Shedding the load

The government proposes reductions in subsidies on power, irrigation and higher education

 
Last Updated: Saturday 04 July 2015


the Union government recently tabled a discussion paper for reducing subsidies. The proposals seek to make considerable savings by making substantial cuts in the cost of goods such as electricity and higher education. The white paper based on a detailed study by the National Institute of Public Finance Policy says that 75 per cent of subsidies were unmerited. In a bid to make the proposals acceptable, the paper made a distinction between 'merit' and 'non-merit' goods and proposed cuts in subsidies for the latter category.

Merit goods consist of services which benefit society as a whole such as provision of elementary education, primary health care facilities, flood control and other such items. 'Non-merit' goods include irrigation for farmers, electricity and higher education. Around three-fourth of the country's total subsidy bill relates to non-merit goods, which do not deserve to be subsidised.Collection of user-tariffs from consumers constitute only a tenth of the cost of such goods. The paper estimates that if subsidies on these goods are reduced by half, it would help save around Rs 60,000 crore in a year.

However, increasing user-tariffs by cutting subsidies on these goods will prove to be difficult. In case of power alone, 15 state governments spent a total of Rs 7,007 crore in 1994-95 but their revenues from power tariffs amount to a mere Rs 1,050 crore or 15 per cent. In case of subsidised irrigation facilities in these states, only four per cent of the total cost was recovered. The subsidy policies are also highly contradictory. On one hand, higher education is heavily subsidised, while on the other, primary education in rural areas is in shambles because of lack of funds.

The white paper has been welcomed by the industry but some experts feel it would make a lot more economic sense if the finance minister goes a step further by making consumers pay green taxes for the services rendered by natural resources. Green taxes should be introduced to cover not only the cost of consumption but also the cost of polluting these resources. For instance, by imposing tariffs on timber, the government will be able to invest in the regeneration of forests and also help local people depending on them to earn a better livelihood.

Shreekant Gupta, an economist from the Delhi School of Economics, is of the opinion that user-tariffs on natural resources was long overdue in India. He feels that under the blanket subsidy policy, affluent users were getting away after plundering and polluting these resources. "The government should come up with user-tariffs for services like sewage and sanitation and treatment of water and solid wastes," he says. However, he feels that economically weaker sections should be given an "entitlement" for these services. All vehicle owners should bear the cost of polluting the air and using the roads in cities like Delhi, by paying a "congestion tax" or "pollution tax", Gupta says.

Subscribe to Weekly Newsletter :

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.