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Myths about UPA’s social spending

Subsidies aren’t the GDP-consuming black holes they are made out to be

Subsidies aren’t the GDP-consuming black holes they are made out to be

Recently,there has been a spate of criticism levied against the UPA government in these pages for what is interpreted as taking some of our “inclusive” policies perhaps too far,especially with the food security ordinance. Much of this has centred on the classic growth versus distribution debate. Many are quick to point out that the government’s policies did little to diminish poverty during India’s glory years,and attribute the same to accelerating economic growth. India’s rights-accruing legislative framework is seen as dole or charity. The present government has been blamed for pushing India into the retrograde period of socialistic welfare states.

A radical welfare state bases itself on the premise that government service in the social services sector (or in all sectors,if one were to look at a country like Cuba),has de facto crowded out competition. This is clearly not the case in India,nor is it reflected in any of the policies of UPA. While socialism is a key tenet of our Constitution,we also have a thriving private sector that is actively encouraged by the government. The UPA has tread the middle road,seeking to build an equal society that boasts of free markets. India’s highly successful record in promoting public-private partnerships (PPPs) is an example. More than 700 PPP projects are in operation across the country. We have also adopted increasingly liberal FDI policies in many sectors. Our financial sector reforms also include steps taken to ease market access for domestic and foreign investors.

A more moderate welfare state bets on raising revenue through higher taxation to offer higher degrees of social protection to its citizens,with the idea of creating a more equal society. Obviously,more government expenditure is a necessary byproduct,the idea of which was fashionably opposed by the likes of Ronald Reagan and Margaret Thatcher in the 1980s. Some economic right-wingers are swayed by this charming rhetoric against “big government”,and try to extrapolate those arguments to our nation without realising the uniqueness of our economic reality.

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First,let’s compare our situation with other moderate welfare states. In 2012-13,Sweden spent 51.3 per cent of its GDP on expenditures,of which 38.2 per cent went entirely on welfare benefits. In return,it charged its citizens almost half (46 per cent) their salaries in tax — one amongst many examples of a high-welfare,high-tax regime. France,with a tax burden of 42.9 per cent and expenditure of 56 per cent (of which 34.9 per cent was on welfare) and a slightly more liberal UK,with a government expenditure of 49 per cent (25.9 per cent going to welfare),are non-Scandinavian examples. In contrast,in 2012,India spent only 27 per cent of its GDP on government expenditure,while taxing its people at a moderate 18 per cent. Our policies are betting on growth,rather than on high tax rates,to support welfare policies. For comparisons closer to home,one need only look at a recent report by the Asian Development Bank regarding social protection spending in Asia. India ranked in the bottom half of the 35 countries surveyed. Contrasted with smaller nations like Japan,with its high 19.2 per cent of GDP going into social protection,Thailand (3.6 per cent),Singapore (3.5 per cent),Malaysia (3.7 per cent) or even Sri Lanka (3.2 per cent),India spent only 1.7 per cent. China,with 5.4 per cent of its GDP going into social protection,is spending over three times what we are. Clearly,to be just to those countrymen who live at the bottom of the prosperity pyramid,we need to be doing more,not less.

Also,there are no doles — the Indian state does not engage in charity,but a rights-based system that partners opportunity with productivity. Our policy critics,however,prefer to perpetuate certain myths with respect to our social spending. The first is that our policies are “pro-poor”,thereby inferring that they do not benefit others. This argument is a fallacy,as other groups too make use of India’s subsidy policies. For example,the middle and upper classes consume more fuel subsidy than the poor. An IMF research paper found that that for all nations on average,the top 20 per cent of households capture six times more in benefits from fuel subsidies than the poorest 20. In India the ratio is much worse — in per capita terms,the top 10 per cent of our households spend more than 20 times as much on fuel as the poorest 10 per cent. So much for the policies being solely pro-poor.

The second is that India spends exorbitantly on its food subsidies,thereby draining government coffers. In 2013-14,food,fertilisers and petroleum subsidies made about 96 per cent of the total subsidies given by the government. Between 2003-04 and 2013-14,the total subsidy bill increased by 421 per cent but an approximately tenfold (923 per cent) increase in the petroleum subsidy was mainly responsible. In contrast,the food subsidy went up only by 257 per cent. The share of food subsidy has decreased from 57 per cent in 2003-04 to 39 per cent in 2013-14,whereas the petroleum subsidy share is up to 28.1 per cent for the same period. Given that our overall subsidy levels are lower compared to even our Asian neighbours,and that we should be looking to restore the balance of subsidy benefits in favour of those who relatively deserve more,we have to take the option of increasing the food subsidy.


Subsidies aren’t the GDP-consuming black holes they are made out to be. Crisil reported that between 2004 and 2010,the number of people dependent on agriculture fell from 24.9 crore to 22.9 crore,but rural consumption increased by 25 per cent over urban consumption. This highlights the burgeoning aspiration for mobility of rural and deprived communities,which is only possible if there is properly targeted subsidisation and social protection.

The UPA’s policies are striving to bridge the chasm of inequality left by the trickle-down effect,which economic right-wingers mistakenly credit with pulling Indians out of poverty. The trickle-down effect is the byproduct of an accelerated economic growth unhinged from ground social realities. It percolates the bottom half of the pyramid slowly and unevenly during periods of high economic growth,but does not offer a safety net to cushion the disadvantaged against periods of low economic growth. It is this contradiction that makes trickle-down unreliable as the only way of bridging disparities. This is not to say that economic growth is unimportant. The present government has never been anti-growth,only pro sustainable,inclusive development. Average growth of 8.2 per cent,seen during the UPA’s tenure,is by far the highest achieved in Independent India. But growth for growth’s sake is meaningless; it is what you do with growth that is important.

Today,the opposition is worried that India’s growth has dropped from the 8.2 per cent average to around 5.5 per cent,which,it must be remembered,remains the second highest among the major economies. In our haste for accelerated economic growth,we sometimes forget the considerable progress we have made amidst all this global economic sluggishness. While India’s strides towards economic growth have been nothing short of impressive,more satisfying to me was our ability to pull 138 million of our people out of poverty in the seven years between 2004-05 and 2011-12.

The writer is a Congress MP

First published on: 06-08-2013 at 04:07:56 am
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