People's Democracy

EDITORIAL

Subsidies & Incentives 

Inverted Logic At Its Best! 

THE prime minister has reportedly remarked, “Today we are offering subsidies to a wide range of users without proper analysis of their economic and social rationale”.  He continued to say that the subsidies should be given only to those who actually need or deserve it on “justifiable, social, economic and political grounds”. It is interesting to note that he has chosen to add political grounds as one of the factors justifying subsidies. How often have we seen Congress governments in various states resorting to pre-election populism by announcing free power to the farmers etc!

Under normal circumstances, there could be nothing objectionable in seeking to ensure that subsidies reach those who need and deserve it the most.  There are, however, serious problems in achieving this. The disquieting factor is that the prime minister is surely not unaware of these problems.

First, in our social system, as a reputed economist of the yore had mentioned, “in order to provide enough for the poor, we have to provide more than enough for the rich”.  As long as this socio-economic system exists (to change the system is neither the agenda of the prime minister nor of this government), this maxim is true. Any talk, therefore, of targeting subsidies will only ensure that whatever little is being received by those who need these subsidies will be further reduced.

Secondly, the country has repeatedly noted that only a small portion of the resources allocated for people’s welfare actually reaches those who are the reason for the launching of such schemes. Rajiv Gandhi has quantified this in the range of  15 per cent.  Instead of seeking to  improve the delivery systems, what is sought  to be done is  to do away with the subsidies themselves.  Inverted logic at its best!

Thirdly, we have repeatedly pointed that there are two types of subsidies.  One is that provided directly to the poor which constitutes an expenditure of the government.  The other one is that, which is not collected from the rich, which constitutes a revenue loss for the government.  For instance, a  tax concession of 5 per cent is tantamount to giving an equal amount as subsidy to those sections.  The irony is that the latter are called “incentives” being offered to the rich while the former are considered burdens on the State exchequer. 

These comments by the prime minister come in the background of the mid-year review of the economy presented by the finance ministry before the parliament.  The review, while pointing to a buoyant economy, highlighted that there was a fiscal stress and that revenue and  fiscal deficits  are higher than the stated targets.  Clearly, therefore, the direction is to reduce government expenditures in order to meet these targets.  What better way can this be done other than focus on reducing further the subsidies for the poor. 

It is in the very class nature of our society that the revenue and fiscal deficit targets are sought to be met not by increasing governmental revenues but by decreasing governmental  expenditures.  This is because the former would have targeted the rich while the latter targets the poor.  Further, burdening the poor in the name of  carrying forward the “reform process” seems to be the order of the day.

Under these pressures and given this mindset, if recourse is taken to reducing or curtailing plan expenditures directed at  improving people’s livelihood, it would be tantamount to  negating the very rationale behind much of the Common Minimum Programme.

The Common Minimum Programme, recognising one of the important elements of the people’s mandate in the 2004 general elections, laid a high degree of emphasis on providing immediate relief to the people.  The employment guarantee scheme, the food for work programme, the mid-day meal schemes are all promises that serve as the recognition of the character of the people’s mandate.  It is these that need to be implemented with urgency.

The employment guarantee scheme (the draft bill hopefully will be presented before the parliament  in this session) has seen many a dilution. By the time the  bill will go through the process of a discussion in the standing or the select committee of the parliament, much of one of the five years that this government is mandated to rule would be over. One-fifth of the expenditure, thus, already appears to have been “saved” by this government.  Such procrastination is simply untenable with the spirit of the Common Minimum Programme. 

Further, the attitude displayed by the finance minister in the discussions on inflation in the parliament strengthens some of our apprehensions.  Explaining the hike in petroleum prices as a result of the rise in international crude prices, the  finance minister stated that the government and the oil companies had already taken “a hit of  Rs 25,000 crore to partly shield the common man”.  Further, he said, “I can take a bigger hit but then there will not be  enough for the food-for-work programme, Sarva Shiksha Abhiyan and the mid-day meal scheme. I am sorry  the remainder was passed on to the common man”. 

These figures that the finance minister has given relate to the losses occurred because of the rise in international  prices of crude oil.  Consider the following example.  If the international price was, say, Rs 100 and there was a duty of 20 per cent, then the government would earn Rs 20.  Supposing the international prices increased to Rs 200, then with the same duty structure the government would earn Rs 40 – instead of Rs 20.  Now, in order to protect the common man, if the duty structure was reduced by half to 10 per cent, then the government would still be  earning the same Rs 20  that it had calculated in its budget exercise.

In terms of government’s planning of revenue earnings, the reduced duty structure would not adversely affect its calculations. This is precisely what the CPI(M) has been asking for. By all means, collect what you have calculated on one set of international prices. But the bonus revenue that is being received due to rise in international prices must be given back to the people. Instead, the  government is arguing that by reducing the duty structure, instead of  collecting Rs 40, they are now collecting  Rs 20 and, therefore, they are losing Rs 20!  Rs 20, in any case, was the target, and, that is being realised.  So, where is the loss?  It is unfortunate that it is the common man who is bearing the brunt of the burden amidst all this statistical jugglery.

Since the prime minister’s comments have come in the wake of subsidies on petroleum products, it is worthwhile to consider if high duty structures of petroleum products is warranted.  The country imports crude since domestic production does not meet our essential requirements.  It is a different matter that the dependence on imported crude is growing alarmingly.   Without such imports, the Indian economy will grind to a halt.  In other words, the import of crude  is similar to the import of foodgrains in conditions of famine.  Foodgrains are imported to prevent starvation deaths.  Would it be moral to impose duties on such imports?  Can the government earn revenue at the expense of people’s misery?

Many countries, including the USA, do not impose duties on imports of petroleum products since these are considered essential for the economy’s survival.  In fact, when the Administrative Price Mechanism (APM) for petroleum products was dismantled, the commitment by the government was to reduce the duties on imported products to between zero to five per cent.  The subsidised products were to have no duty at all. This has simply not been done.

The government’s explanation is that it cannot afford to forego the huge revenues that accrue from duties on petroleum products.  Doing so would mean not having sufficient funds for implementing many of the promises made in the CMP. 

This is a `catch-22’ situation! The government appears to be saying that if you want to implement the promises made in the CMP, then be prepared for greater burdens through inflation and forego future benefits like a new pay commission to recommend revision in salaries and wages commensurate with the rise in the cost of  living!  In other words, the benefits promised in the CMP are to be financed by  putting extra burdens on those very sections of the people who were to benefit in the first place.  The burden of schemes like the employment guarantee, food for work etc, must be borne not by those who can afford to part with their  riches. 

This is not the spirit of the CMP.  The finance minister, himself, has, on record, stated that over Rs 1 lakh crores of tax arrears are pending to be collected.  Similarly, over Rs 1 lakh crores of non-performing assets (loans taken from the nationalised banks by the private corporate sector and not returned) are to be recovered.  The people of this country will heave a sigh of relief, if the government concentrates on such recoveries rather than contemplating a fresh wave of attacks on people’s livelihood.

Finally, it needs to be mentioned that the promises made in the CMP  are not being churned out of charity or  philantrophy.  Apart from accepting the responsibility of the government to provide healthy livelihood to its people, the improvement of people’s welfare also has an economic consequence.  The greater the purchasing power in the hands of the people, the greater the domestic demand, and, hence, the greater the impetus for growth. It would be myopic to impose further burdens on the people and hope for a better economic growth.   The earlier this is understood, the better it is for the country and its people.

Under these circumstances, the CPI(M) and the Left will continue to mount pressure, both in the parliament and through people’s movements, on the government to discharge its promises made in the CMP.