12 May 2017, Manish Padhi
In this context, latest economic survey rightly points out that despite spending as high as 3.77 lakh crore rupees annually on subsidies there is no ‘transformational impact’ on standard of living of masses. While subsidies have helped some poor people to do firefighting in life, main allegation on a subsidy economy is that, through subsidies, money meant for poorest is appropriated by richer sections of the society due to mistargeting and leakages.
Subsidies and its opportunity costs
Subsidies are that part of government expenditure that is ‘consumed’ by beneficiaries. In economics, debate between two alternative uses of money: Consumption and Investment is quite old.
Same concept goes for economy as a whole. We have Tax to GDP ratio of around 17.7%. (Center plus states) With this amount government has to provide for interest payments of its debt, expenses for its humongous administration, defence of the country, devolution to states and panchayats, developmental work, infrastructure and for subsidies.
In 2013, total expenditure by government was 13.8% of GDP. Out of this revenue expenditure (consumption) was 12.1% of GDP, leaving just 1.7% of GDP for Capital expenditure (investments). Out of this revenue expenditure, non-plan expenditure was 9.5% of GDP. Further, non-plan expenditure had following breakup –
Some subsidies led distortion in India:
To remedy this problem, government has plans to separate agriculture feeder network from rest, under Deen Dayal Upadhayay Gram Jyoti Yojna. This separate agriculture feeder will supply electricity only for a few hours a day. This was first tried by Gujrat and results were encouraging as it had role in making Gujrat a power surplus state, along with arresting continuous decline in groundwater levels.
As a result, actual use of NPK is in ratio of around 8:3:1 while recommended use is 4:2:1. This additional use of urea doesn’t give any additional benefit to the farmer. Instead this can degrade soil and harm crop. Productivity and quality of a crop depends upon use of diversified mix of macro and micronutrients, which vary from soil to soil. While urea consumption has increased from 59 per cent to 66 per cent of total consumption in 2012-13 over 2010-11, per hectare consumption of fertilizer has declined from 140 kg to 128 kg over the same period.
Fertilizer subsidy was `67,971 crore in 2013-14, an increase of 11 per cent over 2009-10. Large part of this went to production and consumption of urea that was not needed at all.
Also, due to excessive use of fertilizers groundwater is also getting polluted and chemical bioaccumulation problem is impacting health of people.
Apart from Urea, farmer is not even getting benefit due from NBS in case of subsidized potassium and phosphorus. Subsidy is provided to manufacturers, who in turn are responsible to pass this subsidy to farmers in form of reduced retail prices. Rather, manufacturers have increased their prices forming a cartel and have usurped subsidy meant for farmers. It’s only now that Ministry of Chemicals and Fertilizers has undertaken review of prices charged by registered manufacturers. It has plans to penalize and cancel registration wrongdoers.
Another mistargeting of fertilizer is that most of this is consumed by rich farmers of Punjab, Haryana and North West Uttar Pradesh. Uptake of fertilizers depends a lot on sufficient supply of water to the crop. As about 60% of total cultivated area of India is rain fed, subsidy is cornered overwhelmingly by well irrigated states.
Consumption patterns in India are shifting rapidly from calorie rich diet to protein and vitamin rich one. Despite this, protein based diet in India is abnormally expensive. Main source of protein for Indian masses is pulses. Last whole year there was clamour on the issue of skyrocketing prices of pulses. India’s subsidy regime had its hand behind this problem.
Pulses are most suitable to be grown in areas of Maharashtra and Madhya Pradesh, yet large parts of these areas are under cultivation of sugarcane. Sugarcane due to high ‘fair and remunerative price’ is being sown in these areas. This create two problems – one, it deprives Indians of their source of protein; two, these areas are water deficit and sugarcane is water guzzling crop. This crop is sucking scarce water rapidly and when monsoon failed again this time, mainly in Marathwada; farmer had no way to escape.
Similar is the case for cultivation of Wheat and Rice. These two crops yield much larger quantity (about 5 times) per acre/hectare than crops like pulses. Higher MSP for pulses is not so high to make whole value of produce more remunerative for farmer. So he prefers conventional grains. This has led to huge stockpile of wheat and rice (40-50 million tons) in government inventory which decays and is carried forward at cost of Rs 5/ year. On the other hand, India has to import more than 25% of its consumption of pulses.
Apart from this, freight carriers of railways are even more uncompetitive, because railway subsidizes passenger fare further by charging higher freight charges. Accordingly, in 1970’s freight used to contribute 65% of railway revenues and now it does only 33%. This is due to shifting of freight carriage from rail to road transport, which much costlier, more polluting and more time consuming. This has made our economy a lot more uncompetitive.
Economic survey notes three discrepancies in this subsidy. One, trend indicates that amount for a single loan is increasing for most of these subsidized loans. This means that more subsidies is going in favor of rich farmers. Two, extension of subsidized credit is concentrated in last three months of the financial year, which indicates that reluctant banks otherwise unable to meet priority sector lending targets, desperately disburse loans to reach target at the end only. It is unlikely that this way credit will reach to desirable party. Third, agriculture credit is getting concentrated on peripheries of urban areas, which means that money is being diverted to nonagricultural use.
Few experts believe that entitlements under Food Security Act are sufficient only to fulfill 50% of requirement of foodgrains for a household. For this 50%, there is massive but inefficient storage and PDS system. This in many ways significantly increases price of remaining 50% food grain need of households. So, a well-intended system may be actually working counter to its stated goals.