Wednesday, June 25, 2014

Why subsidies need to be curtailed and targetted – a guest post

The increases in railway passenger fares and freight charges have come at an inopportune time. Though necessary to improve the precarious financial condition of Indian Railways, the raising of charges a few days before the Railway budget has caused a furore.

Political parties of all hues have taken to the streets and blocked trains to protest the fairly steep hike in charges. Already, the government seems to be back-tracking, and there is talk about implementing the proposed increase in phases instead of in one go.

In this month’s guest post, Nishit argues that all subsidies need to be curtailed, and better targetted at the financially weaker sections of society. Incidents of subsidised LPG for domestic consumption being diverted to commercial enterprises, expensive fuel-guzzling SUVs using subsidised diesel, MNREGA funds filling politicians’ pockets prove his case.

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The Rail subsidies are being whittled away. Read my last post:

http://money-manthan.blogspot.in/2014/06/bold-and-welcome-move-by-goverment.html

Let us go into subsidies and what they mean. Subsidies are basically grants from the Government that allows financially weaker sections of the population to live a decent life with dignity. That should be the only guiding principle of subsidies. Over a period of time, that meaning got lost and it became an entitlement raj. Everyone and his grandfather queued up for subsidy. Where does the subsidy money come from? It comes from the revenue collected by the government. So, ultimately funds meant for development go towards subsidies and we are left with poor infrastructure.

LPG subsidy for 12 cylinders in a year means that a family of six consumes 1 cylinder every month and government bears a loss of Rs 5oo per cylinder. That translates to Rs 6000 ‘free lunch’ per year. If there are six members in a family at least two will be earning. If the entitlement of subsidised cylinders was reduced to 6 per year, there will be a straight 50% subsidy cut. That means a saving of Rs 3000 per year per LPG connection.

Same goes for petrol and diesel. The argument is: diesel is subsidised otherwise inflation will go up. Once market rates become effective it cannot go up infinitely. Over Rs 1 lakh Crores saved on subsidies can be used to build better roads, thus giving productivity gains. Classic example is truck drivers using expressways across the country. Earlier they could make 4 trips, now they make say 7 trips thanks to new trucks and better roads. The extra money spent is earned back multifold.

Now, take the MNREGA scheme. People are paid for a minimum of 100 days of labour. There is no accountability for what kind of work is done and who does them. If people were trained to work as road labourers, paid more, one could get the roads built and the people gain a skill. They would be able to get a job in the private sector building roads.

There is a saying: teach a man to fish and you feed him for life, give him fish to eat and you feed him for a day.

Rail subsidies operate in the same way. If the railway earns a rupee it spends almost 90 paisa on salaries and just to maintain status quo. Where is the money to invest in Infrastructure?

Summing up, subsidies are not bad in principle. They are essential to protect the financially weaker sections of society. The target audience needs to be clearly identified. Otherwise, financially well-off people enjoy subsidies not meant for them.

Tailpiece: Looking at the subsidy ‘gift’, I switched from a Petrol car to a Diesel car last year. My running cost per Kilometer has dropped from Rs 8 to Rs 4. I rest my case.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

1 comment:

Karthikraja K said...

Please do not assume all are earning decent money. People are struggling for even one time food. Subsidy is necessary for those who deserved. If they are able to segregate based on income level, that would be good idea. Village peoples are having tough times.