There was a time in India when socialistic policies were found very attractive. However today these policies are not looked upon favourably. The main reason is that it does not make sound economics. As is well known there is no free lunch in the world. Someone somewhere is footing the bill for every free lunch enjoyed by another someone somewhere. Over the years in India a class of politicians have been advocating strong implementation of policies which consists of giving  essential goods and services to a large section of our population at heavily subsidised prices. In fact there is a subsidy competition among different parties. Every party tries to out do the other and appear as the messiah of the poor masses.

In itself such provision of subsidised goods and services to a deserving few is a laudatory gesture. There are persons who are unfortunately at the margins of poverty and deserve all sympathy and support by a caring society and government. Centuries of cast based oppression has emasculated a significant section of our lower economic strata. They need more time to come out of it and need to be guided and supported. Direction of subsidies to this class will not be resented by anyone nor will it affect the economy adversely.

However it is when subsidies are used as a tool to garner electoral support that it takes a different meaning altogether. It is then nothing short of a legal 'bribing' of the voters at state expense. The political class of all colours has by now mastered this art into a fine arrangement under the guise of helping the poor of this country. In the process good economics has been given a go by.

The Central government has planned for a subsidy if Rs 2,20,971 crores in the 2013-14 budget towards food, fertiliser and fuel items. This has resulted in the fiscal deficit touching a figure of 5.2%.

The food subsidy is Rs 90,000 crore, fuel subsidy Rs 65,000 crore and it is Rs 65,971 crore for fertilisers. The falling rupee increases the subsidy costs especially on fuel and fertilisers. Now the government has gone ahead and passed the food security Bill which will increase the subsidy burden further. The government is trying hard to contain the subsidies to under 2% of the GDP.

Why are subsidies given? 

They are given so that the population may be protected from paying the actual costs. These concessions enable people to buy subsidised items at a lower than actual prices. The difference is paid by the government. These costs are considered as non-plan expenditure and they keep rising. One of the primary reason for giving subsidies is because of the relatively low purchasing power of the targeted section of population and the need to keep the prices artificially low. 

They are also given in select cases to promote the use of new items like computers when they were first introduced in the 1980's or fertilisers when they were introduced in the early 1960's so that their use expands fast for the broader good of the society.

Why subsidies affect adversely? 

Subsidies are an expenditure item. They are given out from revenues collected on the income side. Experience shows that subsidies keep rising due to rupee devaluation and rising demand of subsidised products. This extra burden has to be met by cutting expenditure somewhere or by increased borrowings incurring interest costs or the deficit has to be allowed to widen. All these negatively affect the economy and retard growth. 

The large volume of subsidies is also one of the major contributory reasons for the prevailing high inflation in almost all sectors of the economy especially food items. 

The misuse due to overuse of subsidised items is well known. The gradual reduction in diesel subsidy since nearly 10 months has resulted in its usage falling for the first time. Over consumption is common as is the case with supply of free electricity in many states to its farmers. They run pumps without fear of electricity bills and this has resulted in considerable lowering of underground  water table in these states. There is a saying in Hindi " mile muft dil-e-beraham" meaning when items are freely available the heart is ruthless. Subsidies lead to over and skewed consumption. 

Another associated problem is the fact that subsidies are enjoyed by the rich considerably even when they can afford to pay actual prices. Like in case of SUV's costing lakhs and running on heavily subsidised diesel. Also adulteration is another problem like mixing of subsidised kerosene with other costly solvents. Leakages from the distribution chain is a very profitable business as cheap products are sold at high prices in open markets.

Corruption is rampant among officials associated with distribution of subsidised products and issuing of relevant documents to eligible persons. It leads to humiliation of the target population.

Are subsidies a compensation for bad governance?

The increasing burden of subsidy over the years has resulted in the government finding an easy way to offset the demand for providing answers as to why after more than sixty five years after independence also there are large sections of population whose purchasing power is still very low. It means that uniform development has not taken place. Skewed development has resulted in neglect of the economically downtrodden and subsidy is a way out to keep them from revolting. 

Real and actual prices are not allowed to prevail in many items supposedly to keep their prices low and this has created an artificial economy controlled by vested interests cutting through all classes. The artificial economy has to be maintained through higher subsidies, higher deficits, higher borrowings, higher interest burdens, higher taxes and duties and higher levels of corruption. The cumulative failure of governments since independence to create an economic system where there would be no need for subsidies is sought to be covered by providing subsidies and thus trying to control anger and outbursts. In itself it is a good gesture but it dilutes the desire to develop a self sustaining economy capable of taking care of all its citizens.

Politicians and especially the party in power are now increasingly using subsidies as a tool to attract specific sections to vote for them in the elections. That the electorate even of the lowest economic strata has become smart was proved by Tamils who took all the free TV's distributed by DMK government and coolly voted for Amma. But Amma has now started heavily subsidised idly dosa counters all over Tamilnadu at state expense. Recently the Congress government in Rajasthan started free treatment and medicines to all patients thinking voters will vote them back to power,who went and voted BJP to power in record numbers.

Does it mean that the poorest voter also does not want doles but wants good governance which will give him an equal opportunity to earn his wages?

Who is affected by subsidies?

The government is robbing Peter to pay Paul. In order to meet the subsidy expenditure of more than Rs 5 lakh crores per year the taxes and duties are kept high. Thus those who avail these products or services have to bear higher prices due to higher taxes etc so that subsidies are possible. Subsidies are also given for political gains and this is misuse of collected funds.

By having to resort to deficit financing to enable non-plan expenditure of subsidies, the government ends up in high borrowings, driving interest rates up and this fuels inflation which results in high overall prices. Who benefits? Thus heavy subsidies result in everyone getting affected instead of helping particular target groups. Subsidies raise all price levels to a higher level as they are not self sustaining but have to be fed from other sources. 

The only persons not affected are the rich class, the involved middlemen and the patronising politicians in power. Rest all of us are losers.

Can subsidies be removed?

YES. They can be removed. The fear of their removal leading to troubles is far fetched. The removal of subsidies on petrol has not resulted in any chaos. The gradual reduction of diesel subsidies has not abnormally raised transportation costs. The subsidised municipal schools are going begging for students as even poor parents are willing to shell out high fees for good education to their children. If fertiliser subsidies are removed the food grain yields are not going to go down as farmers are using combination of techniques to grow crops which give higher yields which will help absorb increased cost of the only subsidised urea fertiliser. The removal of subsidies from LPG cylinders will raise their cost but will lead to discipline in its use.

If all subsidies are removed the government does not need to collect more than Rs 5 lakh crores annually. A honest govt will reduce taxes and duties to match this reduction in annual costs. This will put money back into the pockets of citizens. Not only tax payers but everyone will benefit from cheaper goods and services.

Why subsidies are not removed?

Because the politicians are living in the past. Subsidies were needed 30-40 years ago when the purchasing power of Indians was indeed low but today that is not the case. Also it gives the power to patronise  and favour on a quid pro quid basis between the politician and the subsidy receiving groups. The governments today are caught in a trap. If they remove subsidies they can be voted out of power. Which politician will do this?

Leakages in subsidies due to corruption enriches a significant number of persons with influence and ability to provide funds and garner votes to politicians. The subsidised groups are now a powerful class with vested interest like farmer lobbies who will not allow their withdrawal. Other sections are also asking for subsidies.

The population is basically tolerant and does not revolt against such high subsidy burden as all groups are getting some subsidy. The fact that funds could be diverted to economic projects which would generate jobs etc is overlooked for a few rupees of subsidy.

It is going to be difficult and will require a very strong non compromising leader who is not on the horizon.

Is there a way out?

It requires political will and creation of awareness that continued subsidies are not in the interest of development. In fact they retard it. Some subsidies for very vulnerable sections of our society like tribals, poor dalits, and marginalised sections can be and should be there to  help them economically so that they also  lead a decent life in a growing economy. But flat subsidies to even persons who can pay is economically not sound economics.

In fact subsidies in a way are a manner of enticing the voters at state expense to vote for the party in power. Still more subsidy will have to be given next time.

Some subsidies on fuel can be done away immediately and others can be withdrawn in a fixed time frame of say two years. But is there a leader who has the guts to do it?