Focus on relief, not reform

Cash for subsidy is a mere cosmetic exercise


Prasanna Mohanty | March 7, 2011

Politicians love to hand out doles to the poor. That keeps the poor happy and the vote bank intact. Therefore, there is little incentive to go for fundamental changes that obviate the need for it.

The UPA government is no different. In this year’s budget, finance minister Pranab Mukherjee promises a major policy shift in the subsidy regime. He has set up a task force under UIDAI chief Nandan Nilekani to work out the modalities of a regime in which subsidies meant for fertilizers, kerosene and LPG will be directly handed over to the BPL families.

He intends to introduce this cash subsidy regime from next fiscal. Whether food subsidy, which stands at more than Rs 60,000 crore a year at present, will be brought within its ambit is not clear but going by the philosophy of switching to cash subsidy outlined in this year’s Economic Survey that should be on the cards too.

What the government seems oblivious about is that subsidy is essentially a ‘relief’ measure. It is meant to help the poor to tide over their economic constraints. Until these constraints, which arise out of non-inclusive growth and absence of basic infrastructure, are removed it is fair to assume that the subsidy regime will continue.

For example, Mukherjee proposes cash for fertilizer subsidy. At present, subsidy in the name of farmers is given to the fertilizer companies. What happens if cash is directly given to the farmers? Firstly, the regulated regime of fertilizer prices goes. As we have witnessed after urea was deregulated and the nutrient-based subsidy (NBS) regime was introduced last year, fertilizer prices went up. There are complaints of hoarding and black-marketing because of an anticipation of further hikes in the prices. Without taking care of these issues cash subsidy will continue to be a drain on the exchequer.

Secondly, our land records are in a mesh. We have no authenticated data but anyone familiar with the agriculture sector will vouchsafe that most of the land is with the big farmers. We have land ceiling laws but these have not been implemented. Most farmers continue to be marginal ones and tenancy is universal and widespread. So, who will get the cash? Obviously the rich farmers who will crowd out the marginal ones. The government doesn’t propose a parallel land reform or putting in place a national databank of land. Selection error will, thus continue whether you have a UID card or not.

Just as is the case with fertilizer, supply side issues bedevil kerosene and LPG too. Without fixing these and by merely handing over money to the BPL families will only cause a rise in price and black-marketing.

But this is to be expected. Take the NREGA for example. It is aimed at providing employment to the needy and is confined to manual labour only. This means only earth work. So, every year out-of-work villagers build kuchcha roads, which gets washed away after the monsoon. Next year, again a kuchcha road is built, which again gets washed away. Pucca roads can’t be built because that involves machines and contractors. Thousands of crore of rupees spent on NREGA works have thus gone down the drain since the scheme started in 2006. Did you see Mukherjee doing anything about it?



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