The Attack on ‘Subsidies’
It is hard to recall a seminar as high-powered as the recent Delhi Economics Conclave (November 6-7). Held behind closed doors, it was graced by the Prime Minister, the Reserve Bank Governor, the vice-chairman of the Niti Aayog, the Finance Minister, the Minister of State for Finance, the Petroleum Minister, the Chief Economic Adviser, three chief ministers, the former chairman of the Unique Identification Authority of India (UIDAI), four US-based academics, a representative of the Bill and Melinda Gates Foundation, and several Secretary-level officials. Something big is afoot.
The theme of the conclave was “Realizing India’s JAM (Jan-Dhan Aadhar Mobile) Vision”. That refers to the combined effect of three things: vast numbers of no-frills Jan Dhan bank accounts recently created under the Prime Minister’s programme; an identification number for (eventually) nearly all Indians; and near-universal mobile telephony. In combination, we are told, they will enable the Government to send cash directly to individual accounts, in place of providing goods and services to the people.
Huge claims are made for JAM and DBT. The world’s richest man, Bill Gates, has congratulated India for having “put in place the foundation for a strong financial inclusion programme, which will lower costs and result in widespread innovation.” The Chief Economic Adviser, Arvind Subramanian, claims that DBT had enabled Rs 12,700 crore of savings on liquefied petroleum gas (LPG) subsidy alone (the actual figure for 2014-15, researchers later discovered, was at best Rs 96 crore, and at worst, negative). The Petroleum Minister announced that “We are confident that soon we will be able to bring kerosene under DBT. There could a reduction in the subsidy bill by Rs.4,000-5,000 crore,” he added. The Expenditure Commission has called for bringing almost all Government welfare schemes and subsidies under the DBT. Such ‘direct benefits transfer’ (DBT) is to be a key feature of the coming Union Budget for 2016-17.
The impression conveyed by the official discussion of the DBT is that it uses innovation to reach people more effectively. In the words of our acronym-smitten Prime Minister, “JAM for me is Just Achieving Maximum – maximum value, maximum empowerment to people and maximum technological penetration among the masses.”
These hymns to technology should not obscure our view of the real object of the exercise: the systematic reduction of the meagre existing claims of the people on the social product. The Finance Minister vaguely indicated this real purpose when explaining the philosophy behind the JAM initiative: “the question was whether to continue subsidies indefinitely with an unquantified amount going to an unidentified number of people, or target specific categories of people needing them.” That is, it is not merely a question of removing bogus ration cards and plugging leakages, but an exercise in removing existing beneficiaries from the target. At the same time, by replacing actual goods and services with cash payments, it creates opportunities for the rulers to reduce assistance in real terms.
It has become even more urgently necessary to expose this attack on ‘subsidies’, and its true character. The following article is addressed to this need.
A necessary component of the attack: theoretical justification
Certain social claims of the working people historically have been conceded by the rulers for fear of popular unrest. The rulers choose to term some of these claims ‘subsidies’. These ‘subsidies’ too are under severe attack, in the name of reducing the fiscal deficit.
However, the rulers are alive to the mass opposition they may face when they try to snatch away these historically established entitlements. And so a necessary component of their attack has been to manufacture a theoretical justification for it, and to indoctrinate the media and the public with this justification. They foster the impression that these subsidies are a form of charity, perhaps permissible in the past, but unproductive, prone to misuse and ultimately unsustainable. In recent years US-based academics, who command a special authority in our semi-colonial intellectual milieu, have been air-dropped into leading positions here to do the job.
“Slash subsidies, transfer cash”
In the Economic Survey 2014-15, one such parachutist, Chief Economic Adviser Arvin Subramanian, lays out the case for the attack. In brief, he says that the Government should do away with subsidies on various goods and services, and replace them with cash transfers to individual bank accounts. He says this would be enabled by what he calls the “JAM trinity” – Jan Dhan (bank accounts), Aadhaar, and mobile telephony. Since bank account ownership, identification, and wireless equipment (i.e., cell phones) for receiving transfers are becoming near-universal, all that will be needed to reach cash to the deserving poor is the push of a button in Delhi.
If the JAM Number Trinity can be seamlessly linked, and all subsidies rolled into one or a few monthly transfers, real progress in terms of direct income support to the poor may finally be possible. The heady prospect for the Indian economy is that, with strong investments in state capacity, Nirvana today seems within reach. It will be a Nirvana for two reasons: the poor will be protected and provided for; and many prices in India will be liberated to perform their role of efficiently allocating resources in the economy and boosting long run growth.
The money saved by stopping leakages and excluding the better-off from receiving benefits, he says, can be channeled into public investment in ‘infrastructure’ (to be built by the private corporate sector). Thus, without increasing aggregate Government expenditure, the Government could boost investment, and prices can be “liberated”, like a bird, from the millstone of the poor. He titles this chapter of the Survey “wiping every tear from every eye”.
Lest anyone accuse him of merely trying to snatch a few rupees from the poor to hand over to infrastructure-building corporations, he hastens to clarify:
growth needs to be complemented with active government support to improve the economic lives of the poor and vulnerable – about that there is no debate. The issue is how best to deploy fiscal resources in support of that goal.
Arguments against subsidies
Subsidies, he says, are not the best way of deploying fiscal resources. In damning subsidies, he makes the following arguments:
(i) Price subsidies are often regressive – that is, a rich household benefits more from the subsidy than a poor household.
(ii) Price subsidies distort markets, resulting in the misallocation of resources and lowering productivity. This ultimately hurts the poor.
(iii) There are leakages to the black market. This seriously undermines the effectiveness of subsidising goods.
He provides what he claims to be evidence relating to railways, LPG, kerosene, fertiliser, rice, wheat, pulses, electricity, water, and sugar. Adding up the fiscal expenditure on these, he gets a figure of Rs 3.78 lakh crore, or 4.2 per cent of 2011-12 GDP.
Subramanian argues that technology now enables better targeted, lower-leakage means of transferring income without distorting markets. He raises a tantalizing prospect: this sum (4.2 per cent of GDP) is almost how much it would cost “to raise the expenditure of every household to the level of a household at the 35th percentile of the income distribution (which is well above the poverty line of 21.9 per cent).” In other words, he hints (without actually saying so): Why bother with all the headache of subsidies? Just hand out that sum the poor, and they won’t be poor any longer; then they can afford to pay the ‘liberated’ market prices.
The deception in this entire exercise may not be evident on the face of it. After all, what difference does it make if, instead of getting something at a low price, one is given cash to buy it at the higher price? Some clever-by-half advocates of cash transfers even accuse opponents of ‘paternalism’ towards the poor, i.e., not allowing the poor to take their own decisions. (So appealing does this argument sound, at least to the rulers themselves, that the Congress even toyed with using it as a campaign slogan in 2014 — “Aapka paisa aapke haath” — before realising that the public may not share their enthusiasm.) Since there is much confusion on this issue, it is necessary to look at his argument a bit more carefully.
Selective scan of subsidies
It is revealing, though not very surprising, that in a chapter devoted to the question of subsidies, Subramanian finds no room for a mention of subsidies to the rich. The Budget documents, by contrast, acknowledge frankly that “The tax policy provides specific tax incentives which give rise to tax preferences. Such preferences have a definite revenue impact and can also be viewed as an indirect subsidy to preferred tax payers also referred to as ‘tax expenditures’.” Such tax concessions in 2014-15 amounted to about Rs 5.89 lakh crore, that is, 55 per cent more than the subsidies to which Subramanian refers. This list of tax subsidies, too, is incomplete. It does not include taxes that are abolished altogether. For example, in 2003 the Government abolished taxation on long term (i.e. > 1 year) capital gains on shares, creating “a virtual tax haven”.
The Economic Survey justifies these subsidies to the rich by claiming that the revenue loss may be only notional; they “could be seen as targeted incentives for the promotion of certain sectors that may not otherwise, in the absence of such incentives, have come up.” Further, it argues, such a notional revenue loss does not take into account the positive externalities (i.e., indirect benefits to other persons, beyond the parties engaged in the activity) of the progress of any sector.
There is a telling discrepancy here. Subramanian does not apply a similar standard to subsidies to the poor, which could also be incentives for the promotion of certain sectors, and create positive externalities. (We will return to this point later, when we discuss specific subsidies.) Nor does he explore whether incentives to the rich were the best way to “deploy fiscal resources in support of those goals” which they are meant to achieve. (This despite the fact that the incentives to the rich were more than 50 per cent larger than the subsidies for the masses.) Were he interested to explore this question, he could have dipped into a recent report by the Comptroller and Auditor General on the incentives provided to the Special Economic Zones. It points out that, despite SEZ developers receiving gargantuan State largesse in the form of tax holidays and land, actual generation of employment fell short of projections by 93 per cent; investment fell short by 59 per cent; and exports fell short by 75 per cent.
There are manifold other hidden/explicit subsidies in various forms to the corporate sector and the rich (there is no real difference between the two, since the rich own the corporate sector). We have discussed these subsidies in past issues of Aspects; were it possible to calculate the cumulative figure, it would be staggering. However, such subsidies are routinely hidden in plain sight: for example, expenditure on roads and flyovers disproportionately benefits car owners, but this is not reflected in the taxation of cars. Moreover, the rulers generally prohibit the use of the word “subsidy” when it concerns the corporate sector and wealthy individuals. For example, the Government provides an explicit cash subsidy to ‘public-private partnerships’ (PPPs), but opaquely terms it “viability gap funding”. No one has suggested renaming the food subsidy “nutritional gap funding”.
“Poor and vulnerable” are the majority
Of course there is nothing wrong with cash transfers as such. If not imposed in place of an existing material right, a cash transfer is a form of redistribution. In a country with massive inequality (where one per cent of the population owns half the wealth), what could be wrong with redistribution? But to make the least dent in that grotesque inequality, much larger transfers would be required, which no one imagines to be on the cards. The transfers which Subramanian and co. tout as a magical panacea are just small change.
A central assumption of the argument in the Economic Survey is that the “poor and vulnerable” are a minor section of society: sometimes it refers to the population below the poverty line (21.9 per cent, by the current official method), sometimes the “bottom three deciles” (30 per cent). Hence all subsidies reaching a broader section than 20-30 per cent are seen as inefficient, not the “best way to deploy fiscal resources”, and so on.
However, an official committee (NCEUS, also known as the Sengupta Commission) famously defined the “poor and vulnerable” as constituting 77 per cent of the population, or 836 million, in 2004-05. Ever since then, the NCEUS figure has haunted the rulers in their efforts to slash social expenditures. Economists of the establishment have tried to denigrate the Sengupta Commission methodology, but other measures turn up similar figures.
* One attempt at an alternative measure of poverty, taking into account various minimum needs for a dignified existence, arrived at a figure of 68.8 per cent all-India for 2004-05.
* The Oxford Poverty and Human Development Initiative devised a Global Multidimensional Poverty Index, which used weighted indicators relating to education, health and standard of living to arrive at measure of multidimensional deprivation. It found that, in 2005-06, 53.8 per cent were ‘Multidimensionally Poor’, and another 16.4 per cent were ‘Vulnerable to Poverty’, totaling 70.2 per cent.
* The percentage of the workforce employed in ‘informal’ employment was 92 per cent in 2011-12.
* Utsa Patnaik points out that the percentage of persons in rural areas who could not consume enough food to obtain the calorie norm (2,200 calories/day) was 75.5 per cent in 2009-10. In urban areas, the percentage who could not consume enough food to obtain the norm (2,100 calories was 73 per cent.
* The Socio-Economic and Caste Census (2011) data relating to rural households are available. They show that for nearly 75 per cent of rural households, the income of the highest earning member is less than Rs 5,000/month; in 92 per cent, it is less than Rs 10,000 a month. Less than 10 per cent have salaried jobs (6 per cent Government or public sector jobs, 4 per cent private sector jobs). For more than half of rural households, the main source of income is manual casual labour – the most insecure, deprived and sweated type of employment. Nearly the same proportion – 45 per cent – live in houses made of kuccha material such as grass, bamboo, mud/unburnt brick, and so on. Around 70 per cent of all rural houses have just one or two rooms. Less than 10 per cent of the rural population reach the higher secondary level of education.
Errors of exclusion more serious
All these indicators make it clear that, far from being confined to the bottom 20-30 per cent of the population, the poor and vulnerable are the large majority of the population. The rulers’ argument for ‘targeting’ benefits at the poor and vulnerable is that providing a universal benefit would cover those who did not need a subsidy, which would be a waste. However, if the poor and vulnerable constitute, not 20 or 30 per cent, but the large majority of the population, the ‘undeserving’ section receiving a universal subsidy would be that much smaller. This makes a very major difference to any estimate of wasted subsidy. Given this, we would need to weigh the costs of subsidising the ‘undeserving’ section against the costs of trying to weed out that section.
In targeting a subsidy, a problem can arise even if we were to agree on a definition of who should and should not be included. There are ‘errors of inclusion’, i.e., inclusion of those who do not deserve a subsidy, and ‘errors of exclusion’, i.e., exclusion of those who do deserve a subsidy. The damage caused by the first is the (possible) waste of the Government’s money. The damage caused by the second is immediate material harm to people – the denial of, say, food to the needy.
Clearly, the latter type of damage is more serious. However, the perverse values of the rulers lead them to give priority to the first type of damage over the second. Enormous bureaucratic energies are devoted to the weeding out of allegedly undeserving beneficiaries; officials know there is no penalty for the wrongful exclusion of deserving persons, but there is a penalty for not reducing expenditure. The results of these perverse priorities, as we shall see in the case of PDS, have been terrible, with more than two-thirds of even those officially defined ‘poor’ being denied Below Poverty Line ration cards. An very important argument in favour of programmes with universal coverage is that they rule out errors of exclusion.
No shortage of potential revenue to fund universal coverage
If indeed ‘undeserving’ people (i.e., people who can afford to pay) were receiving a benefit from some public expenditure, that problem could be addressed in other ways. One simple way, which would avoid errors of exclusion, would be to universalise the subsidy but cover the costs through taxes on higher incomes and wealth – thereby extracting the costs from those who can most easily afford to pay. There are a lot of higher incomes and wealth around, even amid mass poverty. It is estimated that the top 10 per cent of India’s population enjoys 43 per cent of India’s income, and 74 per cent of its wealth; indeed, the top 1 per cent alone enjoys 49 per cent of its wealth.
What is the size of the ‘wasted’ subsidy which needs to be covered by additional revenues? Subramanian, in his charge-sheet against subsidies, finds that total subsidies on railways, LPG, kerosene, electricity, foodgrains, sugar, and water come to 4.2 per cent of GDP. Let us assume, for argument’s sake, that ‘undeserving’ persons are receiving 30 per cent of these subsidies, i.e., 1.3 per cent of GDP.
As we have pointed out in earlier issues of Aspects, tax revenues as a proportion of GDP in India are abysmally low, much below the proportion obtained by countries at a comparable or even lower level of development and per capita income (e.g. sub-Saharan African countries). At the same time, revenue forgone (in the form of tax concessions) on direct taxes alone came to about 1 per cent of GDP in 2014-15. That means that merely eliminating this form of subsidy, which enables the wealthy to pay considerably below the statutory rate of taxes, would generate nearly enough to compensate for the undeserving beneficiaries.
According to the new series of GDP (base year 2011-12), private corporate savings – that is, the retained profits of the corporate sector – was 10.9 per cent in 2013-14. If we take this to be correct, private corporate savings are much larger than earlier thought (by about 3 percentage points of GDP). However, the Government, while trumpeting the new, higher estimates of GDP, has not taken these new figures as a signal to increase its tax collections from the private corporate sector.
Customs duties concessions account for 2.4 per cent of GDP. The failure to tax many imports has in fact crippled domestic industries and reduced employment. Moreover, there is a large luxury component to imports. Gold imports alone were $34.4 billion, or over Rs 2 lakh crore, in 2014-15.
Luxury consumption in India, which grew rapidly in the period of the boom in the previous decade, has resisted the recession. Indians spent over Rs 70,000 crore on foreign travel in 2013-14. The market for domestic airlines is put at $16 billion, or about Rs 1 lakh crore. Various media outlets claim that India’s wedding industry is $35-40 billion (Rs 2-2.5 lakh crore). The automobile industry’s turnover is nearly Rs 4 lakh crore a year; a substantial part of this is passenger cars, of which 3 million are produced a year. All these indicate that, apart from taxes on income and wealth, taxes on the consumption of the wealthy too can yield sizeable revenues. (These taxes may also play a small positive role in restricting socially undesirable consumption and environmental damage, contrary to current Government policy, which is geared to promoting these very forms of consumption. The Government actually formulates ambitious targets for the expansion of passenger automobile production and civil aviation, even as it systematically underfunds frugal and environmentally friendly public transport, which caters to the overwhelming majority.)
In brief, if subsidies aimed at the poor are partly benefiting to sections who do not need them, this amount could have been recovered by taxing the wealth, income and consumption of the rich. Such measures would have been far simpler to implement than the gargantuan exercises of identifying those officially deemed ‘poor’, and would avoid errors of exclusion.
 Times of India, 6/12/2015.
 Kieran Clarke, Shruti Sharma, “Official claims of huge savings from direct benefit transfer for LPG subsidy don’t add up”, http://thewire.in/2015/10/05/officialclaimsofhugesavingsfromdirectbenefittransferforlpgdontaddup12374/
 Business Standard, 2/12/2015.
 Budget 2015-16, Statement of Revenue Forgone.
 C.P. Chandrashekhar, “Jaitley on the MAT”, Frontline, 29/5/2015.
 Economic Survey 2014-15, vol. II, p. 31.
 Report of the Comptroller and Auditor General of India for the year 2012-13 “Performance of Special Economic Zones”, December 2014. http://www.saiindia.gov.in/english/home/public/In%20_Media/21of2014.pdf
 National Commission for Enterprises in the Unorganised Sector, Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector, 2007, p. 6.
 Guruswamy, Mohan and Ronald Joseph Abraham, Redefining Poverty: A New Poverty Line for a New India, Centre for Policy Alternatives, 2006.
 OPHI Country Briefing June 2015: India http://www.dataforall.org/dashboard/ophi/index.php/mpi/download_brief_files/IND
 Economic Survey 2014-15, vol. II, p. 136, citing National Sample Survey (NSS) figures. Informal employment exists in both the organised and unorganised sector; in fact, according to NSS figures, 48 per cent of workers in the organised sector are in informal employment (i.e., contract, casual, apprentice, etc., lacking legal protections).
 Utsa Patnaik, “Poverty Trends in India 2004-05 to 2009-10: Updating Poverty Estimates and Comparing Official Figures”, EPW, 5/10/13.
 Reeve Vanneman and Amaresh Dubey, “Horizontal and Vertical Inequalities in India”, in Janet Gornick and Markus Jantti (eds.), Income Inequality: Economic Disparities and the Middle Class in Affluent Countries, 2013.
 Credit Suisse, Global Wealth Databook 2013, p. 146.
 See Aspects no. 53, p. 86.
 The new GDP series is controversial, and may exaggerate the size of corporate savings and the GDP.