Fuelling Subsidy Reforms: Appetite For a Focussed Approach to Food Subsidies

Raunak_Shah

Author: Raunak Shah, PGP-1 Student. IIM-A

2015 marked the NDA’s first full-blown budget that was expected to define its vaunted reform agenda for the nation. However, the budget was met with mixed reactions.[1] While the budget did present key reforms meant to revitalise the economy, it did so in the form of several incremental reforms rather than a few big-ticket measures.

Unfortunately, legislative proceedings in 2015 were marred by Parliamentary deadlocks that stymied major reforms. The loss of the Bihar elections further eroded the NDA’s political capital. Several reforms therefore, in the last year, have been aimed at increasing functional efficiency and accessibility of existing government machinery, through delegated legislation and executive orders.

Perhaps the most significant set of government policies that can benefit from process-oriented changes is India’s subsidy programme. Subsidies provided by the Government can be broadly classified into fuel, food and fertilisers. This article compares the NDA’s performance and budgetary allocation trends in delivering fuel vis-à-vis food subsidies.   

Fuelling a systemic overhaul

The NDA government has been fairly pro-active in reducing the Centre’s fuel subsidy bill, plugging leakages and streamlining benefits to those most in need of them. At Rs. 30,000 crore, the targeted fuel subsidy for 2015-16 was 50.22% lower than the Rs. 60,270 crore fuel subsidy allocation for 2014-15.[2] No doubt that the fall in crude prices has a major part in this reduction. However, policy measures certainly have a role to play as well.

After deregulating petroleum and diesel prices in its first year, the NDA introduced Direct Benefit Transfer (DBT) for LPG in the form of the PaHAL Scheme in January 2015. In just 7 months, 139 million users had joined the Scheme and in August 2015, the Scheme entered record books as the largest cash transfer scheme in the world.[3] The Government claims that the switch to DBT alone will save the exchequer Rs. 15,000 crore annually by plugging leakages. Riding on the purported success of the PaHAL Scheme, on 1st January, 2016, the Centre announced DBT for kerosene with effect from 1st April, 2016.[4]

The switch to DBT and a concomitant reduction in the fuel subsidy budget by the NDA marked one of the few occasions where a policy change was implemented with such alacrity. It is expected that the Centre’s fuel subsidy target in the FY2017 budget will be 33% lower at Rs. 20,000 crore as a direct consequence of these measures.[5]

Subsidising a larger pie

At Rs. 1,24,000 crore, food subsidies constituted a lion’s share of the Rs. 2,27,000 crore subsidy allocated under the 2015-16 budget. Unlike fuel subsidies however, India’s food subsidy allocation has been increasing significantly every year, up 298% over the last decade.[6] The public distribution system (PDS) has been a chronic source of distress even though every successive government has tried to fix it. The previous UPA government increased the burden on an inefficient PDS by enacting the ambitious National Food Security Act (NFSA) in 2013. The result: a larger food subsidy bill with even greater leakages. Out of the Rs. 1,24,000 crore allocated for food subsidies in FY2016, Rs. 65,000 crore was apportioned for subsidies under the NFSA.

The NDA Government’s approach to food subsidy reforms does not appear to be as coherent as its policy with fuel subsidies.

End-to-end digitisation of the PDS was commenced by the UPA in 2012. A press release by the NDA Government in December 2015 claims that it completed the mammoth exercise of digitising ration cards across all states and digitisation of the PDS supply chain across 8 states. [7] The Government also claims that it has cancelled 6.14 million bogus ration cards in the past two years as a part of the digitisation, purportedly saving the exchequer Rs.4,200 crore.[8]

The same press release also indicates the Government’s intention to move to a cash transfer system for food subsidies. A cash transfer mechanism would obviate the need for fair price shops and hence the need of a complete digitised PDS supply chain. If cash transfer is the way forward, then why also spend on the digitisation of supply chain?

The aforementioned incoherence apart, media reports indicate that in the upcoming budget, the Government is likely to allocate a whopping Rs. 1,30,000 crore to just food subsidies linked to the NFSA, which translates into double the allocation for FY2016.[9]

By proposing such an enormous increase in budgetary allocation without completing digitisation of the PDS supply chain or establishing a cash transfer mechanism, the NDA Government will commit the same mistake that the UPA did with the enactment of NFSA before fixing leakages. Moreover, any further increase on food subsidies would jeopardise the Finance Minister’s fiscal deficit target and inhibit greater public investment in infrastructure. The time is ripe for the Government to take an unequivocal stance in its commitment to augment India’s subsidy mileage, and fuel cannot be the only driver.

References

[1] Pratap Bhanu Mehta, Two Experiments, Indian Express, 4 March 2015, available at: http://indianexpress.com/article/opinion/columns/two-experiments/
[2] Utpal Bhaskar, Budget 2015: Petroleum subsidy slashed by half, Live Mint, 1 March 2015, available at:
http://www.livemint.com/Politics/OQaYOOKMJcCNNliEV6SWTJ/India-to-spend-37-billion-on-major-subsidies-in-201516.html
[3] Somit Sen, LPG subsidy scheme is a Guinness record holder, The Times of India, 19 August 2015, available at: http://timesofindia.indiatimes.com/business/india-business/LPG-subsidy-scheme-is-a-Guinness-record-holder/articleshow/48538003.cms
[4] DBT for kerosene in 26 districts from April 1, Business Standard, 2 January 2016, available at: http://www.business-standard.com/article/current-affairs/dbt-for-kerosene-in-26-districts-from-april-1-116010100795_1.html
[5] Twesh Mishra, Budget 2016 may halve fuel subsidy to Rs 20,000 cr, Bloomberg TV, 8 January 2016, available at: http://www.btvin.com/article/read/news/3999/exclusive–budget-2016-may-halve-fuel-subsidy-to-rs-20-000-cr
[6] Sumit Chaturvedi, Lax digitisation of food subsidies slows reforms, Business Standard, 29 January 2016, available at: http://www.business-standard.com/article/economy-policy/lax-digitisation-of-food-subsidies-slows-reforms-116012900224_1.html
[7] Press Information Bureau, Ministry of Consumer Affairs, Food & Public Distribution, Year End Review-2015, 22 December 2015, available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=133703
[8] Sayantan Bera, Digitization of PDS helped plug Rs4,200 crore in leakages: centre, Live Mint, 29 December 2015, available at: http://www.livemint.com/Politics/urdNj5GwTlNxbFbJ9mwIWO/Digitization-of-PDS-helped-plug-Rs4200-crore-in-leakages-c.html
[9] Vasudha Venugopal, Narendra Modi government gearing up to announce Food Security Act with Rs 130,000 crore outlay, The Economic Times, 3 February 2016, available at: http://articles.economictimes.indiatimes.com/2016-02-03/news/70313785_1_national-food-security-act-prime-minister-narendra-modi-food-subsidy
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One thought on “Fuelling Subsidy Reforms: Appetite For a Focussed Approach to Food Subsidies

  1. Nice read! Thanks Raunak.

    Although, I’d like to point out that the first NDA budget lacket big-ticket reforms and these reforms were only incremental, since this was the government’s first budget, and they didn’t want to do anything outright abrupt.

    KR,
    Sachin B
    Engineering+MBA Team

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