Mounting subsidy bill

Compared with the revised estimates of last year, the state's subsidy bill went up by 30% while its revenue receipts grew only by 9%.

Out of every one rupee that the Union government will spend in Financial Year 2017-18, 10 paise will be in the form of an explicit subsidy given to one group or the other. Food, petroleum products and fertilisers will continue to remain the three major subsidised items. Taken together, subsidy on these three items alone will make up 1.4% of India’s GDP.

Given this size of the Union government’s subsidy bill, it receives enough scrutiny and attention. This issue has now even spurred action on the part of the Centre. For example, the Narendra Modi government expects that the `JAM scheme’ (Jandhan-Aadhaar-Mobile) will reduce wastages by targeting beneficiaries better and this will in turn reduce the size of the subsidy bill.

So far, so good. But there is hardly any commentary on what is the size of the subsidy bill of the state governments. This kitty is not small either. For example, out of every rupee the Karnataka government intends to spend in FY 2017-18, 13 paise will be in the form of an explicit subsidy to one group or the other.

As a proportion of overall expenditure, the Karnataka government spends more on subsides than the Union government does. Hence, isn’t it a pity that the state government’s subsidy bill hardly ever gets noticed?

Subsidies in the Karnataka budget FY 2017-18: In what is a crude measure of the importance of subsidies, the word ‘subsidy’ appeared in the Budget presented by Chief Minister Siddaramaiah (who also holds finance portfolio) on 47 occasions!

When compared with the revised estimates of last year, Karnataka’s subsidy bill went up by a whopping 30% even though revenue receipts increased only by 9%. Clearly, freebies are back in fashion given that this is the last full budget before the next assembly elections.

The major components of Karnataka government’s subsidy bill are: assistance given to various electricity boards, subsidies for constructing low-cost housing, free food through the PDS system, and a range of subsidies for the agricultural sector. These four areas together constitute nearly 75% of the subsidy bill.

Are the increases in subsidies justified? Subsidies to ailing electricity companies (Discoms) alone make up one-third of the total subsidy bill. And the disappointing part is that there is no long-term solution on the cards for this category of subsidy.

The Union government’s reform scheme Ujjwal Discom Assurance Yojana (Uday) is expected to provide short-term relief only. Unless the Discoms improve their finances by levying higher charges through peak pricing, ending free electricity supply for agricultural consumption and reducing unmetered connections, the burgeoning subsidies for this sector will continue.

Low-cost housing has recently become a big focus area for Union and state governments alike. The last assembly election manifesto of the Congress carried the promise of making Karnataka a hut-free state.

Consequently, a number of schemes that subsidise housing for lower income groups have been taken up over the last four years. The latest one, announced in the FY 2017-18 budget, is called the ‘Chief Minister’s 1 Lakh Bengaluru Housing Scheme’.

As per this scheme, ‘amount reali-sed from the sale of plots/houses developed in an area of up to 25% of the available land will be utilised to subsidise affordable housing for urban poor in Bengaluru’.

An important question went unanswered: should governments be spending money to ensure that every resident owns a property instead of spending more on critically underfunded areas such as health and education? Is living on rent such an ignominy requiring governmental largesse?

Food subsidy totals around Rs 3,477 crore. The chief minister’s flagship scheme called Anna Bhagya that gives low-cost food grains to BPL (below poverty line) beneficiaries witnessed a big jump: Rs 1,344 crore to Rs 2,145 crore.

This was because of two reasons.
One, food grains being distributed under the scheme are planned to be increased from 5 kg to 7 kg per person. And two, apart from cereals, 1 kg of pulses will also be subsidised going ahead in this scheme. Again, critical questions remain: is hunger still a big issue in a state like Karnataka?

Focus on malnutrition
An oft-cited NSSO (National Sample Survey Office) survey report doesn’t think so. According to this report, 99% of rural households and 99.6% of urban households were getting two square meals a day throughout the year in 2009-10. This shows that perhaps state governments should focus on malnutrition and its leading cause — poor sanitation.

Agricultural subsidies come up to Rs 2,367 crore. In fact, this sector has the widest range of subsidy programmes under various names: Krishi Bhagya, Rashtriya Krishi Vikas Yojane (RKVY), Pashu Bhagya to name just a few.

It’s time that we start questioning that if merely explicit costs were a problem in agriculture, shouldn’t the various subsidies over all these decades have improved the agricultural situation by now? It is more likely that the problem rests elsewhere.

And what about education and health? It is important to take note of the constitutional mandate: the Union government has been assigned a predominant role in the provision of physical infrastructure (roads, ports, bridges etc) whereas the state governments have a predominant role in the provision of social infrastructure (health, education etc).

Hence, it is only natural that the state governments might want to lower the costs of accessing key social infrastructure facilities through subsidies.  But when a large part of the subsidy bill goes for compensating losses of electricity companies — as in the case of Karnataka — the scope of spending on health and education reduces. To correct such imbalances, the state government subsidies need greater scrutiny. Only then can they be forced to change their tired approach towards subsidies.

(The writer is a fellow at The Takshashila Institution, Bengaluru)