The Hindu : Opinion / Editorials : SUBSIDIES AND THE POOR

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Thursday, Dec 30, 2004

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SUBSIDIES AND THE POOR

THE FINANCE MINISTRY has once again agonised over the mounting level of subsidies paid out by the Central Government — over what is to be done to target them more sharply at the poor, and what goods or services deserve to be subsidised. Its recent report to Parliament provides an excellent recitation of the problem. Subsidies have no doubt lowered the prices on many essential goods and brought them within the reach of poorer sections of the population. But the report notes that there has been an "undue expansion" of government activity into providing goods and services, many of them not purely public in nature, without it being able to recover the full costs of doing so. So subsidies on goods such as the post card, urea, and kerosene and on services such as education, meteorology, and broadcasting have proliferated to Rs.115,000 crore a year, or an average of more than Rs.1,000 for every person in this country. Containment and targeting of these payouts are obviously the objectives of the Finance Ministry, which is also aware of the inefficiency in the delivery system: the benefits do not reach all the needy population, not all the beneficiaries are deserving, and there are substantial leakages.

Take the case of food subsidy, a two-pronged measure that provides a minimum price to farmers for their grain and a cheap source of rice and wheat to consumers. In reality, farm support has gone to those who grow rice and wheat, typically rich farmers who till well-irrigated lands in just six States. The poorer farmers, who typically grow rain-fed crops such as coarse cereal, virtually get no price support. As consumers, the poor can get to buy only rice or wheat at the subsidised price, not ragi or jowar even if these have been their staple. Over the years, the price distortion introduced by the subsidy has changed food preferences across the country in favour of rice and wheat that only the well-endowed farmers grow. Similarly, the subsidy granted to urea has pushed up its use to a level that is disproportionate to other nutrients, threatening the fertility balance of the soil. Kerosene is reckoned to be the poor man's fuel for lighting and cooking, and provided a large subsidy while LPG, the cleaner-burning of the two, is indulged less by the Centre and taxed heavily in many States.

Behind such distortions is the presumption of the policy makers that they know best what is good for the country's poor — what they ought to consume and at what price. The bitter truth is that the poor would be better off deciding that themselves. If only they were given the cash rather than subsidised goods. With the people below the poverty line already identified, the Government can quite easily deliver the funds directly to them given that over the years the financial system has considerably enhanced its reach and capability — an efficient system of delivering old-age pensions already exists. What if the head of the family spends the money on liquor rather than food, critics might ask. That could happen today too when even the poorest have to come up with a few rupees to buy a couple of kilograms of grain. If the central food subsidy were to be handed out directly as cash to the 260 million people below the poverty line, that would be more than Rs.400 a month for each family, a sum that can command a reasonable amount of cereal and more even at market prices. Why, an income supplement on this scale could lift many of the recipients above the poverty line. The question is not one of whether there should be public intervention to ensure food security, but really one of finding the best way of reaching the targeted population.

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