Give and take

Every Budget in recent years has paid lip service to rationalisation of subsidies. But despite three recent reports commissioned by the government on the subject, nothing much changed.

Budget ’04-05 has projected a subsidy bill of Rs 42,021 crore for major subsidies including food, fertiliser and petroleum. This is a tad less than Rs 43,569 crore revised estimates for ’03-04.

Including all explicit subsidies, the total rises to Rs 43,516 crore for the current fiscal against Rs 44,709 crore in ’03-04. However according to the report prepared by the finance ministry and the National Institute of Public Finance and Policy, the actual subsidy tab is higher at Rs 45,780 crore, or 1.5% of the GDP.

The report says subsidies have risen because the government has raised input costs such as paying higher minimum support price for agriculture without making those benefitting from the subsidy pay for it. Besides, there are operational inefficiencies because of which the subsidy does not reach the poor.

The domestic LPG and PDS kerosene subsidies seem to be ineffective in fulfilling the desired objectives, it says. Therefore, these subsidies should be gradually reduced and market competition be introduced. It adds that the poor people can be protected by giving them coupons that protect them from rising prices.

It adds that over 44% of the Centre’s annual revenues go towards meeting its subsidy bill. Almost 88% of the fiscal deficit goes into the subsidies, but less than 42% of these subsidies reach the poor population.

The prescription, a drastic overhaul of FCI, includes the freedom to set its own procurement target. Once the targets are achieved the corporation should suspend additional purchases. Simultaneously, the government should institute a punishment and bonus system for FCI officers to reduce losses in storage.

The report also suggests allowing fertiliser companies to set up units abroad to take advantage of cheaper natural gas, restricting hikes in the minimum support price of wheat and rice and giving food coupons for below-poverty-line families for foodgrains and kerosene.

It says there is an urgent need to change the raw materials for the domestic fertiliser industry from naphtha and fuel oil to the cheaper natural gas. The feedstock comparison of retention prices with the import parity price suggests that if the sector is opened to imports, the gas-based plants would survive, whereas the others would not, it adds.

It has recommended doing away with fertiliser subsidy in the present form, which has reached Rs 12,662 crore in ’04-05, de-canalising of urea imports, and the introduction of a flat rate of subsidy. It remains to be seen how the suggestions with regard to retargeting of subsidies square with the UPA’s political compulsions.