If, there is any political dispensation that has carried out administrative reforms in the true sense of the term, it is the present NDA – government led by Narendra Modi. He has delivered governance whose hallmark is ‘transparency’ and ‘honesty’.
These traits have glided him towards a policy driven state, maximum focus on e-governance, minimizing use of discretion and elimination of physical interface. The results are there for all to see in terms of efficient delivery of services and reaching financial assistance and subsidies in full to the beneficiaries by leveraging technology especially direct benefit transfer [DBT].
This has also saved tens of thousands crore every year. That money is being re-deployed for building roads, highways, rails, ports, hospitals, schools etc thereby helping in rapid growth in GDP catapulting Indian economy to the 6th rank.
But, the above addresses only part of the problem of resource loss which in large measure, is also due to obtrusive controls in critical sectors such as food, fertilizers, petroleum products [POL], power etc. Successive governments have recognized the dire need for removing these controls but none has walked the talk.
How do controls lead to loss of resources? In a bid to make food and fertilizers affordable to the poor, the government controls their maximum retail price [MRP] at a low level unrelated to cost of production and distribution. Whereas, in case of food, 80% of populace get food at subsidized price, as regards fertilizers, all farmers have access to these at low MRP.
Among POL, though retail prices of diesel and petrol are technically decontrolled, but de facto, the government controls them. The prices of LPG and kerosene are also regulated by giving subsidy. All farmers and a vast section of households [albeit poor] have access to power at heavily subsidized rates.
When, the government directs the manufacturers/suppliers – through ‘statutory’ control or executive order [written or ‘unwritten’] – to supply the products at a price lower than what it costs them, it undertakes to fully compensate them for the shortfall which in common parlance is referred to as subsidy. This is where the rub lies.
When, a company/agency has an assurance that all of the cost incurred by it will be fully reimbursed, it won’t have an incentive to cut cost and improve efficiency in operations. Instead, it will be tempted to claim higher cost or, even make fictitious claims. Let us take the case of food subsidy.
Under the National Food Security Act [NFSA], wheat is given to the beneficiaries at Rs 2 per kg as against the much higher cost of supplying it or Rs 25 per kg. The latter includes minimum support price [MSP] of Rs 17 per kg paid to farmer and Rs 8 per kg as handling and distribution charges reimbursed to the handling agency.
The charges are given on ‘actual’ basis. These subsume inefficiency and irregularities in handling operations of state agencies also pointed out by the Comptroller and Auditor General [CAG]. The ‘loaders’ getting away with monthly salary in lakhs could easily pass muster under such a cost based mechanism. In 2016, there were reports of disappearance of food stocks in Punjab causing gargantuan loss of over Rs 20,000 crore to the exchequer.
In his Independence Day address, Modi referred to large-scale siphoning off heavily subsidized food by dubious operators and raking in huge profit by selling at higher price. He informed that under his regime, this loot of public money has been curbed. But, other losses under the controlled regime continue unabated.
In fertilizers too, the subsidy cushion was leveraged to misappropriate funds. In 2000s, then government contracted for gas import at ‘inflated’ price knowing that the resultant higher cost of making fertilizers would be fully reimbursed under new pricing scheme [NPS]. It also imported urea at high price which at times went up to a high of Rs 50,000 per ton [2008-09] against then MRP only Rs 4830 per ton.
There were irregularities too; in one year [early 90s], payment was made but not even a grain of urea came. Under the retention price scheme [RPS] – the earlier incarnation of NPS – some new manufacturing units were allowed inflated retention price [RP] in early 90s. Those days, there were even allegations of ‘gold plating’ – a euphemism for showing capacity lower than actual to get higher RP.
There was no rational basis to keep urea MRP at an exceptionally low level – a mere 1/4th to ½ of the production cost. Yet, this was a golden goose available to dubious traders to mint money by selling to chemical factories at high price. True, Modi has brought in mandatory neem coating of urea and has claimed that this has stopped diversion. However, considering that there are 600 million bags to be policed, this seems to be too good to believe.
In the petroleum sector, adoption of DBT for giving LPG subsidy has undoubtedly eliminated fake beneficiaries. But, oil PSUs [public sector undertakings] viz. IOCL, BPCL, HPCL who are the sole authorized agencies to sell subsidized LPG [besides kerosene] continue to receive prices much higher than their cost. In petrol and diesel too, they enjoy a virtual monopoly position.
In power sector, inflated tariff charged by generators [both public sector undertakings such as NTPC as well as independent power producers [IPPs] easily pass muster in the name of subsidized supplies made to farmers and poor households. As in fertilizers, here also instances of ‘gold plating’ have come to light.
This loot of national resources needs to be stopped. But, this can’t be done merely through administrative cleaning up. To do this, the government should go for policy reforms with focus on removing pricing and distribution controls. The control on MRP must go and subsidy to the poor should be given directly.
With this, the very basis for entities claiming inflated cost will disappear. Instead, they will be forced to cut cost and increase efficiency to stay afloat. While, benefiting all consumers, this will reduce subsidy outgo and help fiscal consolidation.
When will Modi crack the whip?