Column : Where have all the subsidies gone?

Feb 23 2013, 06:21 IST
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SummaryPerfectly-targeted spend of 0.5% of GDP would remove poverty—we spent 6 times this and have 22% poor.

If one has a good idea of where we went wrong in the last 5 years, one can begin to project the future and what the finance minister might or might not be able to do on February 28, 2013. No matter what the source, the discussion, and complaint, has centred on the fiscal deficit. And the fiscal situation is dire—an increase of nearly 2 percentage points in the consolidated fiscal deficit in the last 5 years.

But fiscal deficit is the net difference between revenues and expenditures. So, theoretically, the fiscal deficit can expand because of a shortage of revenues, or an excess of expenditures, or both. Consequently, depending on one’s ideological preference, the emphasis is either on raising taxes or on cutting expenditures. And given a country like India, whose politicians and many of the glintelectuals (glitterati intellectuals) do not believe in any evidence-based policy, the concentration is on raising taxes. The last 2 months have been dominated by discussions of how to raise tax revenue, and of course ‘motherhood’ dictates that one cannot go wrong by suggesting that the rich should pay more. If it is pointed out that the top 10% of earners in the country pay for almost all of corporate and individual tax revenue, the refrain of the glintelectuals is: why can’t they pay more?

Back-of-the-envelope calculations for the Indian economy are now made easier with several important numbers approaching 100 or multiples of 100 levels! Nominal GDP in 2012-13 is estimated to have been R94.6 lakh crore; for 2013-14, with 12% growth, nominal GDP is estimated at R106 lakh crore. For the same year, poverty is forecast to be 220 million or 18% of the population. This based on a Tendulkar poverty line equal to R1,000 per capita per month (pcpm) and the average consumption level of the poor equal to R834 (R12,000 and R10,000 on an annual basis).

These simple calculations, assuming conservative historical trends, imply that the government needs to spend, in 2013-14, R0.44 lakh crore (obtained as the multiple of 220 million poor with an average poverty deficit of R2,000 per person per year). This fraction is 0.4% of GDP and what is needed to be spent on the poor in order to claim that “India is a land with NO poverty according to the official poverty line”. This claim assumes perfect targeting. Further, the amount

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