If the Government is serious about making a dent on subsidy, it should dismantle controls and give subsidy directly to target beneficiaries (the poor) under direct benefit transfer. This will pave the way for many players, increase supply, offer more choices and foster competition

In the Medium Term Expenditure Framework (MTEF) statement (a statutory requirement under the Fiscal Responsibility and Budget Management Act, 2003) presented by the Modi Government, expenditure on fertiliser subsidy during 2018-19 and 2019-20 was kept unchanged at Rs 70,000 crore. The provision was the same in this year’s budget. Allocation for food subsidy has been increased from Rs 145,000 crore  during 2017-18 to Rs 175,000 crore during 2018-19 and further to Rs 200,000 crore in 2019-20.

These numbers are out of sync and are in contradiction to the Government’s commitment to ‘rationalise’ and ‘target’ both fertiliser and food subsidy (ie give these to the deserving) made in successive Budgets as well as to the recommendations of committees viz,  the Expenditure Management Commission headed by former Reserve Bank of India Governor Bimal Jalan and Shanta Kumar committee on restructuring Food Corporation of India (FCI).

Subsidy represents excess of cost of production (insurance and freight landed cost in case of import) and distribution over maximum retail price (‘issue price’ in case of food for sale from public distribution system) (PDS) multiplied by the quantum of production/imports. Subsidy will increase if either the cost increases or maximum retail price/issue price is lowered or a combination of both.

For any given level of per unit subsidy, the aggregate subsidy will also go up if production/import increases. For instance, in fertilisers, when urea production increased by over two million tonne in 2015-16 over 2014-15 (the Prime Minister mentioned about it in his speeches in the run up to Assembly election in Uttar Pradesh as a major achievement of his Government),  this led to higher subsidy outgo. Likewise, in food, expanded coverage under PDS implies higher subsidy payment.

Under the extant dispensation of fixing MRP/issue price and determining cost for the purpose of reimbursing differential between the two, there is an inherent tendency for each to move in a manner as to lead to higher subsidy. Thus, successive political dispensations have kept MRP of urea unchanged for over one-and-a-half decade. Likewise, under the Food Security Act, issue price of coarse cereals/wheat/rice is ridiculously low at one-two-three rupee per kg.

As regards the cost, provision for reimbursement to manufacturers on ‘actual’ basis leads to an upward bias. Natural gas is the feedstock used in production of urea. Nearly one-third of its requirement is imported as liquefied natural gas. This comes mostly under long-term contracts of up to 25 years at higher price when compared to prevailing spot price. These contracts, signed during 2003-2010, were riddled with irregularities leading to inflated payments to exporters and corresponding higher subsidy (last year, the Modi dispensation renegotiated a contract with Qatar to secure good price reduction but that was one-off event).

There are several other cost components in supply/distribution chain and treatment of each on actual basis triggers a never ending stream of attempts to ‘prove’ and ‘claim’ expenses instead of  taking steps to reduce (in fact, there is no incentive for this as a manufacturer runs the risk of savings being mopped up). Scenario in food is no better. Handling, storage and distribution costs are reimbursed to the FCI.

The ‘subsidy push’ is generic to existing controls and will not go away till such time the system itself is dismantled. The proof of pudding is in eating. For instance, the so-called Comprehensive New Urea Policy (CNUP) unveiled in 2015, merely tinkered with energy consumption norms (these are used for computing feedstock/fuel cost) and cost reimbursement to manufacturers for production above a threshold capacity. Consequent to these, saving in subsidy was a mere about Rs 1,000 crore in an annual budget of Rs 70,000 crore.

If  the Government is serious about making a dent on subsidy, it should dismantle these controls and give subsidy directly to target beneficiaries (the poor) under a scheme of direct benefit transfer (DBT). This will pave the way for many players, increase in supply, offer more choices and foster competition leading to lower prices for all consumers. The poor will get additional benefit under DBT.

Unlike the present dispensation, wherein subsidy payment is on a rising scale or at best constant, the payout (albeit under DBT) will be ‘finite’ and ‘predictable’. In case of fertilisers, the new system will promote balanced nutrient use, higher crop yield, improvement in soil health and less damage to the environment. In view of the above, it can be safely surmised that reforms and a substantial reduction in subsidy go hand-in-hand.

Considering that in the MTEF, the Government has retained fertiliser subsidy at the existing level and provided for steep hike in subsidy on food (from the present already high level), it follows that it has no plans at least until 2019-20 to implement reforms in these sectors. Its relevant policy decisions are also in conformity with this lackadaisical approach.

Thus, under the CNUP (2015), the Government had frozen the MRP of urea at existing level for four years. Further, it decided to continue the new pricing scheme (NPS) — cost determination and subsidy payments are made under it — for that long. Both NPS and control on MRP are intrinsic to existing dispensation and since these will stay till 2019-20, it follows that latter won’t go away.

As regards DBT, in both fertilisers and food, the Government is currently running pilot projects in select districts and it is unlikely that actual launch will happen before 2019. In any case, sans reforms (read: Removal of controls and allowing pricing freedom), DBT is like ‘a human without soul’.   But a billion dollar question is: Why Modi is running away from reforms in these sectors? For an answer, we may have to wait till 2019 general elections are over.

(The writer has a PhD in economics from JNU, Delhi)


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