Whose Subsidy is it Anyway?
Economics is peculiar. It affects our existence in many ways – including intimidating and baffling us. We are living witnesses to the fact that economic jargon is not just limited to government policies and documents. We are forced to consume the deadly concoction of economic mumbo jumbo in our day to day life. But most of us have no clue what ‘words’ like subsidy, direct tax, excise duty actually mean.
It was this thought that triggered us to look at the issue of subsidy. What does it mean? How relevant is it in the Indian scenario? Which industries get it? Do they really need it? You see, we at Gobar Times subscribe to the tradition that words of veterans – politicos as well as economists – should be heeded. So here’s what Ronald Reagan, the 40th US President once said: “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.” Let’s examine whether or not Reagan’s thought holds true in today’s India.
What is subsidy?
Let us begin with this simple statement: Defining subsidy is complex. You see, this term subsidy has been used by economists with different meanings and connotations in different contexts. The dictionary defines it as ‘money granted by state, public body, etc, to keep down the prices of commodities, etc’. In a budgetary context, it may be defined as ‘unrecovered costs in the public provision of private goods’.
governments also hand out subsidies to curry favor with political constituents and powerful interest groups. constitute an important economic instrument for modifying market-determined outcomes. School of Social Sciences. The aim is to ensure that a larger section of the society gets a larger chunk of the national cake. Professor at the Centre for Economic Studies and Planning. to correct market failures. Jawaharlal Nehru University.
1. Source: Global Subsidies Initiative (GSI)
“The notion of subsidy has to be addressed within the tax-subsidy framework. “The definition of a subsidy. like that of beauty. subsidies inject money into circulation. Subsidies are a means for governments to promote the growth of particular industries or regions. Taxes appear on the revenue side of government budgets. That is one of the dangers of subsidies. “The government introduces subsidies to mobilise resources in a progressive manner.” says C P Chandrasekhar. is the fact that while taxes reduce disposable income. that economists have not settled upon a commonly acceptable definition of subsidy. varies with the beholder”: The House Committee on Agriculture of the US Congress (1972). and subsidies. 2. Subsidies. Here is a very interesting take. that they nurture recipients who have a vested interest in perpetuating them even after they are no longer needed. as converse of indirect tax. economic sector subsidies are nearly
.” says Professor Chandrasekhar. Why are they needed? Subsidies are usually meant to achieve one of these four objectives: • Economic and industrial development • Redistribution of resources among different sections of the society • Research and innovation • Environmental protection The danger Of course. simply. or to enhance social welfare.2
The Commonwealth of Learning (COL). way back in 1974. in practice. an intergovernmental organisation created by the Commonwealth Heads of Government had commented. on the expenditure side. In the case of subsidies given by the Union Government. What this means.
Today. Subsidies are crucial for progressive growth and equitable distribution of resources. So what is the problem? Where is the conflict? What is the debate all about? Well. however. health and environment are advocated on grounds that their benefits are spread well beyond the immediate recipients. author of ‘Lessons Learned from Attempts to Reform India’s Kerosene Subsidy’. energy. and transport.000-crore”. bribe government officials to obtain licenses to distribute or blend the fuel and to maintain the subsidy policy. Provided these are designed and administered efficiently to serve a clearly stated set of objectives. “However. “Subsidised kerosene is sold at much lower prices than gasoline or diesel and is frequently diverted to the black-market for use as a transport fuel.” he elaborates. ‘Objectives’ being the operative word. the subsidy is subject to widespread abuse. We decided to look at three sectors that particularly run into controversy. general economic services. present and future. The economic sectors arranged in diminishing order of size of subsidies are: agriculture and allied services. the subsidy was maintained with the intention of stabilising prices and providing poor households with sufficient fuel for cooking and lighting. What are subsidies doing in reality? Are they actually assisting the poor or serving the rich?
Did you know India’s kerosene subsidy was initially established as a distribution scheme during fuel shortages in World War II? After the war. in turn. industry and minerals. They are: So far so good. and are shared by the population at large.3
five and half times as large as those for the social sector.” the study elaborates. the answers to all these questions come in the form of shocking headlines such as “PDS kerosene scam: a whopping Rs 2. Subsidies in areas such as education. “Only 60 per cent of subsidised kerosene reaches the people it is meant for.” says Dr Bhamy V Shenoy. subsidies can also be very costly if they are poorly designed and inefficiently administered. a study published by the International Institute for Sustainable Development (IISD). a study by the National Institute of Public Finance and Policy highlights the fact that subsidies can have a major impact in the overall development and profitability of the society. The diversion of kerosene is a lucrative business for corrupt fuel distributors who. (National Institute of Public Finance and Policy)
What’s the debate?
Subverted subsidies? ‘Budgetary Subsidies in India’.
” says Professor Chandrasekhar. Director General of the Centre for Science and Environment says. Unemployment needs to be curbed to prevent social disruption. So the subsidy-tax framework needs to be addressed in this light. as Professor Chandrashekar points out.” he adds. What are they doing in the process? Taking unfair advantage of the subsidy handed out in this sector. Let’s do a quick recall. Sunita Narain. Wasn’t he right? Aren’t they the real beneficiaries of the diesel subsidy?
It is empirical we look at the health care sector. “The subsidy mechanism is expected to work in a manner that it neutralises external effects.
Hell broke lose when the former environment minister Jairam Ramesh called Sport Utility Vehicles (SUVs) “criminal” for guzzling cheap subsidised diesel. Unfortunately. Every economy needs them for progressive growth. High cost of diesel will definitely result in a higher cost of food – something the Government can’t afford.” he adds. Alternative sources of energy save the environment. Let’s admit it. is to realise an objective. inflation will be caused.
The automotive industry has been advertently abusing the diesel technology by specifically turning top-of-the-line models into diesel versions and targetting the richest. so it should be taxed. So what was done to promote cheap trips for goods carrying trucks has ended up fuelling the automobile fantasies of the high and mighty. The real issue is of defining those objectives. there is nothing controversial about the concept of subsidies. It is the fuel used by the farmer and the transporter to cultivate our food and bring it to us.
Right. What started as a motive to provide a means to reach out to the lowest denomination of the society has ended up being the rich man’s fuel.
. “we have tried in our ham-handed socialist ways to find answers to provide services such as health services. The real purpose of subsidies. so the industry needs to be promoted and incentivized through subsidies. For example. We are in a mess. “The issue is not which industries get a subsidy. Inflation needs to be controlled to make food affordable. the chemical industry pollutes. the truth is far from reality. It is a macro strategy aimed at attaining equal distribution. Over the past 50 years. “If the Government charged us the full price of diesel.4
We all know why diesel is subsidised.
No questions asked. let’s forget all other arguments and look at the diseases of the poor.” says Professor Chandrasekhar. India has only 0. solar or biomass gasification – for future energy security. housing. It
is for this reason that the Government ‘intervenes’ to promote the development of new vaccines or drugs that are less resistant to dreaded bacteria.” says Sunita Narain. is: under what conditions can these emerging technologies be introduced into the market? The answer is not so simple.
. far below the global average of 2.” The poor shouldn’t have to be limited to ‘poor hospitals’ and thus. in a quest to make the best services available to them. But who are the beneficiaries? Healthcare spending in India accounts for over 5 per cent of the country's Gross Domestic Product (GDP) but 80 per cent of the total spending comes from the private sector.7 beds per 1. We need to add 2 million beds to the existing 1. generous subsidies have been given out. Why is such miniscule R&D done in this area? Simply because the scope to make money is limited.
“For a moment.5
infrastructure. education for all. Where is the improvement?
RENEWABLE ENREGY SOURCES
We need green technologies – wind. “The critical question.1 million by 2027. power. water.000 people.6. now.
There is no subsidy. By March 31. For some years now. rightly. when you look at the quantum that is needed and the costs of inputs. The bogey of free power is a bogey. Land is one of the main investments in this sector and the Government has been giving away large chunks of land at highly subsidized rates to set up wind mills. in contrast. It pushes investment. it contributed a paltry 1. 2008. spinning mills and even film stars have invested in wind energy. But there is no interest in power generation. “By giving subsidies and incentives to those with promise. — Sunita Narain Let us take the example of wind energy. a sector that has been on the line of fire. Fertiliser subsidy is given to companies and not farmers. Over 60 per cent of cultivated area is irrigated with private groundwater systems. And simultaneously.
Subsidy: A bogey? Farmers in our world get peanuts in the name of subsidy. the Centre and state governments have given generous fiscal incentives to promote the sector. There is no question incentives are needed for this technology to penetrate the energy market. by taxing the polluters. Farmers will tell you they pay for diesel to pump water.6 per cent to the actual power generated. Experts say the problem is fiscal benefits come without regulatory support. It should not surprise us hotel companies.6
We all know the reason why alternative sources of energy like wind or solar energy need to be promoted. Yet. Power generation. Subsidies in this sector smell foul because benefits seem to be going to pockets that don’t deserve it. wind energy certainly comprised 6 per cent of installed power capacity in the country.” he says. “How does the Government get the industry to deliver?” questions Professor Chandrasekhar. They will also tell you that they have invested to build their own infrastructure for agriculture. has been miniscule.
. It adds up to nothing. Let us be clear on this count.
India’s fossil-fuel subsidies: A timeline 1939 Commencement of the Public Distribution System (PDS) for subsidised food Domestic oil prices based on import parity 1939-1945 (WWII) Subsidised kerosene included in PDS for residential consumers 1948 Fixed petroleum refining and dealer margins established Late 1960s Subsidies for liquid petroleum gas introduced for residential consumers 1976 Petroleum prices fixed under the Administrative Pricing Mechanism (APM) 1980s First attempt at marking subsidised kerosene with dye
1989 Coupon system introduced to control access to subsidised kerosene in Mysore (program closed two years later) 2002 APM dismantled. petroleum prices (other than residential kerosene and LPG) liberalised 2003 Government intervention in petroleum prices 2005 Global positioning systems fitted to kerosene distributor trucks in an attempt to prevent diversion of fuel (program closed in 2008) 2006 Marking of subsidised kerosene with a dye to prevent diversion of fuel (program closed in 2008) 2007 “Smart cards” considered to control access to subsidised kerosene (program not adopted)