New Delhi - The prime minister's stated intent in recent months has been to rationalise subsidies for the poor, while also taking a hard look at corporate incentives and the concessions made to the "rich".
And the Economic Survey of 2015-16 gives us ample evidence of his intentions possibly becoming the guiding principle in the upcoming Union Budget. Expect a significant rationalisation of subsidies for the poor, which may mean they are better targeted, not necessarily lessened, through schemes like Direct Benefit Transfer (DBT).
The Survey has emphasised that subsidies as a percentage of GDP have been kept on a tight leash in 2015-16. It is another matter that payout in food and fertiliser subsidies has increased and the overall decline has been only on account of a drastic fall in global crude prices, bringing down fuel subsides and therefore the total subsidy outgo. Interestingly, the Survey has also devoted a full chapter to subsidies which are accorded to the "rich", saying these represent leakages which could have been plugged but now represent a lost opportunity.
Let's first look at what the government says about offering concessions to the rich. The Survey notes that as far as corporate taxes are concerned, the government has recently taken decisive action by identifying and quantifying exemptions amounting to about Rs 62,000 crore and announcing a clear path for phasing them out. This must be read in reference to the famous Modi speech where he mocked the term exemptions used to describe tax concessions to corporate houses while using the terms “subsidies” for concessions to the poor. Then, the Survey has dome some fantastic number crunching to arrive at a figure of Rs one lakh crore – the amount it says is additionally lost in subsidies to the rich, outside of the tax concessions to India Inc. This huge amount of subsidy given to the rich comes from just these seven categories: small savings schemes, kerosene, railways, electricity, LPG, gold, and aviation turbine fuel (ATF).
Take ATF for example. Though the Indian aviation industry’s constant demand has been a rationalisation of taxes on ATF since its contention is ATF taxation in India is among the highest anywhere in the world. But the survey says ATF taxation averages just 20 percent (average of tax rates for all states), This, “while diesel and petrol are taxed at about 55 percent and 61 percent (as in January 2016). The real consumers of ATF are those who travel by air, who essentially are the well off. Hence there is an implicit subsidy for air passengers (the difference between taxes on diesel/petrol and aviation fuel) amounting to about 30 percentage points,” the Survey notes. India’s loss laden airlines better take note.
The Survey similarly points to subsidy element in pricing of diesel, petrol, railways, electricity and even small savings. D K Joshi, Chief Economist at Crisil , says cross subsidisation in railways must go. Railways earns 2/3rd of its revenues from freight traffic and freight tariff is used to subsidise passenger travel.
The Survey says “The Rs 1 lakh crore of subsidy going to the better-off merely on account of 6 commodities plus the small savings schemes represent a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving.”
Now lets come to the subsidies meant for the poor. The Survey says the total subsidy bill as a proportion of GDP is expected to be below 2% as per budget estimates for 2015-16. But then goes on to show that there has been only 1.7 percent decline in major subsidies despite a nearly 44.7 percent decline in petroleum subsidy during April - December 2015. Doles on food and fertiliser increased by 10.4 percent and 13.7 percent respectably during the period.
Take the case of urea, the most commonly used fertiliser across India. Fertiliser subsidy payout was the second highest after food at about Rs 73,800 crore in 2015-16, which is about 0.8 % of the country's GDP. Nearly 70 percent of this amount was allocated to urea. The Survey has suggested that urea subsidy should now be offered through the Direct Benefit Transfer Scheme (DBT) to plug leakages. The Survey notes that urea manufacturers derive most economic benefit from the subsidy, not farmers. "Farmers, especially poor farmers, have elastic demand for fertilisers".
The Survey says fertiliser subsidies encourage urea overuse, which damages the soil, undermining rural incomes, agricultural productivity, and thereby economic growth. The current subsidy design—uncapped, varying by end use, and larger for more inefficient producers—incentivises diversion, creates a black market that hurts farmers most and does not encourage producers to operate efficiently
The Survey notes that fertiliser subsidies illustrate the difficulties with using price subsidies as a core anti-poverty strategy. The ultimate aim of subsidising fertiliser is to provide farmers with access to cheap fertilisers to incentivise usage and cultivation of high-yielding varieties. Yet because farmers’ demand for fertiliser is likely to be more sensitive to prices than fertiliser manufacturers’ supply, the larger share of economic benefits from the price subsidy probably accrue to the fertiliser manufacturer and the richer farmer, not the intended beneficiary, the farmer.
Richard Rekhy, CEO of KPMG in India said in a statement that addressing key problems such as scaling up investment, downsizing subsidies, creating a predictable and clean tax policy environment and quickening disinvestment might need to be the milestones in the short-term road map for the Indian economy.
Joshi of Crisil says major savings in food subsidy can be found if Direct Benefit Transfer (DBT) scheme is implemented here. Besides, the government also needs to improve its system of correctly identifying beneficiaries.
Making a further case for widening the DBT cover, the Survey says that the Pahal scheme has been a big success in the case of LPG subsidy. “The use of Aadhaar has made black marketing harder and LPG leakages have reduced by about 24 percent with limited exclusion of genuine beneficiaries. Diversion could be further reduced by equalising taxes across end-uses. This will not necessarily be inequitable because...LPG subsidies almost entirely benefit the well-off”.
It remains to be seen if there will be any affirmative action in the Budget on lessening subsidy allocation for the poor with better targeting, And whether, on the issue of corporate tax, the government will come up with a firm roadmap for reducing headline rate from 30 percent while also slashing myriad exemptions currently available. These make effective corporate tax rate much lower than the headline rate.