NEW DELHI, May 5: What is more disturbing than the simple fact that the total subsidies by the government is a whopping 15 per cent of GDP, is the impact of this on the economy. After all, if the subsidy just enables, as it is meant to, the poorer sections of society to get goods at cheaper rates, what's the harm? The harm, unfortunately, comes from what the regime of subsidies has done to the whole delivery system for various inputs such as water or power. In a nutshell, in the process of giving subsidies, the whole system is near-collapse and cannot even deliver the amount that it was capable of supplying initially. Excellent examples of this are in the power, irrigation, road and, indeed, the entire agriculture sector. In the event, the subsidies' policy actually hits the very same people it is aimed at benefitting. In the case of the power sector, it is well-known, heavily subsidised power has resulted in a situation where all state electricity boards (SEBs) are likely to incur losses of Rs 10,000 crore this year, which is a negative return of 16 per cent on their investments. The result of the poor state the SEBs are in, and the consequent problem in attracting private investment, is evident from the increasing power cuts in all parts of the country. With the SEBs in dire financial state, understandably few private players are willing to invest enough money in the sector. If, on the other hand, rates are increased to enable SEBs to earn even a meagre 3 per cent return on their investment, this would give these SEBs an additional Rs 12,000 crore, or close to half what they earn today from the subsidised sales. Let's move on to some of the other subsidies, and their effects, in areas which are not so well-publicised. Take the agriculture sector where the "poor" farmer is meant to be benefitting from these subsidies. What do the facts here show us? For one, India spends at least twice as much on agriculture as East Asian countries do but has a lower agriculture growth. Why? Because much of this expenditure goes to subsidies instead of in areas like irrigation which would actually help improve growth prospects. During the 80s, agricultural subsidies grew thrice as fast as public investment. By 1994-95, 40 per cent of total spending in agriculture was on subsidies, 22 per cent on safety net programmes and just 38 per cent on productivity-enhancing areas - by contrast, in 1981-82, more than 60 per cent of total agriculture spending was in productivity-enhancing areas. Total investment in the sector (as a share of agricultural GDP) has fallen from 14 per cent in 1979-80 to around 8.5 per cent today.
