PICTURE SPEAK

FOOD SUBSIDY Rs 25,200 cr Annual Rs 69 cr per day subsidy Can provide a meal to 138 million people a day.

Do we want the government to reduce tax rates? Yes, sure. Do we also want the government to pay higher taxes to us? Well, what is that? Elementary. Subsidies are inverse of taxes. Just as a tax increases the price of the product taxed, subsidies reduce the price of the product subsidised. And just as taxes increase a government's income, subsidies reduce it. Barring a few exceptions, most governments in the past decade have reduced tax rates. And they have also raised subsidies. In just eight years, between 1995-6 and 2003-4, the Central government's annual subsidy bill has shot up 280 per cent-from Rs 12,158 crore to Rs 46,869 crore. That's just counting the explicit (easier to monitor) subsidies. The implicit subsidies (more intractable) form a higher share of the total subsidy bill.

A combination of lower tax rates and higher subsidies is a double whammy for government finances. In 2003-4, over 45 per cent of the Centre's revenue receipts were eaten up by subsidies. Yet the most alarming aspect of the surging subsidies is not the size, but the manner and purpose of spending on them. That is the key concern voiced in the discussion report on Central government subsidies tabled in Parliament by Finance Minister P. Chidambaram in December and is certain to influence the next budget.

PICTURE SPEAK

FERTILISER SUBSIDY Rs 11,797 cr Annual Rs 32 cr per day Will buy 6.6 lakh quintals of urea a day.

To be sure, subsidies are essential to ensure food supply to the poorest. They are also almost mandatory for small farmers who may not be able to cultivate their lands if farming inputs are not made available to them at subsidised rates. Besides, subsidies are neither unique to agriculture (industry is at times as heavily subsidised) nor to India (developed countries also have very irrational subsidies). But subsidies provided in India suffer from both inclusion error (wrong kind of people benefiting) and exclusion error (deserving people left out of subsidies). Efficient subsidies must be transparent, targeted and-in many cases-temporary. The Finance Ministry paper establishes that these three Ts are missing from most subsidies in India.

Take, for instance, the biggest of them all, the food subsidy which makes up 54 per cent of total explicit subsidies and has grown by almost three times in five years. The subsidy has two components-support to farmers in the form of minimum purchase price for their crops and support to consumers in the form of subsidised food grains through the public distribution system (PDS). The spurt in food subsidy in recent years was not because the poor are eating more PDS food, but because the government bought huge amounts of food grain from farmers, only to stock them at prohibitive cost. In 2003-4 the Food Corporation of India (FCI), through which the government buys food grains, paid an average of Rs 1,253 to acquire and distribute a quintal of rice.

PICTURE SPEAK

PETROLEUM SUBSIDY Rs 6,573 cr Annual Rs 18 cr per day Can pay for 6.5 lakh LPG cylinders a day.

It supplied the rice to the PDS at Rs 565 and Rs 830 per quintal. So, on the purchase and sale of rice the government lost between Rs 688 and Rs 423 per quintal. Even at such price differential, the government is lucky if the grains are bought through PDS. Or else stocks just pile up at the FCI at huge holding costs. After peaking at 63 million tonnes in July 2002, food grain stocks with the FCI fell to 20 million tonnes in April 2004-still higher than the stock it is required to hold. Even this reduction was not brought about by higher sale through PDS, but by exporting at subsidised prices.

The FCI purchases crops mostly from Punjab, Haryana, Western Uttar Pradesh and Andhra Pradesh-where some of the country's richest farmers live. They get the entire benefit of farmer's subsidy. The government provides price support to only farmers of wheat and rice. This is distorting the cropping patterns in favour of these two food grains, at a time when consumption pattern is moving away from food grains. Similar problems plague fertiliser subsidy (only 60 per cent of fertiliser subsidy goes to farmers) and petroleum subsidy (more than 50 per cent of it comprises LPG subsidy).

PICTURE SPEAK

RAILWAYS SUBSIDY Rs 1,228 cr Annual Rs 3 cr per day Will buy 1,200 Delhi-Mumbai Rajdhani tickets a day.

The paper lists out many solutions. At a very broad level, it classifies all subsidies into merit-I, merit-II and non-merit. On food subsidies, the paper suggests limiting FCI's purchases and providing farmers security through measures like crop insurance. Whatever purchase of crop does take place, it could be decentralised and spread to more states. Most importantly, private companies and traders should be allowed to buy crops from farmers directly, which will be efficient and unburden the FCI.

It is not the first time problems besetting subsidies have been talked of. It is also not the first time solutions have been offered. In 1997 too Chidambaram had brought out a paper on subsidies, hoping to make the system leaner and cleaner. Nothing happened. Through his second report, more alarming than the first, he is looking to renew the debate and find fresh solutions. But before that he has to convince his fellow parliamentarians that the question is not whether to subsidise or not, but who to subsidise and how.

Index