#NotesforMrJaitley 3: How to tackle the subsidy beast without harming the poor
The Budget for 2016-17 is around the corner and all eyes are now on Finance Minister Arun Jaitley. Should the government spend more, or keep its wallet shut? The global economy wades through crashing commodity prices and unsure policy moves and shaky investors. In the midst of this India has to decide which course to take, to ensure jobs to millions of youth joining the workforce every year. We at Catch bring you a series with a focus on all sections of the population and their requirements from Mr Jaitley's Budget.
A few days back, Prime Minister Narendra Modi defended subsidies aimed at helping poor. Within days of his statement, media reports suggested that the Union government is slated to increase food subsidy to Rs 1.3 lakh crore, about Rs 6,000 crore more than last year's budget.
In our latest report in our Budget series #NotesforMrJaitley, we take up the behemoth called subsidies and analyse its benefits and shortcomings.
Total subsidies that were allocated during the Budget 2015-16.
- This is higher than the funds allocated to school education, higher education, health and family welfare, rural development and road transport and highways.
- However, there was a nearly 8% decrease in subsidies from the allocation in 2014-15.
- The major subsidies in India are related to food, petroleum, fertilisers and debt relief for farmers.
- "Well-intentioned schemes introduced in the past have often been ill-targeted, riddled with leakages and delivered with inefficiency. The same is true of subsidies," Finance Minister Arun Jaitley had said in last year's budget speech.
Total food subsidy allocated in 2015-16, or more than half of the total subsidy.
- This was a meagre increase of about 1% from Rs 1,22,675 crore, the revised estimate of 2014-15.
- This is less than Mukesh Ambani's net worth which, as of 2014, stood at Rs 1,49,474 crore. His wealth is 20% more than the amount meant to feed crores of Indians.
- Food subsidy is the amount given to Food Corporation of India, which in turn procures rice and wheat from farmers with a minimum support price (to insure them against price fluctuations). It stores the foodgrains and distributes them through fair price shops at a much cheaper rates for those who cannot afford them.
- Bogus Ration Cards, delayed availability of foodgrains, leakages and diversion are the biggest challenges in the public distribution system.
- However, we need to keep in mind that 1 in 6 people in India go hungry everyday, and 1 in 2 children in India suffer from malnutrition. Therefore, bolstering food security is a need, not just a political compulsion to gather votes.
The amount that was allocated in Budget 2014-15 as compensatory payment to oil companies for under recoveries on account of sale of fuel.
- Budget 2015-16 had no estimates for under recoveries.
- This is ascribed to the fall in petroleum prices globally and deregulation (oil companies can now fix prices and based on their own financial calculations) of petrol and diesel prices. Similarly, the prices of LPG and kerosene have also fallen. Also, the direct benefit transfer of LPG subsidy has reduced leakages.
- Moreover, millions of customers have given up on the LPG subsidy, which would also help the government in bringing down fuel subsidy costs.
- But with the recent fall in the rupee against the dollar, crude oil may become costlier for India. The big question is: what will be the revised estimate of Budget 2015-16 that the government wants to shell out for under recoveries?
This is the amount allocated as fertiliser subsidy in 2015-16.
- This approximately equals the debt of the Jaypee Group, one of the leading infrastructure and power companies in India.
- There is a shortfall in domestic fertiliser production and that demand is being addressed through imports. Furthermore, imported fertilisers are being sold at the same price to farmers as domestic fertilisers.
- As per revision in energy consumption norms, India is projected to save about Rs 2,618 crore by 2018-19.
- The problem that ails fertiliser subsidy is that in states like Andhra Pradesh, Karnataka, Haryana, and Punjab, the annual consumption of 'N' nutrients fertiliser has been more than the recommendation, according to Indian Council of Agricultural Research. The subsidy used for unirrigated lands has also increased.
Subsidies in India are highly controversial. Costs are rising (mainly due to mismanagement) every year, which may spike fiscal deficit, borrowing and debt. This is not good news for the health of the economy.
However, a reduction in subsidies may push the poor towards hunger, cause inflation in retail and affect the income of small and marginal farmers, who are the biggest beneficiaries of the fertiliser subsidy.
What Jaitley needs to do is increase public accountability and strengthen the logistics of subsidies.