies come with a price. One has to find funds for subsidies and a government which will notprogressivelytaxtheaffluentnaturallyresortstodeficitfinancing.If, forexample,MukeshAmbanihadtopayanexpendituretaxofRs.650croresontheRs.650croreshespentonconstructinghisnewhouseinBombay,ortheSwaminarayansecthadtopayRs.1,500crorestaxontheRs.1,500croresspentontheAkshardham temple at Delhi, government would have the funds for genuine subsidies. The alternativewould be for potential big spenders to demonstrably prove that they are diverting luxury spending tophysical or social infrastructure development, thus relieving pressure on the budget. In any case deficitfinancingforadefinedpurposeisnotreallyevil,asanyKeynesianeconomistwillvouch,provideditcreatesassetswhichbegintocontributetoeconomicdevelopment.

Theadministrationofsubsidiesisourbiggestweakness.Firstandforemostsubsidiescannotbeameansofpopulismandboththeneedforsubsidyanditsquantumandtimespanmustbecarefullythoughtout.Theadministrationofeachsubsidyhas tobemadeover toadedicatedofficerororganisation,whoseareaofresponsibility and accountability must be defined. Within the organisation there must be interlockingaccountability,withthesinsofthesubordinatebeingvisitedonthesuperior.Punishmentmustbeswiftandsure and there has to be ruthlessness in awarding it. Equally important is reward for good work. Thesupervisory, monitoring and evaluation has to be tight knit and the subsidiary regime must be free ofpolitics,completelyopenandamenabletopublicviewingandreview.IrefusetobelievethatwecannotrunasystemefficientlyandhonestlybecauseIpersonallyhaverunsystemsaccordingly. I knowgovernmenthasmanyofficersbetterthanIalltheyneedisasenseofdirection,amotivationtosucceedandfreedomtooperatewithoutinterference,badgeringorworse.

Intheultimateanalysisthekeywordisequity.Ifequityistobeensuredinacountrywithmassiveincomedifferentials,theneffectiveuseofsubsidieshastobeoneofourmajorweapons.Letusnotshyawayfromit.

AuthorisVisitingFellowinVivekanandaInternationalFoundation

PublishedDate:30thMarch,2012

EconomicStudies GovernanceandPoliticalStudies

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A Perspective on Subsidies in Our Economy _ Vivekananda International Foundation