The Telegraph
Thursday , April 19 , 2012
Since 1st March, 1999
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- Subsidies are pointless when the affluent receive the benefits

I have just finished reading Katherine Boo’s Behind the Beautiful Forevers. This is a truly poignant and beautifully written account of life in Annawadi, a slum which is just a few hundred metres away from Mumbai International airport. Annawadi is also very close to a five-star hotel, but also borders a “sewage lake” so polluted that pigs and dogs resting in its shallows have “bellies stained in blue”. Its protagonist is Abdul, who supports a family of 11 by selling garbage. Abdul and the other inhabitants of Annawadi live in squalor in India Shining. The daily experience of the inhabitants of the hundreds of Annawadis in the country is a scathing indictment of the quality of our public institutions, as well as of the skewed priorities of our politicians and governments.

Against this background, the agitation by jewellers and the public support they have received seems bizarre. I gather from the newspapers that the jewellers have called off their strike since the finance minister has promised them “good news”. Pranab Mukherjee’s “promise” is a sequel to his own party’s request to consider the jewellers’ demands sympathetically. Indeed, politicians cutting across party lines have been lobbying on behalf of the jewellers, who have been insisting that the government reverse the increase in customs duty on gold imports as well as the excise tax on unbranded jewellery. Apparently, Mukherjee has refused to roll back the increase in customs duty, but has indicated that he would consider their demands for a reversal of the excise tax sympathetically.

The various jewellers associations have been claiming vociferously that the industry employs thousands of small artisans and that the tax and increase in customs duty will bring ruin to the industry and hence affect the livelihoods of these artisans. However, let us put the proposed excise tax in perspective. The budget proposal is to levy a tax of 1 per cent on 30 per cent of the value of a transaction. In other words, a transaction of Rs 10,000 will attract a tax of Rs 30. Clearly, customers who can afford to pay Rs 10,000 will not lose much sleep if they have to pay a little bit extra, perhaps because none of them live in Annawadi. So, there is little doubt that jewellery shops will pass any increase in taxes to the customers. There will be at worst a minuscule reduction in demand for gold jewellery on account of the new excise tax on unbranded jewellery. All claims about the prospective ruin to small artisans is nothing but a bargaining strategy to extract concessions from the finance minister. Why is he taking this seriously? More important, why are politicians supporting their demands?

Unfortunately, this is not the first time that the United Progressive Alliance government has caved in under pressure. This has now become the pattern — the government makes policy announcements, defends them as the only options available given the circumstances, but then reverses the decisions if protests from Mamata Banerjee, other allies of the UPA — and, in this case, a well-organized lobby — are vociferous enough. Immediately after the budget was presented, both the finance minister and the prime minister declared that they were determined to take hard decisions about subsidies — “bite the bullet” was the exact expression that was used. Our recent experience suggests that “swallow every insult” would be a more apt description of the government’s intentions.

The next controversy will erupt if and when the government allows fuel prices to be increased. Fuel prices are officially decontrolled. But everyone knows that the domestic oil companies do not have the freedom to raise prices of petroleum, diesel and liquefied petroleum gas — they need the government’s permission. It needs no soothsayer to predict that virtually every non-Congress party will protest vehemently if and when the government allows the oil companies to raise fuel prices. Ironically, these protests will all be ostensibly to protect the interests of the “common man”, the latter category presumably including owners of BMWs and Mercedes.

We import the bulk of our need of petroleum products. International oil prices are very high for a variety of reasons including the uncertainty surrounding Iran and its oil supply. There is no sign that this is a temporary phenomenon — oil prices can hover around current levels in the foreseeable future. The public sector oil companies incur huge losses on every litre of petrol and diesel, as well as on LPG cylinder when the prices paid for these products are lower than the prices at which they are imported.

Obviously, some group has to pay for these subsidies. The popular feeling seems to be that “the government should bear the burden”. But, this is a misconception. When the government subsidizes some good or service, it is simply diverting expenditure it could have made elsewhere in the economy. So, every rupee spent on subsidizing petrol or LPG cylinders is a rupee less spent on primary healthcare centres, primary schools, provisions of safe drinking water, sanitation, irrigation channels and so on. I have deliberately chosen these examples because the government often finds ways of curtailing spending in the social sectors and in development when it has to reduce total expenditure, at least partly because it does not have any scope for manoeuvrability in a lot of other items of expenditure. For instance, it cannot obviously reduce its huge salary bill or its expenditure in servicing public debt.

This is not to say that all types of subsidies should be eliminated. We are likely to see a landmark food securities bill passed later this year. This piece of legislation aims to eliminate hunger and malnutrition by promising minimum quantities of foodgrains to every needy individual. The subsidy involved in this programme may cross Rs 1,00,000 crore, But, the removal of hunger is undoubtedly the most important priority for any caring government and so this would be money well spent. This is not meant as a defence of the public distribution system. Of course, the most efficient delivery mechanism should be implemented to ensure the goal of adequate food for all.

But, there is no justification for subsidizing petrol if the affluent receive fifty paise out of every rupee of fuel subsidy. Of course, identical principles apply to taxation. If there is a need to raise government revenue by taxing commodities, then the commodities such as gold that are typically purchased by the rich are the obvious candidates. The revenue raised through these taxes can be used to bring some relief to the thousands of Abduls and their siblings.