Column: Discard dysfunctional subsidies

Apr 24 2014, 03:00 IST
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SummaryBut with no party ready for this, Aadhaar-based conditional cash transfer is the way to go

Subsidies for the middle-class are here to stay. None of the political parties have mentioned any reduction, let alone elimination of subsidies in their manifestos for the ongoing Parliamentary elections. One can only hope that some parties, especially the BJP if it comes to power, will not feel bound by their manifestos and move to do away with at least those subsidies that can be seen to be dysfunctional and that do not reach the intended beneficiaries. One such is the kerosene subsidy. From several studies and anecdotal evidence it is clear that a major chunk of the kerosene subsidy is misused for adulteration of petrol with kerosene. Officers who tried to stop this nefarious practice have had to pay with their lives. Similarly, the fertiliser subsidy does not go directly to the farmers who use them but to the producers, some of whom can continue with their outdated manufacturing capacities rather than be forced to modernise them. Consequently, fertiliser subsidies perpetuate inefficiency and high costs which, in turn, raise the cost of producing food grains and stoke inflation. Therefore, the best outcome would still be for the incoming government to do away with these subsidies that encourage wasteful consumption, degradation of our natural resources and industrial inefficiency. Such bold steps will have to be taken in the first few months of taking office so that the positive consequences of curbing fiscal profligacy and switching to market-determined prices can emerge well before opposition can be mobilised and people get sucked into a costly strife and agitate against doing away with the subsidies.

But we have to be prepared that such an outcome is highly unlikely. Going by their manifestos, political parties do not appear to have the necessary will to alienate the middle-class which is undoubtedly the principal beneficiary of these subsidies though the latter are marketed as being intended for the poor. In this situation, it may be useful to consider some alternatives for a more efficient delivery of these subsidies to the intended beneficiaries. An oft-discussed option is to monetise the value of all the subsidies that are received by an individual or a household and transfer the amount directly to her/its bank account. This form of cash transfer, in lieu of product-specific subsidies, is seen to be less distortionary and more efficient as it has far less avenues for leakages and misappropriation. Additionally, as in Brazil, such cash

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