India Intelligence Report

 

 

   Subsidy Cuts on the Cards

  Facing unending global fuel price increases and increasingly exposed to global economy, Prime Minister Manmohan Singh reminded the nation that Government cannot on indefinitely subsidize consumption as there were limits to budgets.
 

 

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Facing unending global fuel price increases and increasingly exposed to global economy, Prime Minister Manmohan Singh reminded the nation that Government cannot on indefinitely subsidize consumption as there were limits to budgets. Inviting a national debate, he rhetorically asked ““How much more can the government treasury bear this burden?” Singh warned that continued policy of appeasement will have serious ramifications for economic efficiency, income distribution, and fiscal deficit and will affect the nation’s “ability to spend on other important development programs.”

The Government rightfully is concerned that the nation continues to import 70% of its crude oil needs and this consumption will only grow with the affluence. While petrol and diesel prices have more or less achieved parity with global prices, political compulsions have forced the Government to not alter prices of kerosene and Liquefied Petroleum Gas (LPG). These products are being abused by many to adulterate diesel and petrol and LPG cylinders are being used by auto-rickshaw and taxi drivers to power their vehicles. The worst part of this is that those who abuse the subsidy do not or cannot pay taxes.

Singh sounded pleading that despite the doubling of fuel prices over the last two years, the Government has “succeeded in insulating our consumers to a great extent.” However, it is precisely this sort of well-intentioned appeasement that has resulted in abuse of the system. For example, free electricity to farmers have seen massive abuse of farmers using free power to pump out underground water to grow water intensive crops like sugarcane and creating serious irreparable environmental damage. Other farmers have used this free power to violate laws to steal waters from rivers to irrigate their lands.

Thankfully, there are signs that the Government is slowly learning that blind vote-seeking appeasement does not pay. Singh said that he wanted a system that will make the beneficiary potential of subsidies transparent, well-targeted, and suitably designed for practical implementation. Speaking at the Independence Day function in New Delhi, he called for a new mindset within the political class on prioritizing issues to fight poverty.

Gently bunking the subsidy regime of yesteryears, Singh said that “The most effective weapon against poverty is employment. And, higher economic growth is the best way to generate employment.” For this he insisted that the nation needs to “create an environment that encourages business to grow and create more employment, especially in the manufacturing sector.” He pointed out that it is only by removing “the disproportionate burden on agriculture in providing livelihood to two-thirds of our population” and moving people to gain employment in manufacturing and services can poverty be eliminated.

Economists have been rightfully arguing that India has a disproportionate number of people working in agriculture but have also been naively saying that they need to be moved to manufacturing and services. While a section of the population can be moved to these new areas, it calls for intense investments in education, training, motivation, and self-employment that are accountable.

Many politicians translate this to mean creation of handout schemes that finances people out of poverty. Such schemes have failed largely because the money has been siphoned by political parties for its cadre, offering irrelevant employment to the wrong population, and self-employment schemes being used to finance personal fantasies. Instead of trying to solve the problem itself through the creation of more bureaucracies, the Government may be better off empowering for-profit banks to introduce financing schemes.