While spending cuts and lower oil prices have reduced India’s deficit, our near-term outlook remains clouded. India has set aside Rs 4,55,145 crore for payment of interest on public debt in 2015 (non-plan expenditure, central government budget 2015), including those paid for special securities issued to oil-marketing companies, fertiliser companies, FCI etc. Outlays for subsidies to fertiliser companies comprised Rs 72,968 crore. Our food subsidies cost us Rs 1,24, 419 crore (Rs 64,919 crore allocated for implementing the National Food Security Act), helping to meet the difference between the economic cost of foodgrains and their actual sales realisation at fixed prices. The government control of the retail price of LPG and kerosene has led to an additional Rs 30,000 crore in subsidies.
India’s food subsidy programme has multiple mandates, focusing on price stabilisation, food access to the poor and supporting farm prices. However, the performance of such subsidy programmes varies significantly, given significant leakage and major non-target beneficiaries. A survey of universal food subsidy schemes, Coady (2002) highlighted that most governments spent three times the subsidy amount to deliver the subsidy to the poor. By 1998, TCS research highlights that the illegal diversion of rice and wheat accounted for one-third of all rice and wheat subsidies, across India — by 2005, the Planning Commission quoted this at 37% nationwide. These inefficiencies can have a significant combined effect, cutting the total food subsidy reaching the poor.
Improving programme delivery can potentially cut costs and leakage significantly. Chhattisgarh’s food subsidy delivery mechanism dramatically increased its efficiency by digitising its supply chain and monitoring the movement of grain from warehouses to retail shops. Food coupons, conditionally tied grants that allow consumers to purchase limited foodgrains at a subsidised price, could eliminate the dual marketing system in agriculture. They would allow consumers to spend on their preferred commodities without the need for setting up special physical and institutional infrastructure. Although counterfeiting would always exist, food coupon fraud would be easier to track than grain shipments. While cash transfers are increasingly advocated, in-kind coupons could help meet specific food intake targets while respecting consumer choice.
India’s energy subsidies have seen significant transformation over the last year, with the government introducing dual pricing for kerosene and making the market-priced kerosene free from government control. The Direct Benefit Transfer (DBT) cash transfer scheme for LPG has successfully enrolled millions of citizens, becoming the largest cash transfer scheme globally. These efforts have already resulted into savings of approximately $2 billion and weeding off approximately 55 million fake users, besides curtailing black market use.
However, LPG and kerosene subsidies have encouraged a flourishing black market. Nominally under the purview of state governments, kerosene is largely disbursed through a corrupt and inefficient public distribution system (PDS). Local politicians are often in cahoots with mafias that adulterate petrol and diesel with cheap kerosene. With the price differential between PDS kerosene and diesel remaining significant, diversions will continue.
Numerous committees have pushed for reforms — the Rangarajan Committee (2006) advocated raising the retail price for LPG, with any remaining subsidies financed directly from the budget. The Parikh Committee (2010) recommended raising the prices for PDS kerosene, in line with the nominal growth in agricultural GDP per capita along with supporting moves towards market-based kerosene being priced close to diesel. The Kelkar Committee (2012) pushed for eliminating LPG subsidies over three years, along with a 33% reduction in kerosene subsidies. A push for market-based prices and reduction in subsidies, both in LPG and kerosene, besides evaluating alternative energy forms over the long term, remains necessary. Meanwhile, in order to encourage safety and cleaner forms of energy, one-time subsidy for solar lamps can be provided instead of recurring kerosene subsidies, used primarily for lighting. This shall also provide a fillip to manufacturing in the solar generation sector.
The last Union Budget promised an overhaul of the subsidy regime with the three main contributors — food, fertliser and fuel — being brought under the ambit of an expenditure management commission, which aims to review the operational efficiency of allocated subsidies and revamp them to achieve maximum social output.
India’s subsidy regime is flawed, with spending growth benefiting wrong targets and excluding relevant beneficiaries. While subsidies should ideally be tightly targeted, transparently administered and temporary, India’s ad hoc system is rife with leakages and does not encourage direct benefit transfers.
We need to set out a roadmap for fiscal consolidation for which controlling subsidies remains critical. The temptation for populist policies like offering low electricity prices (like in Delhi) will always need to be tempered by improvements in near-term service delivery and fiscal retrenchment.