End unproductive populism!

Since Independence, Subsidies have been used as a policy tool by successive governments till today. Some of these were necessary, some were introduced due to political compulsions. After Independence there were very few people or groups who were capable of investing money into big businesses, which in turn would generate employment and in turn would help the building nation. Hence the government started subsidizing industrialists in the form of cheap land, electricity and taxes. This could be justified given the business environment at that point in time. But gradually this practice gave rise to the now abolished “License Raj/Permit Raj”. Multinationals were discouraged from doing business to protect the local business. eg. Companies like Coca-Cola, Daimler, Royal-Dutch Shell had to close there operations in India. Businessmen started finding it more convenient to do business under the protected environment of the License Raj.  With lack of credible competition, the quality of products or services never seemed to improve. Premier Padmini and Ambassador were the only cars which were available for generations. Its was quite evident that the real beneficiaries of these policies was not the common man but these handful of business men and the bureaucracy.

Types of Subsidies
Subsidies have been granted in different formats few of them are listed below:

a. Food Subsidy:

This can be considered the most crucial form of subsidy. It is such a pity that after more than 60 years of independence, there is a huge population which is counted as Below Poverty Line(BPL). Making food available to these people is important. But due to non-availability of dependable mechanism in our Public Distribution System (PDS), significant portion of the allocated food ends up with population which doesn’t actually needs it. Even the mid-day meals program run under the “Sarv Shiksha Abhiyan” has huge amounts of leakages and has not yielded the desired dividends. It has been consistently observed in rural areas that kids run away from school after the meals are distributed. Hopefully the Aadhar program, by providing unique numbers to each citizen, may help in plugging few of the above leaks. But even the governments commitment towards successful implementation of Aadhar program has come under doubts, especially after concerns raised by the home ministry.

b. Fuel Subsidy:

India imports more than 80% of its energy requirement. With more than $120 billion in our import bill for oil in 2011,  India is amongst the top 10 crude oil importer in the world. Any efficient government would like to discourage use of resources which result in drain from its exchequer. On the contrary the government in India forces its oil marketing companies (OMC’s) to sell fuel at prices which are below its cost thus creating an artificial demand. The OMC’s incurred huge losses amounting to more than Rs.1 lakh crore in 2011. These losses are partially shared by upstream oil companies like ONGC, Oil India and Gail and the government. Even the subsidy sharing formula is not certain, and is decided on the whims and fancies of few populist politicians. Thus effecting the valuation and competitiveness of our navratna companies. The amount of subsidy if capped to a reasonable level could have saved ONGC billions of dollars. This money could have in-turn be used for more oil exploration in Indian basins like Krishna-Godavari, Mumbai High, Mahanadi basin etc. If not invested in these fields, this fund could have given ONGC enough muscle to buy valuable oil assets abroad, thus contributing to country’s energy security.

c. Fertilizers Subsidy:

This is one of the most crucial and arguably the most hazardous form of subsidy. The government has been paying subsidy to farmers which costs the exchequer thousands of crores of rupees. Government has been subsidizing fertilizers like urea to a great extent. Like oil, most of the urea is imported, thus fueling India’s trade deficit. Apart from the cost impact, it has been consistently observed that farmers tend to use much more urea than actually required since it can be bought cheap! This has been affecting the quality of soil and will have an impact on harvests in long run. The money wasted in these subsidy could have have been used in other productive avenues like better warehouses and logistics for farm products or may be in research for better seeds and pesticides. This would have significantly reduced the wastage of farm products, thereby providing better earnings for farmers. Even after 60 years of independence more than 50% of farmers have to rely on monsoon for farming. A better irrigation program consisting of dams and canals could have been much more productive.

d. Electricity Subsidy:

In the last few years there has been a populist trend in many states where in successive governments are offering free electricity to farmers for farming. With almost half of the population in the country still not having access to electricity, out of the remaining half, baring the few urban pockets almost all other areas have to face hours of outages(load shedding). Given the scenario, can we afford such largesses? The side effect of such freebies is that farmers tend to use their ground water pumps endlessly, thus effecting the ground water levels. As is evident in many states, the ground water level has gone down to alarming level. Farmers now have to dig in deeper and deeper to get water for consumption. Apart from this the average amount of electricity lost in transmission and distribution is at huge 30%. The primary reason for this is theft. It is not that the relevant agencies are not aware of the culprits, but many a times local politicians protect the people responsible in lieu of their votes. These freebies and transmission losses thus raise the cost of electricity for industries and residential customers. Reducing losses and bringing down the cost of electricity would indirectly aid in making our factories and other industries more competitive.

Better use of limited resources

If we calculate the total subsidies, it could easily go above Rs. 2 lakh crores. Even after spending such humongous amounts what have we achieved in so many years? Rather than making its recipients self sufficient, subsidies are making them more dependent. Countries like Israel, which are water deficient have innovated and found ways to grow foodgrains in desert, but for us, even after falling in monsoon region we are still not able farm throughout the year!

The amount spent above could have easily been used for productive means. Infrastructure in our country lags far behind what it should have been. Investing in roads, railways, logistic hubs, cold storage’s would need thousands of crores of rupees. Such projects would create lakhs of jobs. These jobs would primarily be taken up by people who are dependent on agriculture. This would thus help in mechanizing farming, making it more profitable.  Projects similar to e-choupal, which provides farm related information should be given priority. Education is one more aspect which needs huge investment. Government schools in rural areas do not have proper teaching staff and classrooms. Children have to travel far of for there schools daily. Educated people do not find teaching as a competitive career option. These children if given good education, would be capable to stand on there on feet. They would no more be dependent on wasteful subsidies. The government should channelize tax payers money to productive avenues like research in fields like health, biotech, defense, technology etc. Companies like Infosys, Bharti and Wipro etc, have flourished without such protective subsidies. Our policies should be directed such that the next Microsoft, Google or Apple may come from India. We should invest in our people to make them capable enough to take advantage of India’s Demographic Dividend.


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