Weaning the people off food, fertiliser and oil subsidies is needed for fiscal consolidation, writes UTTAM GUPTA
One of the planks on which Prime Minister Narendra Modi got mandate to govern was his promise to deliver on fiscal consolidation. In its maiden Budget for 2014-2015, the Government pledged to achieve this by pruning subsidies and increasing tax revenue based on lower rates. Union Minister for Finance Arun Jaitley announced the setting up of an expenditure management commission to recommend a roadmap for rationalising and phasing out major subsidies — food, fertilisers and oil.
As a follow up, Mr Modi has recently approved the constitution of the EMC, under the chairmanship of Mr Bimal Jalan, former Governor of the Reserve Bank of India. The committee has been asked to submit its report within 18 months. However, it will submit an interim report in six months. The protracted time-frame for the committee should not be taken as a dilution of the Government’s commitment on this crucial reform. It has not only laid down a roadmap but also implemented some credible steps in that direction.
Mr Jaitley has announced reduction in these subsidies to two per cent of GDP in 2014-2015, 1.7 per cent in 2015-2016 and 1.6 per cent in 2016-2017, and vowed to abandon the extant system of subsidising product sales (selling below-cost) in favour of direct cash transfer to beneficiaries. Subsidies on petroleum products are the biggest drag on the national exchequer. During 2013-2014, under-recovery on their sale was Rs1,40,000 crore. Of this, Rs74,000 crore was paid by the Government as subsidy and the balance by Oil and Natural Gas Corporation and Oil India Limited, as discount on supply of crude oil to public-sector refineries.
Diesel alone accounted for nearly 60 per cent of petroleum products under-recovery. The UPA dispensation had initiated a plan in January 2013 to increase diesel product prices by 50 paise every month. The present Government has continued with this plan. Together with a drop in crude price, this has led to a progressive decline in under-recovery to Rs1.8 per litre. Consumers have also become used to small hikes. This July there was even a spurt in consumption.
Against this backdrop, and keeping in mind the complete elimination of under-recovery in a couple of months, the Government is considering a proposal to de-regulate diesel. This is a well-timed move and should be accompanied by the freedom to import and the removal of restrictions on the entry of private players in oil retailing.
With both public and private players in the fray, and a further boost through freeing of supplies from the import route, competition in the market place will intensify. Suppliers will be under pressure to improve efficiency and reduce cost in the supply and distribution chain, eventually benefitting consumers.
De-regulation and free play of market forces will also bode well for upstream majors — for example, ONGC and OIL will not have to give any discount on crude supplies to public sector undertakings. The money thus saved can be used to plug investment gaps and help with oil exploration and other development plans.
LPG accounts for nearly 30 per cent of petroleum product subsidies. According to the Economic Survey, only 0.07 per cent of LPG subsidy in rural areas went to the poorest 20 per cent households. In urban areas, only 8.2 per cent went to the poorest 20 per cent.
Considering that the LPG subsidy benefit goes predominantly to the better-off, Mr Modi’s commitment to restricting subsidy only to the poor is welcome. The Government should take a call on this right away. In fact, with launch of Pradhan Mantri Jan Dhan Yojna it may already be readying for this as it should soon be possible to transfer LPG subsidy directly to the account of poor households. It will be great if banks can coordinate with State Governments to impregnate the income status of household on bank accounts, alongside bio-metric identification.
With regard to food subsidies, the Government recognises that flawed procurement policies have led to excessive build-up of stocks which, as of end June, was 70 million tonnes or 2.2 times the requirement. The carrying cost of the excess is about Rs88,000 crore.
The Government has directed the Food Corporation of India to restrict its food grain purchases from farmers, so that it only holds the amount necessary to feed the public distribution system and ensure strategic reserves. Where States ride piggy back on the FCI in procurement, the former have been told that the Centre will not reimburse the cost of excess purchase made by them. These States have also been indiscriminately resorting to granting bonuses, over and above the Minimum Support Price fixed by the Union Government. This is at huge cost to the exchequer. Implementation of these steps will result in the saving of an estimated Rs25,000 crore in food subsidy.
A lot more saving will be generated if the Modi administration cracks down on the large-scale diversion of food from the public distribution system, which on an average is about 50 per cent and substantially higher in some States. On this front, emphasis on good governance and improved efficiency in administration can yield rich dividend.
Eventually, the Government should switch to direct cash transfer to the poor if it is to make a lasting impact on food subsidy. It needs to consider reducing subsidy entitlement for the extant two-thirds of the population under the Food Security Act.
As regards fertiliser subsidy, though the EMC has been mandated to address this and formulate a new urea policy, the Government can at least kickstart the process of reforms by affecting gradual hike in urea selling price.
http://www.dailypioneer.com/columnists/oped/saying-no-to-subsidies.html