The politics of subsidies

There will be a push to restructure the subsidy regime,as political allies press for their own agenda

Written by MK VENU | Published: March 22, 2012 3:23:00 am

There will be a push to restructure the subsidy regime,as political allies press for their own agenda

The limit on the total subsidy to be handed out by the Centre — at 2 per cent of GDP,according to the budget — has come at a time when coalition politics is becoming more fluid and uncertain. Various parties are in a mood to bargain hard with the government at the Centre by exploiting the prospect,howsoever remote,of a general election getting advanced.

Samajwadi Party leader Mulayam Singh Yadav will not join the UPA because he does not want any negative rub-off from a muddling Congress closer to the general elections in 2014 or earlier. Yet he will support the UPA from the outside so that his party could get goodies from the Centre to make good all the election promises SP has made in Uttar Pradesh. How this will square with the Union budget’s commitment to limit subsidies to 2 per cent of GDP is something we will have to wait and see.

Uttar Pradesh Chief Minister Akhilesh Yadav made a sharp comment after Pranab Mukherjee presented the Union budget. Akhilesh said he would find it difficult to accept any decision that puts a burden on the farmers of UP. The subtext was that the Samajwadi Party would not support a sharp hike in the price of diesel,which is currently being sold at well below market prices.

However,the Union budget implicitly assumes that diesel prices will be hiked substantially to keep subsidies at under 2 per cent of GDP or about Rs 1,90,000 crore. This will have to accommodate fertiliser,food and oil subsidies. In 2011-12,the total oil under-recoveries alone are about Rs 1,50,000 crore. Both Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee have said they would “bite the bullet” on the promise of limiting subsidies. Biting the bullet will not be easy in the current political climate.

For the first time,the Centre is under severe pressure to restructure the subsidy regime because of the growing contestation among various political constituents. In order to satisfy the Samajwadi Party,the Centre is considering a mechanism to insulate the farmers using water pump sets from a diesel price increase. The idea seems to be to increase the diesel prices across the board and then hand over money to state governments to provide farmers a direct cash subsidy for their diesel pump sets.

This will mean the middle-class users of diesel vehicles and other transporters will have to pay market-related prices for diesel. Of course,the urban middle class will not like this. Everyone likes subsidies and indeed even people who can well afford to pay higher prices get used to subsidised goods and services. It is precisely this sentiment that makes the government dither when it comes to increasing the price of LPG gas cylinders.

The urban middle class has emerged as a strong and growing political constituency over the past two decades following economic liberalisation. The Congress,in fact,did much better than the BJP in urban constituencies in the 2009 general elections. The challenge for the Congress is to politically explain to its urban voters,many already unhappy with it,why there is an urgent need to restructure existing subsidies and direct them to the really poor and needy. The Centre has implicitly committed to do this if one reads the Union budget numbers carefully. Indeed,if this complex political exercise is not undertaken,many of the budget assumptions will get thrown out of the window,especially on the expenditure side.

The Congress,therefore,will do well to do some straight and honest talking to the people and avoid rhetoric for some time. The UP elections showed that beyond a point,rhetoric does not pay. In this context,Rural Development Minister Jairam Ramesh showed some candour when he attributed the lower fund allocation to the Mahatma Gandhi Rural Guarantee Employment Programme in the budget to falling demand for temporary work in rural areas. In fact,the minister said he had himself asked for a lower allocation as there were carry-over funds from the previous year.

The restructuring and redirecting of the subsidies is by far the most difficult political exercise,which every government has chosen to postpone. Two decades ago,when economic liberalisation had just begun,the National Institute of Public Finance and Policy (NIPFP) had done an elaborate study,which showed that both implicit and explicit subsidies handed down by the Centre and state governments was about 15 per cent of GDP. India’s GDP then was around $250 billion. The total subsidy would have worked out to $37 billion then. Today India’s GDP is close to $2000 billion,nearly eight times more. But the ratio of the total subsidy remains,more or less,at 15 per cent of GDP,according to Prof Govind Rao,the author of the original report,who now heads the NIPFP. So the actual amount of the implicit and explicit subsidy now could be close to $300 billion a year!

Rao also reckons the bulk of these explicit and implicit subsidies are cornered by the urban middle class whose political clout has always been disproportionately larger than its numbers. However,the political economy of subsidy distribution has changed somewhat with the rise of Dalit and backward class politics. Since the bulk of the very poor are represented by the more assertive Dalit and backward class leaders whose representation has gone up in the state assemblies and Parliament over the decades,this class has risen to demand a bigger slice of the implicit and explicit subsidies. The urban middle class,which had traditionally cornered nearly 75 per cent of all subsidies,will have to give up some of its privileges if the current trend of politics is anything to go by.

Free supply of schoolbooks,cycles for girl students,lunch packets and subsidised tuition fee,etc are becoming the norm in the governments run by Nitish Kumar and Mayawati. There is so much pressure from the young voters that Akhilesh Yadav’s promise of a Rs-1000-a-month dole to unemployed youth has resulted in over 20 lakh persons registering themselves in just the last one month.

So,the contest to get a higher share of the subsidies will only intensify and the pressure to restructure the existing subsidy regime will increase. The promise made in the budget to restructure the subsidies given on a few big items like food,oil and fertiliser,is only the tip of the iceberg in a sharply divided polity in which the question and manner of resource-sharing remains unresolved.

The writer is managing editor,‘The Financial Express’,mk.venu@expressindia.com

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