Time to overhaul the subsidy system!

Thu, 22 May Pre-Open

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Subsidies have often been targeted for a lot that has gone wrong with the Indian economy. Fuel subsidies, fertilizer subsidies and food subsidies have been the prime reason behind high fiscal deficit. Not just the Government's fiscal health, the subsidies have been a major reason for underperformance of the associated sectors, the leading example of which is oil and gas sector. But the key question here is: Can India really survive without subsidies?

For all the fiscal mess that is blamed on subsidies, there is one thing that can not be denied. India with a significant share of poor people can not remove subsidies overnight. That said, there is a lot of scope to rationalize subsidies so that they go to intended beneficiaries only.

With a new Government taking charge at the centre, it will be really interesting to watch its approach towards subsidies. It is quite clear that the existing subsidy system can not go on and a huge share needs to be redirected towards productive investments.

As suggested in an article in The Hindu Business Line, one way to tackle the issue is to differentiate good subsidies from the bad one. The latter category includes subsidies that are recurrent and do more damage than good. For e.g. fertilizer subsidies have led to over use of urea thus leading to soil imbalance. Even diesel subsidies until some time back were benefitting rich people, giving them cheap fuel to drive expensive vehicles. A phased diesel deregulation has plugged loopholes in the system to some extent. However, we have a long way to go to make subsidy system more efficient and effective.

While subsidies can not be totally eliminated considering the economic disparity in the country, the Government should consider a phased decline in the non productive subsidies. Another way to improve things is to ensure streamlined process and proper delivery system so that subsidies go only to the poor and needy people. One way of doing so could be cash transfers to the low income groups.

At the same time, productive subsidies like that on healthcare and education, sanitation, provision of clean drinking water etc should be continued.

Through its decisive mandate, the public has made it quite clear that the public wants efficient Governance and not subsidies. Hope the new Government will be able to take care of the loop holes in the existing subsidy system and bring back Indian economy to the path of stable recovery.