Perverse subsidy on LPG, diesel: Why we're a nation of freeloaders

The playwright and screenwriter Anuvab Pal recounts an interesting experience of overhearing snatches of conversation among a group of manual labourers about the proposal to allow FDI in multi-brand retail.

One of the labourers, recalls Pal ( here), said that his MLA (in an indeterminate State) had said that when the FDI proposal was formalised, “foreigners would go house to house and shoot small shopkeepers.” This evidently prompted a minor discussion on the merits of the government paving the way for murder of its own citizens by _firang_s.

Pal’s narrative ends on a happy note, but in the main it points to the uninformed nature of the public discussion around the proposal for FDI in retail - and other broader areas relating to the economy. With political parties resorting to polemical points to pander to their constituencies, facts have become a casualty - and an understanding of the issues is at a premium.

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Likewise, the findings of a CNN-IBN opinion poll on the UPA government’s ’new reforms agenda’ makes for sobering analysis. Conducted across ~five~six cities - Delhi, Mumbai, Kolkata, Chennai, Lucknow and Ahmedabad - the poll shows that even in urban India, where you might reasonably expect a keener understanding of the principles that underlie the political economy, there is an inadequate appreciation of the structural drivers that determine our collective economic destiny.

[caption id=“attachment_472398” align=“alignleft” width=“380”]  The middle-class see freeloaders all around getting away with it. But rather than fight lawful plunder, which is a long, hard grind, they too are joining the queue. Reuters[/caption]

More disquietingly, the findings establish that even people in urban India, who have benefited the most from the opening up of the economy since 1991 and who ought to know that excessive state ‘benevolence’ of the sorts we saw in an earlier time comes at an exorbitant cost, have perhaps come to join the freeloaders’ bandwagon.

Indicatively, an overwhelming 87 percent of those surveyed said they considered the recent hike in diesel prices to be “unjustified” and that an even higher 93 percent believe that the ceiling of 6 LPG subsidised cylinders a year is unjustified.

Drawing inferences from closed-end opinion polls - where respondents must choose from the given range of options - may be somewhat problematic, but even so the correlation between the various answers gives one the scope to connect the dots and arrive at a reasonable understanding of the “wisdom of crowds”.

Indicatively, 57 percent of those surveyed overall said they considered inflation to be their topmost concern. That is, of course, an understandable emotion, given that inflation has never seriously dipped far below double-digit levels in recent years. Particularly in the context of urban wages that are shrinking after factoring in inflation, the pain of seeing prices gallop at this rate is widely shared.

Yet, when it comes to understanding the factors that contribute to inflation, large sections of even urban people appear not to comprehend the structural factors that account for this stubborn inflation.

Inflation in the Indian economy is the result of governmental failures at several levels: on the one hand, it is driven by excessive government borrowing and spending, which has pushed up deficits, and populist policies that in the name of protecting the poor have only bloated subsidies that are channelled to all the wrong sections.

On the other hand, the government’s failure to undertake initiatives on the supply side - that is, build roads and other infrastructure facilities, and encourage investments - has created scarcities and bottlenecks, which drive inflation.

Yet, a full 59 percent of those surveyed said they considered the recent hike in diesel prices to be the biggest contributor to inflation. Even given the undoubted cascading effect of diesel price hikes, such a finding reflects an incapacity to see beyond the surface at the far more serious structural failures - and the government’s failure to address its fiscal slippages.

The debate over the diesel price hike is driven by “false economics” myths that subsidies shield the poor and that any reform of the subsidy regime - by, for instance, aligning energy costs closer to market price - works against the interest of the “aam aadmi”.

It also overlooks the fact that given the overall universe of energy subsidies in India - on LPG, diesel and kerosene - it is the urban rich and the middle class who benefit disproportionately from the subsidy regime, which is ineffective in targeting subsidies at the intended beneficiaries.

As Firstpost noted earlier ( here ), the absence of a cap on subsidised LPG cylinders meant that fat-cat tycoons like Naveen Jindal, whose household in Delhi uses up 369 LPG cylinders a year, are being subsidised by you and I. Likewise, the unchecked subsidy on diesel only means that the middle-class owner of a petrol-fuelled two-wheeler is effectively cross-subsidising the owner of a diesel-run SUV guzzler.

If anything, the urban middle class should be pushing the hardest for subsidy reforms - of which the diesel price hike and the cap on subsidised LPG cylinders are an important component - since it will go a long way towards taming one driver of inflation: the bloated subsidy bill.

But strikingly, it appears, going by the findings of the opinion poll, that the urban middle is instead getting in line to milk the welfare state for whatever it can get away with in terms of unfunded subsidies.

This is what happens when leaders don’t deliver on good governance and make a habit of pandering to the lowest common denominator of populism: such entitlements become entrenched, making it doubly difficult to get rid of them.

As the economic philosopher Frederic Bastiat observed, it is natural to expect men to rebel against any injustice of which they are victims. So, when “plunder” - which he defined as everything from subsidies to tariffs to protection - is organised by law for the profit of those who make the law, the “plundered classes” may respond in one of two ways: either they may wish to stop lawful plunder, or they may wish to share in it.

Likewise, what we are likely witnessing is the creeping ’entitlement mindset’ to the urban middle class. They see freeloaders all around getting away with it. But rather than fight lawful plunder, which is a long, hard grind, they too are joining the queue.