Wastage or welfarism?
Across the class divide that is India, the grumbling against the UPA had been that its overemphasis on social welfare and security has led to inflated welfare expenditures at the cost of growth. Because, it is an empirical truth that overprovision of welfare fails to target resources on the most needy, and hence leads to inefficiency and injustice.
The New Right under Narendra Modi, on the other hand, emphasises welfare cuts and the expansion of private sector that might lead to a deterioration of life qualities of the poor and the needy. Sadly no emphasis is being laid on “positive welfare” where people are encouraged to earn a living through work, rather than through receiving welfare.
After the Asian financial crisis, most East Asian states had to face a tightening welfare budget. Contracting out commodification, privatisation, and marketisation of social services have become common practices in a bid to tide over the difficult period. In Japan, the government also tried to marketise and residualise social housing which led to deteriorating social issues such as homelessness, lone-parent problem and inadequate housing for the elderly.
In India, Modi moved to eliminate state controls on diesel prices for the first time in over a decade late last year, while also increasing prices for natural gas, a move thought to offer fiscal savings over time that can be used for public investment and for other productive areas.
While a case can always be made about good subsidies and bad subsidies, petroleum subsidies not too long ago accounted for one-quarter of India’s Rs 2.6 trillion ($42.4 billion) subsidies bill. When Modi said he wanted to cut back on the costly subsidies, the government offered millions of Indians to ‘cushion’ the blow of those soaring prices, he, at a time of global fall of oil prices, could afford to do that with the softest pinch.
With an objective of shielding its consumers from international price volatility and providing energy access for its citizens, especially the poor, energy subsidies in India have a time-honoured role, though they place a heavy burden on government budgets, while often failing to reach their targeted beneficiaries. In contrast to fuel subsidies, electricity subsidies in India are disbursed by the state governments, at considerable cost to state budgets.
Subsidy dilutions are like suicide missions. They tend to attack entrenched interest groups, mobilise widespread resentment, fan partisanship amongst malcontents and can become grist to the mill of the canards of the opposition.Democratically elected leaders who do not keep an ear to public opinion often end up paying heavier electoral costs, as seen in the dismissal of the Left Front in West Bengal at the crest of an agitpropist movement in Singur and Nandigram. Besides, statism being popular with many segments of the population in developing nations such as Brazil, India, Indonesia and Thailand, they have rarely taken to an unqualified free-market script. Even in China,under a one-party dictatorship, state-owned enterprises constitute almost all of the 20 biggest companies by valuation. In a democracy, political sustainability trumps economic necessity every time.
According to a study by Chief Economic Advisor Arvind Subramanian in the Economic Survey released recently, the fertiliser subsidy and the water subsidy are the two of the worst performing subsidies. The Survey says that the fertiliser manufacturers derive the maximum benefit from the fertiliser subsidy since farmers have elastic demand, and the water subsidy goes to private taps, while 60 per cent of the poor get their water from public taps.
India embarked on a subsidy-raj, as is wont for a welfarist state since independence, amounting to 14 per cent of GDP almost a decade ago, and compromising on its expenditure on education, health, or infrastructure.
Public expenditureAccording to the UNESCO, India has the lowest public expenditure on higher education per student in the world. As per a recent report from the Organisation of Economic Co-operation and Development (OECD), India’s public social spending measured as a fraction of its GDP was not only far lower than the developed countries, but also lower than the ’emerging economies’ like China, Russia, Brazil and South Africa.
In India, where populism runs rife, subsidies – one of the most powerful policy tools – have been used for decades to achieve a range of economic, social and environmental objectives. As one of the most challenging responsibilities of a government is allocating financial resources to achieve public good, for the sake of probity and transparency, a government must never be suspected to serve a private, rather than a public interest.
Despite creating an effective social safety net, one of the largest food subsidy programmes in the world run by India has drawn flak not only for contributing largely to government budget deficits and causing economic inefficiency but also for poor targeting. Therefore, in this year’s annual budget, the focus on savings was more on cutting waste rather than on more radical free market efforts, though some policy advisers had long been lobbying for scaling back on oil, food and fertiliser subsidies to improve the country’s fiscal health.