Comprehension

Governments looking for easy popularity have frequently been tempted into announcing give-aways of all sorts; free electricity, virtually free water, subsidised food, cloth at half price, and so on. The subsidy culture has gone to extremes : cooking gas (used mostly by the top 10% of income-earners) has been sold at barely half its cost. The wealthiest people in the country have had access for years to subsidised sugar. The riches farmers in the country get subsidised fertiliser. University education, typically accessed by the wealthier sections, is charged at a fraction of cost. Postal services are subsidised, and so are railway passengers. Bus fares cannot be raised to economical levels because there will be violent protests, so bus travel subsidised too. In the past, price control on a variety of items, from steel to cement, meant that industrial consumers of these items got them at less than cost, while the losses of the public sector companies that produced them were borne by the taxpayer! One study, done a few years ago, came to the conclusion that subsidies in the Indian economy total as much as 14.5% of gross domestic product. At today’s level, that would work out to about Rs. 150,000 crore.

And who pays the bill? The theory — and the political fiction on the basis of which it is sold to unsuspecting voters — is that subsidies go to the poor, and are paid for by the rich. The fact is that most subsidies go to the “rich” (defined in the Indian context as those who are above the poverty line), and much of the tab goes indirectly to the poor. Because the hefty subsidy bill results in fiscal deficits, which in turn push up rates of inflation -- which, as everyone knows, hits the poor the hardest of all. Indeed, that is why taxation call inflation the most regressive form of taxation.

The entire subsidy system is built on the thesis that people cannot help themselves, therefore governments must do so. That people cannot afford to pay for a variety of goods and services, and therefore the government must step in. This thesis has been applied not just in the poor countries but in the rich ones as well; hence the birth of the welfare state in the West, and an almost Utopian social security system : free medical care, food aid, old age security, et al. But with the passage of time, most of the wealthy nations have discovered that their economies cannot sustain this social safety net, that it in fact reduces the desire among people to pay their own way, and takes away some of the incentive to work. In short, the bill was unaffordable, and their societies were simply not willing to pay. To the regret of many, but because the laws of economics are harsh, most Western societies have been busy pruning the welfare bill .

In India, the lessons of this experience — over several decades, and in many countries — do not seem to have been learnt. Or, they are simply ignored in the pursuit of immediate votes. People who are promised cheap food or clothing do not in most cases look beyond the gift horses — to the question of who picks up to the tab. The uproar over higher petrol, diesel and cooking gas prices ignored this basic question : if the user of cooking gas does not want to pay for its cost, who should pay? Diesel in the country is subsidised, and if the trucked or owner of a diesel generator does not want to pay for its full cost, who does he or she think should pay the balance of the cost? It is a simple question, nevertheless it remains unasked.

The Deve Gowda government has shown courage in biting the bullet when it comes to the price of petroleum products. But it has been bitten by a much bigger subsidy bug. It wants to offer food at half its cost to everyone below the poverty line, supposedly estimated at some 380 million people. What will this cost? And, of course, who will pick up the tab? The Andhra Pradesh government has been bankrupted by selling rice at Rs 2 per kg. Should the central government to bankrupted too before facing up to the question of what is affordable and what is not? Already, India is perennially short of power because the subsidy on electricity has bankrupted most electricity boards, and made private investment wary unless it gets all manner of state guarantees. Delhi subsidised bus fares have bankrupted the Delhi Transport Corp., whose buses have slowly disappeared from the capital’s streets. It is easy to be soft and sentimental, by looking at programmes that will be popular. After all, who doesn’t like a free lunch? But the evidence is surely mounting that the lunch isn’t free at all. Somebody is paying the bill. And if you want to know who, take a look at the country’s poor economic performance over the years.

CAT/1996

Question . 306

The statement that subsidies are paid for by the rich and go to the poor is ............