InclusionWhat Went Wrong With The India Growth Story?

Streamlining Subsidy Management

“ The time is for reckoning in policy circles as well as in the public that in the days ahead, there is no point in the proliferation of subsidies the way India has been doing so far. The democratic polity sometime misses to follow the course of proper interface of politics and economics. Such a scenario gives room for populist measures rather than inclusive policy supplementations”
M Govinda Rao Member,,
Fourteenth Finance Commission

In recent times, the focus of subsidy management has been centered on budgetary allocation. However, this makes fiscal consolidation a harder goal to achieve. C Rangarajan has correctly noted that subsidy has significant impact on the growth because it increases the fiscal deficit and more than that, it distorts relative prices. In fact, the growth implications of disoriented subsidies are much higher in terms of the unintended fiscal distortion it creates. Therefore, the problem is much larger in the sense that these subsidies, many of which are not shown directly in the Budget, disturb the anatomy of public spending. The reason is the lack of transparency on subsidy planning. Many indirect ways influence the overall allocation of subsidies, but without figuring out the deserving beneficiaries.

The time has come where we need to really look at the overall problems arising from improper pricing of natural resources. We give various types of subsidies when we allocate natural resources.

Administered Nature of Pricing

A close look at the overall subsidies scenario shows that the prices, at least in principle, are mostly determined through administrative routes. This makes the whole issue of ‘relative price distortion’ blurred and incomprehensible. Nevertheless, in policy circles, it is believed that high savings and investment are a prerequisite of such scenario.

But if you have high savings and investment, the other way of increasing growth is to increase productivity — the incremental capital output ratio. And if you have this type of distortions going on in the system, obviously the best way to improve the condition is to release these prices. So, it would be prudent in allowing the market to determine these prices. That would streamline the efficiency in resource allocation.

But the question arises as to why should we continue the subsidies? What is the strong case for maintaining them? Surely, there is a case for subsidies, as we need them for addressing genuine obvious (external) compulsions. However, in India, the bigger consideration appears more political than redistributive justice.

In such a tricky situation, we really need to justify the rationale of continuing the subsidies scheme. If subsidies are meant for redistributive purposes, it should be better channelised through cash transfers. It’s not necessarily a fair idea to subsidise goods in order to achieve redistribution.

But in any case, the direst benefit transfer (DBT) will not replace the need for commodity subsidisation. Commodity subsidisation is essential to some extent, as it is linked to the required minimum or standard calorie consumption by its beneficiaries. In a greater sense, a democracy like India is naturally bound to do it. So, the need is to make an appropriate distinction between benefit transfers and subsidy. This will take the matter forward to a progressive end.

Interestingly, DBT appears as negative direct tax and subsidy is like negative indirect tax. So, the benefit transfers have to be launched on a broadly planned model, such as the Aadhaar platform. But challenges would remain on the subsidy front, as it can be used in many terms and for diverse end-results.

However, the same is not true with redistribution plan, as it hails from a better defined territory and can be approached reasonably. But for some overt compulsions, if subsidies stay imminent, they must be properly designed and delivered to cater to set inclusive goals.

Proliferation of Subidies Must End

The time is for reckoning in policy circles as well as in public that in the days ahead, there is no point in the proliferation of subsidies the way India has been doing so far. The democratic polity sometimes misses to follow the course of proper interface of politics and economics. Such a scenario gives room for populist measures rather than inclusive policy supplementations.

On this basis, the hope for enterprise among the different strata’s comes to halt. The freebies are like contagious malady on which electoral politics can thrive. They not the reasonable economics. For the same reason, the need is to maximise the scope of cash transfers, instead of subsidies. With its inherent weakness, redistribution is inappropriate as well as inefficient.

We really need to justify the rationale of continuing with subsidies scheme. If subsidies are meant for redistributive attributes, it should be better channelised through cash transfers. It’s not necessarily a fair idea to subsidise goods in order to achieve redistribution

The basic difficulty it faces in reaching to the needy segments begins with the misuse of the funds allocated. With no clear policy on poverty estimation, it’s not logical to rely on the old subsidy format. Cash transfer too will do well only when the actual beneficiaries are figured out.

In the present form, the consequences of our subsidies are hard to predict. Even the scales of subsidies are not known properly, leaving aside their actual functional potential. So now, the time is to release the prices to let the market determine it, rather than following them administratively. This will ensure much-needed transparency in the system and will make economy well-shaped and inclusive.

M Govinda Rao

M Govinda Rao is Member, Fourteenth Finance Commission
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