Subsidy reforms: even Modi won't take that risk

Subsidy reforms: even Modi won't take that risk

Recently, Delhi Chief Minister Arvind Kejriwal vehemently opposed the hike in fares for travel by Metro Rail and offered to share the financial burden equally with the Union government to ensure that commuters are not affected. About three years ago, he had decided to give heavily subsidised power to households consuming up to 400 units a month. Then, too, he vowed to bear its financial burden out of the state budget.

Kejriwal is not alone in giving subsidies using taxpayers' money. During the last five decades of governance - be it at the Centre or in the states - successive political establishments have built a super-structure of subsidies, such as on fertilisers, food, kerosene, LPG, irrigation, power, credit, seeds, etc.

When given initially, these were justified in terms of helping the poor but progressively, some of these subsidies have been extended to cover a majority of the population. At present, all 140 million farm households (including the rich and very rich) are eligible for fertiliser subsidy. Two-thirds of Indians qualify for heavily subsidised food under the National Food Security Act (NFSA). The LPG subsidy is given to around 165 million, which includes a large number of well-off people.

The subsidised credit, though meant for poor farmers only, is also appropriated by better-off/rich farmers. Instances of the latter on-lending to the former at much higher rates and making money on 'arbitrage' are common. Likewise, subsidies on power have increased leaps and bounds, and much of this is pilfered. The story of subsidy on other items such as irrigation, seeds etc., are no different.

The number of such subsidies and their ever-expanding reach (embracing even the non-poor) clearly shows that they have a lot to do with vote-bank politics. By giving more subsidies, the incumbent governments enhance their chances of retaining power. On the other hand, even a whisper of reducing these causes them jitters. And, since reforms inevitably involve subsidy reduction, no party wants to touch them even with a barge pole.

Take fertiliser subsidy, for instance. Back in 1991, when economic reforms were initiated, the then government had given a commitment to IMF/World Bank that this would be eliminated within three years. It is more than 26 years since, and we still have
fertiliser subsidy guzzling about Rs 70,000 crore (budget allocation for 2017-18).

During the last 15 years or so, none of the ruling parties had the gumption to increase the retail price of urea (except, for a mere 10% hike in 2010) – the most widely used nitrogenous fertiliser. In 2015, the Modi government decided to freeze the price at its existing level for four years. As a result, fertilizer subsidy won't see any reduction from the current Rs 70,000 crore till 2019-20 - as per the medium-term expenditure framework statement (MTEF).

In food, successive dispensations have only harped on reducing the price at which food is made available to beneficiaries - consistently ignoring the steep increase in the cost of supply. Thus, one shudders to fathom that under NFSA, a mammoth 800 million people are eligible to get food at throw-away rates of Rs 1/2/3 per kg for coarse grain, wheat and rice. No wonder then that the annual budget of the Union government alone for food subsidy is Rs 1.45 lakh crore (2017-18). This is set to increase to Rs 2 lakh crore in 2019-20.

Likewise, in the power sector, states compete with each other in supplying electricity at either nil or heavily subsidized tariffs. This results in a huge shortfall in realisation of state electricity boards (SEBs)/power distribution companies (PDCs) vis-à-vis cost. It led to the pile up of losses of over Rs 4 lakh crore. Now, these companies are being relief under UDAY (Ujwal Discom Assurance Yojna).

Persistence with low prices, no matter how
high the cost is, imposes a huge cost on the economy by increasing the subsidy component and thus the fiscal deficit. This, in turn, leads to high government borrowings (and attendant increase in interest rate), besides
being inflationary. The resulting low sovereign ratings (invariably, international agencies Moody's, Standard and Poor, etc., give India just above junk rating) affect our ability to raise funds from global markets.

There is also a hidden cost by way of impact on the viability of industries through whom subsidies are routed. The payment of subsidy to fertilizer manufacturers is del-
ayed (at times even denied) if only to rein in overall outgo. SEBs/PDCs are made to suffer losses which affect their ability to make payments to power generators. The profitability of banks comes under stress as they are forced to lend at subsidised rates. Delhi Metro suffers if fare hike is disallowed.

You too, Modi?

There was nothing unusual about it under the erstwhile UPA dispensation, for which reform was not important at all. But for the Modi government, which is deeply committed to it and has demonstrated its intent through concrete action in a host of other areas, even at the cost of triggering adverse reaction - for example, demonetisation and GST - this is unusual. That the benefit of low price continues to be cornered by better-off sections - contrary to Modi's philosophy of restricting it only to the poor - makes it even more anomalous.

What makes Modi helpless? All the more,
when he has zero tolerance for corruption and nepotism, evils which are natural concomitants of controls and subsidies? The
sole reason for this is elections every now and
then. Be it fertilisers, food, power, credit, etc., these are all items whose low price has got identified with a government that does 'good' to the people at large. Any party which goes for a hike, howsoever strongly justified by reforms, is perceived to be 'bad'. So, even Modi is unwilling to take the risk!

If, elections to Lok Sabha and all state assemblies can happen at the same time, then we can have political stability for a full five years, thereby creating the right ambience for reforms even in these most sensitive areas. Else, it will be business as usual.

(The writer is a New Delhi-based policy analyst)

Get a round-up of the day's top stories in your inbox

Check out all newsletters

Get a round-up of the day's top stories in your inbox