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Behind the facade
of Indian subsidies
By Kunal Kumar
Kundu
KOLKATA - Good politics is quite often bad
economics, and nothing epitomizes this better than
India's subsidy system. The subsidy policies in India
are being advocated by those same policy makers who
appear in public as pro-poor, but are driven by the
political implications of their actions, the economy be
damned.
For a resource-scarce country like
India, non-merit subsidies result in a substantial
misallocation of resources which act as a ceiling to
economic growth and, concomitantly, overall prosperity.
What is more important, in the case of India, is that
subsidies hardly ever reach their intended target.
India's experience in certain cases on the efficacy of
subsidies bears it out.
Agricultural
subsidies
Despite continuously rising food
subsidies (about a 10-fold rise between 1991-92 to
2003-04), there is the pervasive presence of persistent
hunger in India. Not only are there persistent
recurrences of severe hunger and starvation in
particular regions, but there is also the prevalence of
endemic hunger across much of the country.
According to the Nobel laureate Dr Amartya Sen,
India has done much worse in this respect, even in
comparison to sub-Saharan Africa. Estimates of general
undernourishment - what is sometimes called
"protein-energy malnutrition" - are nearly twice as high
in India as in sub-Saharan Africa. Surprisingly, despite
the intermittent occurrence of famine in Africa, it
still manages to ensure a much higher level of regular
nourishment than in India.
About half of all
Indian children seem to be chronically undernourished,
and more than half of all adult women suffer from
anemia. In maternal undernourishment as well as the
incidence of underweight babies, and also in the
frequency of cardiovascular diseases in later life (to
which adults are particularly prone if nutritionally
deprived in the womb), India's record is among the worst
in the world. This is all the more surprising given
that, as of late, the country's stock of food grains
surged to such an extent that it necessitated exports.
Take the case of procurement. While the Food
Corporation of India (FCI) was supposed to be a last
resort for farmers unable to sell their produce in the
open market, the higher minimum support prices announced
by the government over the years has meant that FCI has
become the preferred buyer for the farmers. This is
clear from the mounting stocks of rice and wheat since
2000 in relation to the required buffer-stocks of 16.8
million tonnes (rice and wheat). Clearly, the majority
of food subsidies tend to be the producer's subsidy
rather than the consumer's subsidy. It is quite well
known that the producer's subsidy encourages
inefficiency. And this keeps on increasing as the
politically strong farmer's lobby (read rich farmers)
makes procurement prices a political issue, which leads
to a continuous rise in procurement prices.
What
is even more galling is that the government keeps on
hiking public distribution system (PDS) prices for even
below poverty line (BPL) consumers, citing increasing
storage costs and a hike in procurement prices. As a
result, offtake from PDS shops by BPL consumers have
actually declined, so much so that the government was
forced to export food grains to clear the stock and
reduce storage costs while the BPL consumers failed to
lift their quota due to a lack of purchasing power on
account of increasing prices for them. Clearly, those
who are in real need of subsidies - even for their sheer
survival - are being forced out of the system as the
strong (and rich) farmers' lobby takes the cake. And
subsidies in India are meant to be pro-poor.
It
must, however, be stressed that agriculture is a
subsidized item throughout the world, more so in the
developed than in the developing countries such as
India. The opposition to India's subsidy regime,
however, has not only to do with the wrong subsidies but
also the wrong priorities, as its selective nature has
also resulted in the near shutdown of direct investments
in creating a modern agricultural infrastructure.
There has been a clear case of subsidies being
provided at the expense of expanding the irrigation
system, and improving rural infrastructure with more
all-weather village roads, transportation and storage
facilities etc, which would have gone a long way in
improving the fortunes of the agricultural sector in
India in general and the rural poor (innumerable
landless agricultural laborers and a large number of
small farmers) in particular.
Consider this. The
share of agriculture and irrigation in the total plan
outlay, which was about 33.5% in 1995-96, fell to just
13.6% in 2004-05 as per the budget proposal. On the
other hand, there has been a constant increase in
indirect support to agriculture, seen in the steep rise
in budgeted subsidies. Between 1995-96 and 2004-05, the
total food and fertilizer subsidy increased by around
12.30% per year, with food subsidies alone rising from
around Rs 54 billion (US$1.16 billion) to Rs 258 billion
during this period.
Even the amount of money
spent on PDS does not reach the intended beneficiaries.
Studies show that as much as 95% of the amount spent on
PDS does not reach the poor. A shocking reality indeed.
Moreover, a substantial amount of food grains meant for
the poor is diverted and sold in the open market.
Clearly, the system in India has engendered legions of
politically connected rent seekers, who ensure the total
failure of the delivery mechanism.
Farmers in
India enjoy free or highly subsidized electricity rates.
Even as recent as the current year, the newly elected
government of the state of Karnataka (as also the
current government of the state of Tamil Nadu which
faces elections this year) has announced it would grant
free electricity to farmers. These decisions have
clearly been necessitated by political urge, rather than
an honest effort to help the farmers.
India's
experience with free power shows that rather than
stimulating agricultural production, it has, in fact,
become an impediment to agricultural growth and has
saddled state electricity boards with mounting losses,
affecting their ability to add to generation capacity
and improve distribution. Moreover, though these
subsidies were launched to reach the smaller farmers,
they have largely benefited the rather well-to-do
farmers who have their own water sources - mostly wells
and tube-wells - and hence consume the lion's share of
electricity. The benefits of free power go only to those
few farmers who can invest huge sums in sinking
borewells. Between them the medium and large farmers
(who account for less than 10% of landholding) own a
third of the tube-wells. This gives a fair idea of who
has been cornering the power subsidies. In any case,
causes of rural distress are unrelated to agricultural
power tariffs. Problems of productivity, markets and
value addition continue to remain unaddressed.
In addition, the farm sector receives huge
subsidies on account of irrigation loses. According to a
study on irrigation subsidies by A Vaidyanathan,
professor emeritus at the Madras Institute of
Development Studies, "Revenues have not kept pace with
costs: collections, which were just under Rs 1 billion
in 1977-78, rose to Rs 1.4 billion in 1987-88 and an
estimated Rs 4.9 billion in 1994-95. In 1977-78,
revenues covered three-fourths of the 'working expenses'
but only one-sixth of the total cost (including interest
and depreciation). By 1987-88, revenue covered barely a
quarter of working expenses, and 6% of total cost. The
position has vastly worsened since: the recovery rates
in 1993-94 fell to less than 15% of working expenses and
5% of the total cost. As a result, overall losses jumped
from Rs 4.3 billion in 1977-78 to around Rs 70 billion
in 1994-95. Since then, the situation almost certainly
has deteriorated further."
The irrigation
subsidy is incurred on the non-realization of the actual
cost of canals and tanks built by the government. In
1990-91, canals comprised only 34.3% of total
irrigation. Only 35.8% of the area irrigated by state
sources belonged to the medium and large farmers,
suggesting that the benefit of this may be more
equitably distributed than in the case of power.
However, in 1998-99, of the total cropped area of 192.6
million hectares, less than one-third was covered by
man-made irrigation. Thus, 135.6 million hectares of
cropped land, where the overwhelming majority of farmers
work, is entirely rain-fed. In other words, they are
solely dependent on the vagaries of the monsoon and
without any benefit from the state. This vast,
unirrigated cropped area of 135.6 million hectares is
also where the majority of the rural poor lives.
According to data from the Ministry of Water
Resources, the cost of creating the irrigation potential
for one hectare during the 8th Plan (a five year agenda)
through large and medium irrigation projects was Rs
98,495 against just Rs 10,051 for small irrigation
projects. The gap is certain to have widened. It,
therefore, makes more economic sense to focus more on
minor irrigation schemes to get more out of the limited
budget. But when politics walks through the door,
economics fly out of the window. Available information
shows that there has been a dramatic fall in minor
irrigation from around 1.6 million hectares a year
during the 7th Plan to 1.1 in the 8th and 0.1 in the 9th
Plan. Given the political connections of big
contractors, India continues to deploy most of the
decreasing irrigation outlays on major irrigation rather
than on minor irrigation. With few exceptions, major and
medium irrigation projects have accounted for more than
three-fourth of the funds allocated to irrigation
through the entire planning period.
Even the
fertilizer subsidy in India reveals the same dismal
picture. It is also justified on the grounds that the
developed countries also give fertilizer subsidies. But
there is a fundamental difference. While the latter give
subsidies as support to the farmers, in India, subsidy
payments are made to the manufacturers. The result of
such a policy is that it covers up the inefficiencies of
a producer or shores up their profit.
Clearly,
there is now a bizarre circumstance of falling public
investment in agricultural infrastructure (which would
have had a positive rub-off on the entire sector and
enabled it to achieve its true potential) and increasing
subsidies which end up benefiting mostly the undeserving
- viz the rich farmers and various layers of
rent-seekers who are responsible for the massive leakage
out of the system.
Education subsidies
For a country with one of the most enviable
resources - a high proportion of its population is young
- it is unfortunate that even after spending 4.1% of the
gross domestic product (GDP) on education, 35% of
India's population is illiterate. It is well known that
many developing countries have achieved better results
with far less spending. China, for example, spends only
2.2 % of its GDP on education, yet has 91% literacy. Sri
Lanka and Indonesia spend only 1.3% of their GDP on
education, yet have literacy rates of 92.5% and 88%
respectively. Even the UK and the US spend only 4.4% and
4.9% of their GDP respectively on public education.
Clearly, spending is not an issue. Efficiency
is. More often than not, political affiliations decide
on the enrollment of teachers. Efforts to discipline
errant teachers result in huge unionized protests.
Therefore, with teaching very low down in their list of
priorities, government aided primary schools in India,
especially in the rural areas, suffer from a vicious
cycle of unmotivated teachers skipping classes leading
to disenchanted students, thereby further reinforcing
the lack of motivation.
The result? Substantial
dropouts. Dropout rates in Indian primary, middle and
high schools, particularly for girls, continue to be
shamefully high - 50 years after independence and
despite constitutional obligations on the part of the
state, reflecting a sheer wastage of resources. For
example, in the state of West Bengal, it is estimated
that of the 100 students who enroll in the 1st standard,
only 17 of them finish the 10th standard.
A
study conducted by UNESCO based on educational data for
the 2000/2001 school year from 22 Asian nations throws
up an interesting result:
|
Primary school dropout
rates |
Expenditure as % of
GDP |
| India |
53% |
4.1% |
| Myanmar |
45% |
1.4% |
| Bangladesh |
35% |
3.7% |
| Cambodia |
35-38% |
1.9% |
| Nepal |
35-38% |
2.5% |
Source: UNESCO Global education digest 2003
As one can see, countries spending much
less than India have better results. Even in the recent
union budget on India tabled by the Congress-led United
Progressive Alliance government, nowhere can one find
measures to tackle this root cause - an utter failure of
governance. Further increases in subsidies will only
result in keeping the political constituents happy and
lead to a bulging fiscal deficit - without benefiting
the intended beneficiaries.
(Copyright 2004 Asia
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