Sincere about job guarantee? Give up subsidies you milk

In a fortunate coincidence, the money budgeted for subsidies in Union Budget 2004 was Rs 43,570 crore, while the estimate of spending on the EGA is Rs 40,000 crore. The money for the EGA can all come from eliminating other subsidies that fail to reach the poor.

The first claimant to public subsidies should be the poorest. As the finest anti-poverty programme, the Act should have the first right on subsidies and the government should be prevented from subsidising others until it has fulfilled its employment guarantee obligation.

What makes an employment guarantee scheme so attractive? Research has shown that it passes the three tests that any anti-poverty programme must be subjected to.

EGS is self-targeting: no rich person is going to sign up for a hard day’s labour in order to earn Rs 50 — so there is little risk of payments ending up with the rich. In contrast, about 60 per cent of fertiliser subsidy is estimated to go to the fertiliser industry. The bulk of the remaining 40 per cent ends up with the big farmers who consume the maximum amount of fertilisers. EGS is self-adjusting: the expenditure under the scheme is higher during periods of drought and famine and lower in good times. In contrast, the LPG subsidy is paid, come rain or shine.

Most importantly, EGS is self-liquidating: when an area becomes prosperous, the scheme dies a natural death. In contrast, the food subsidy is a Frankenstein monster that is still with us, even though India’s cereal problems are history. So how should the EGS be funded? While the draft Act proposed by the NAC had pinned its hopes on the Goods and Services Tax, but the reality is that GST still seems some way off. So we have to make hard choices if we still want to live within our means.

Government expenditure can be broken up into two groups: public goods (like law and order or judiciary), and subsidies (like EGA or the LPG subsidy). The provision of public goods is an essential role of the government and we should not tamper with it. The spending on EGS constitutes a subsidy and therefore the money should come from the existing head of subsidies.

Will that suffice? A note on the fiscal implication of the EGA prepared by Jean Dreze on behalf of the National Advisory Council gives some insight into the money required. His estimates are based on spending Rs 100 per day, and so Rs 10,000 per family per year, for the 4 crore rural households below the poverty line, which adds up to Rs 40,000 crore per year. Let us work with this estimate. The food subsidy of Rs 25,200 crore, the fertiliser subsidy of Rs 11,797 crore and the petroleum subsidy of Rs 6,573 crore are all poorly targeted subsidies. They do not reach the poor.

The food subsidy is spent on providing minimum support prices, on the operations of FCI and on the PDS, which is witnessing huge leakages. The fertiliser subsidy benefits either the fertiliser industry or the kulaks. The petroleum subsidy includes subsidy on LPG and kerosene. This is captured by the urban rich.

In the drafting of the Act it is crucial that there is certainty about funding. Otherwise, it will be easy for the government to dilute EGA, and some reports suggest that this has already happened, on the grounds that the government does not have the money. But the government seems to have money for LPG subsidies, whose recipients do not even have to put in a hard day’s work to receive it. In fact, they did not even have to protest much for the government to roll back the proposed hike of Rs 5 every month.

It is right to live within our budgetary contraints. And Dreze correctly emphasised the tax opportunity and the GDP growth opportunity in GST. But there is no sign of implementation on that score. The right thing to do is to draft the Act so that the National Employment Guarantee Fund has the first claim on public subsidies, that it is put together at the expense of the existing poorly targeted subsidies. Martin Ravallion, a top expert on poverty, pointed out that one way of assessing if growth was pro-poor was to examine whether the rate of growth of incomes of those below the poverty line was higher than the average growth of income.

If the EGA is funded out of subsidy programmes, then it squarely hits this goal: we will get higher income growth for the poor and slower income growth for the rich.