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Business Commentary/Dilip Thakore

Demolishing the poor, sparing the rich

BUDGET 2000

At times, one wonders if the bureaucrats who framed the latest tax-and-spend Union Budget live in the real world. Under pressure to cut the massive fiscal deficit, Finance Minister Yashwant Sinha has proposed a sharp cut in the food subsidies available to the poor under the public distribution system or PDS.

By some rather complex reasoning, which involves “doubling the allocation of foodgrains to BPL (below poverty line) families from 10 kg to 20 kg” per month, Sinha has raised the price of rice and wheat issued to BPL families through the PDS by an astonishing 68 and 87 per cent overnight.

The rationale of this substantial hike in foodgrains' prices for the poor is that even after the issue price increase, BPL families will pay only 50 per cent of the “economic cost” of PDS foodgrains. It is quite evident that doubling the quota of foodgrains to BPL families after hiking the issue price, is a meaningless gesture, given that BPL families are hard pressed to purchase their existing quotas at current prices.

Of course, there is a justifiable case for reducing the numerous subsidies, which cost about Rs 1.2 trillion annually and push up the fiscal deficit (total expenditure minus aggregate revenue) of the Union government to unsustainable levels. But justice demands that ‘non-merit’ subsidies should be the first to be slashed. There are many such non-merit subsidies within the Indian economy.

Electricity, water, higher education and rail travel are heavily subsidised by the Central and state governments. Therefore, it requires a particularly tough mindset to begin the process of de-subsidisation of the economy by targeting foodgrain subsidies, which enable large numbers of the destitute to keep body and soul together.

However, despite a 50-year-long effort, the PDS is not a nation-wide system. It has not reached a vast majority of the nation's needy, estimated at around 300 million souls. Now, following the sharp rise in foodgrain prices within the PDS, the floor prices of grains, too, will rise across the country.

The justification that even after the sharp increase in PDS grain prices, BPL families will pay only 50 per cent of the “economic cost” thereof is unsustainble. Why is the economic cost of foodgrains supplied to the PDS so high? Primarily because of the high handling costs of the public sector Food Corporation of India, the monopoly procurer and supplier of rice and wheat for the PDS and one of the most inefficient public sector enterprises in the country.

Not only does the FCI annually waste some 20 million tonnes of foodgrains valued at an estimated Rs 200 billion because of inefficient storage and food preservation practices, it also maintains an unnecessarily high inventory of 32 million tonnes on which the interest cost is phenomenally high.

All these costs of inefficiency and mismanagement are reflected in the “economic cost” of the FCI on which PDS prices are based, and contribute to the Union government’s food subsidy burden. By the time foodgrains reach the ration shops, the politically determined procurement price will have more than trebled. Hence, the high “economic cost” and huge food subsidy (which, in the latest Budget proposals, has been reduced to Rs 82 billion from Rs 92 billion in 1999-2000).

For Sinha, a more justifiable target than the food subsidy for BPL families would have been higher education that is heavily -- and indefensibly -- subsidised.

Surely, he is aware that the Union government subsidises higher education to the tune of Rs 200 billion per year because varsity tuition fees in India are the lowest in the world averaging Rs 30 per month? Instead, wouldn’t it have made more sense to have halved this subsidy to the middle class that can easily afford to pay twice as much?

There were many other options open to Sinha to raise the Rs 10 billion that would be saved due to the hike in foodgrain prices for BPL families. For example, he could have easily raised Rs 10 billion through a more aggressive privatisation effort. Instead of the modest Rs 100 billion, which he proposes to mop up by divesting the equity of PSEs, Sinha could have easily sold some PSEs outright and raised, say, Rs 500 billion.

Many of these PSEs, with assets estimated at Rs 5 trillion, are slowly bleeding the Centre's finances dry. He could have utilised half of this amount for debt retirement and some of it to build primary schools. This would have helped contain the fiscal deficit.

Alternatively, he could have 'bit another bullet' and downsized the bloated government machinery as recommended by the Fifth Pay Commission. Instead, he has sanctioned the expansion of the five million strong central government bureaucracy (whose annual wage bill exceeds Rs 400 billion) by 81,000 employees. According to journalist-economist Prem Shanker Jha, the amount spent on creating each government job could create 18 jobs in the private sector.

But these are more difficult options because the nation’s pampered varsity students, PSEs and government trade unions would yell blue murder. On the contrary, it is much more expedient to target illiterate, uncomplaining BPL families to warn the nation that this administration is serious about reducing the burden of subsidies to manage the fiscal deficit.

Dilip Thakore

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