A CASE FOR PHASING OUT THE SUBSIDY
ELEMENT: PETROLEUM PRODUCTS, FOOD
AND FERTILISERS: A STUDY FOR THE
TWELFTH FINANCE COMMISSION
BY: Prof. K.S. RAMACHANDRAN
Economist & Author
Research & Editorial support: Ms. Y. Vijayasri
Secretarial Assistance: Mr. K.M. Sinha
1
SL.
NO.
CHAPTERS
1.
Chapter I
2.
CONTENTS
PAGE No.
Terms of Reference
3
Chapter II A
Study Outline
4
Chapter II B
A Critique of ERC Report
11
Chapter II C
The Agenda for end March, 2010
16
3.
Chapter III
About the Author
19
4.
Chapter IV
Subsidy Phase-out
20
5.
Chapter V
The Petroleum Sector
23
6.
Chapter VI
Food Subsidy
31
7.
Chapter VII
Fertiliser Subsidy
50
8.
Chapter VIII
Safety net concepts as evolved by the World Bank
64
9.
Chapter IX
Subsidies – The International Experience
66
10.
Chapter X
From Reports of Earlier Finance Commissions
84
11.
Chapter XI
From Earlier Studies on Central Subsidies
85
12.
Chapter XII
Winding up
103
2
TERMS OF REFERENCE OF STUDY ON EXPLICIT
SUBSIDIES ON PETROLEUM PRODUCTS, FOOD AND
FERTILISERS
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Trends in explicit subsidies given by Central Government. Rationale
for subsidies with an analysis of the pros and cons of identification of
particular goods for grant of subsidies. International practice in regard
to subsidies.
Recommendations of the Expenditure Reforms Commission (ERC) on
each of the explicit subsidies and the extent of their implementation.
Impact of the modification made by the Government while accepting
the ERC’s recommendations along with a quantification of the same in
terms of the financial implications thereof.
Analysis of the methodology and criteria for determination of the
quantum of each subsidy. Targeting of subsidies and achievement in
this regard – evaluation studies, if any, undertaken in this regard,
conclusions thereof and the action thereon.
Fertiliser subsidy – advantages of the new pricing policy and its impact
on target groups. Extent to which the subsidy has been able to
achieve the stated objectives. Whether the new policy has adequate
incentives for efficiency. Reforms required in fertiliser subsidy to
ensure better targeting and phasing out.
Food subsidy – Analysis of the present pattern of the subsidy and
whether it meets the objectives as far as target groups are concerned.
Feasibility of phasing out of the food subsidy or increasing efficiency
through greater decentralization. Reform required in the manner of
determination of Minimum Support Price.
Road map for
decentralization and quantification of its impact.
Subsidy on petroleum products, its rationale and road map for its
phasing out.
Approach followed by earlier Commissions with regard to explicit
subsidies. Reasons for the spurt in the level of subsidies in recent
years, notwithstanding the views/recommendations expressed and
assumptions made by the previous Finance Commissions on the
subject. Road map for desirable policy initiatives in regard to subsidy
reform. Suggested approach for the Twelfth Finance Commission in
regard to explicit subsidies along with the suggestions on making
projections of expenditure on account of subsidies during the award
period of the Commission.
(Rakesh Sharma)
Deputy Director (Sectt-II)
15th December, 2003
3
(II A) STUDY OUTLINE
A)
(i)
CORE ISSUES
FOOD SUBSIDY
a) Narrowing the focus of PDS to only the poorest of the poor – using the
Antyodaya Anna Yojana as the basis.
Marginalising the public procurement system over a five year period.
Introducing a special scheme to take care of small and marginal farmers.
b) Marginalising the FCI.
c) Phasing out the system of statutory price fixation.
d) Accepting the demand made by the developed countries at the forum of
WTO for transparency over procurement price as well as operations, and
voluntarily giving up the benefit of exclusion of PDS – for the purpose of
farm subsidy reforms – available under WTO-related provisions on
agriculture.
e) The foodgrains stockpile must be reduced to the absolute minimum level
necessary to take care of calamities, natural or man-made. Generally, the
Government must adopt a policy of buying foodgrains from the open
market or importing on an ad hoc basis to take care of emergency
requirements.
(ii)
FERTILISER SUBSIDY
I a)
In regard to the producer component of it, the subsidy must get
transformed into an efficiency booster and stop being used to
reward inefficiency and to punish efficiency.
4
b)
The unit-wise retention scheme for fertiliser pricing has given way
to the group concession scheme, but the principle remains the
same – rewarding de-merit and penalising merit.
c)
This has to change and the plants that cannot stand the real test of
competition must be offered for sale to pave the way for their
commercial rehabilitation or liquidation.
d)
Rising global fertiliser prices must stop being offered as a
justification for pampering sick units like NFL.
II
Coming to the consumer component, a limited subsidy must be
given but only to poor and small farmers.
(iii) OIL SUBSIDY
There should be no subsidy on LPG, effective March end, 2005, while
subsidised kerosene must continue to be available only to the poorest of
the poor – the population segment covered by the Antyodaya Anna
Scheme. The principle of import parity prices must apply to all petroleum
products. In regard to non-domestic category of LPG, there is a perfectly
genuine case for subsidising the supply earmarked for poor hawkers and
small shopkeepers.
The latter should stop being treated on par with
proven commercial users of LPG like hotels and restaurants.
(iv) POVERTY CRITERION
This must be strictly in terms of nutritional standards, not income. The
time has come to differentiate between population that is deemed to be
below the poverty line on the basis of income levels and those close to
destitution.
Subsidies must be targeted at the latter.
In favouring
nutritional standards, we must refuse to proceed on the basis that the
poor, along with the better – off sections of the community are voluntarily
5
opting for low nutrition food articles.
Indeed, if such is the consumer
preference among people near the level of destitution, it is all the more
reason why efforts towards poverty alleviation should focus sharply on
propagating consumption of cheap goods but with the required level of
calories.
Table I
Estimate of incidence of poverty in India
Year
Poverty ratio (%)
Number of poor (million)
Rural
Urban
Combined Rural
Urban
Combined
1973-74
56.4
49.0
54.9
261.3
60.0
321.3
1977-78
53.1
45.2
51.3
264.3
64.6
328.9
1983
45.7
40.8
44.5
252.0
70.9
322.9
1987-88
39.1
38.2
38.9
231.9
75.2
307.1
1993-94
37.3
32.4
36.0
244.0
76.3
320.3
1999-00
27.1
23.6
26.1
193.2
67.1
260.3
2007*
21.1
15.1
19.3
170.5
49.6
220.1
* Poverty projection for 2007
Source: Tenth Five Year Plan, Vol. 1, Planning Commission.
B)
EXPLAINING THE FOCUS
With the Centre having formally committed itself, under the Fiscal Responsibility
and Budget Management (FRBM) Act, to wiping out the revenue deficit by end
March, 2008, a time bound plan of action has to be thought out to drastically
contain the open (and acknowledged) subsidies – as well those that are hidden
/ implicit – of the Centre and simultaneously those of various state governments.
A study sponsored by the 12th Finance Commission recommending an end to
universal subsidies on food, fertilisers and petroleum products and its
replacement by selective relief targeted exclusively to the economically weakest
sections of the community should hasten fulfillment of this critical aspect of
economic reform. The Commission is entirely justified in undertaking this task
given the harsh reality of 85 to 90 percent of its constitutional non-plan revenue
6
transfers to states going towards funding the wage bill of the respective
governments, and thereby leaving virtually no resources for developmental
activities. By its sharp thrust on an effective reform of explicit subsidies, the
Commission places itself in a position from where it can put a lot of pressure on
policymakers as well as administrators at the Central as much as the state level
to address clinically the removal of the massive subsidies that are hidden and go
unacknowledged and unreported. The Commission would, thus, contribute to
bringing to the limelight a long neglected part of the reform effort, the
unfinished agenda.
C)
THE REAL PROBLEM: AN APPRAISAL
While a major component of non-plan expenditure of the Central Government –
defence – is outside the reform agenda and is more or less beyond the control of
the administration, the other two, interest payments and subsidies, not only are
controllable but also demand strong counter-action. In recent years, successive
Finance Commissions have sought to weaken the internal debt trap –
representing a situation, that emerged, according to RBI, in fiscal year 1991-92,
where fresh market borrowings were sufficient merely to take care of the interest
liabilities, unlike in the past when new loans had been raised in a somewhat
mechanical fashion to pay off the old debts – by easing the indebtedness of state
governments.
In recent months, a plan involving use of additional market
borrowing and small savings by state governments has emerged to facilitate
retirement of high interest bearing debts and recourse to cheaper, new loans –
benefiting thereby from the present low interest regime – and this should reduce
the debt service burden for the present. Yet, this is no lasting solution to the
fact that Central and state governments cannot any longer treat market
borrowing as a net resource. This must receive serious attention in the light of
the compelling demands of the FRBM Act.
7
Obviously, an efficient management of the economy and the fiscal regime duly
reflected in (as well as by) a sharp reduction in open as well as hidden subsidies
can (and should) soften the strains of debt servicing by facilitating normal (as
against a contrived mechanism that is in force now) retirement of debts and by
postponing new loans and also scaling these down. However, this is not the goal
of the study undertaken. Here, I only seek to work out a feasible remedy to the
mounting subsidies. The impact this will have is not going to be ignored, but this
will get only passing notice.
In regard to food, I propose to argue against an indefinite retention of the
system of public procurement of foodgrains on the basis of a perpetually rising
price structure as much as the continuation of an universal system of public
distribution sustained by a truly massive stockpile. While the budget provision
for this purpose (Rs.21,200 Crore during 2002-03 and Rs.27,800 Crore in 200304) is itself cause for considerable worry, what is even more disturbing is that
procurement prices are raised arbitrarily over and above what are recommended
by the requisite authority.
More importantly, do we need a PDS targeted
towards all? This is a question that concerns not only the Central and state
governments but also constitutional bodies like the Finance Commission
entrusted with the delicate task of outlining the distribution of the nation’s
resources between the Centre and states and among the various states
themselves.
It is in the overall interest of sound national finances that a
mechanism should come into being which provides easy and economical access
to food to only the most needy among the nation’s population. The Antyodaya
Anna Yojana should be strengthened to provide such access. Simultaneously,
the system of public procurement and statutory price fixation must be phased
out and a special scheme formulated for small and marginal farmers.
On fertiliser, a subsidy amounting to around Rs.4,100 per tonne of urea sold to
farmers is borne by the Government which added up to a total Rs.7004 crore for
8
2002-03 (B.E.). But, this is not all. The total subsidy was Rs.11,009 crore in
2002-03 (R.E.) and the budget estimate for 2003-04 has been Rs.12,720 crore.
There are two aspects of the fertiliser subsidy: inefficient producers are rewarded
even as indiscriminate or overuse of fertilisers is encouraged. Despite well over
a decade of reform, efforts to introduce an element of discrimination in the
distribution of subsidies have not made any significant headway. Here, the goal
for the current Finance Commission would be to introduce a pricing mechanism
that would help promote efficiency in fertiliser production and rid the industry of
weak performers.
The Commission cannot, obviously, accept an approach to
disinvestments that shows undue haste – for the shortsighted fiscal reason of
easing the strains on Central revenue – in respect of excellent players in the oil
segment like BPCL and HPCL (held up by the Supreme Court though for entirely
different reasons). It cannot also endorse the reluctance on disinvestments of
poorly functioning fertiliser plants like NFL. The Government has replaced the
unit-wise retention price scheme with the group concession scheme but this is
only a compromise of sorts. That expediency is still the guiding factor emerges
easily from the fact that the high price of fertiliser in the global market is being
opportunistically used by the Government to paper over the operational
weaknesses of domestic plants. The Commission must ask for a pricing policy
that rewards efficient producers and expedites the exit of those consistently in
the red. As regards price incentives to consumers, these must be limited to the
small and marginal farmers only.
Coming to petroleum products, with the Central subsidy projected at Rs.8,116
crore in 2003-04 (reduce to Rs. 6,300 crore in the revised estimate by passing on
the burden to the petroleum companies), the interim budget for 2004-05
mooting a further reduction to Rs. 3,500 crore, again with the oil PSUs picking up
the tabs, and the Minister for Petroleum having publicly declared that the subsidy
in respect of cooking gas and kerosene would be retained till February 2007, a
case has to be strongly made for doing away with the subsidy on cooking gas
9
altogether while keeping the subsidy on kerosene only in respect of the
economically most vulnerable sections of the community. Policy-wise, we have
accepted parity between international and domestic prices. This must be fully in
force, subject to the essential softening needed for the economically weakest
members of the community.
The Commission must press for a poverty criterion that is free from undue
tinkering.
Since the income norm always threatens to become a populist
instrument – with a former minister of the Delhi Government, demanding on the
eve of the elections to the legislature, a hike for the purpose of PDS coverage –
the Commission must stick to the nutritional norm as prescribed by the
Lakdawala Committee constituted by the Planning Commission, with due
allowance being made for the escalation in the cost of providing essential levels
of nutrition.
Every expert panel on subsidies has proceeded on the basis that subsidised
access to fertilisers indiscriminately to all farmers, regardless of their economic
status, was unavoidable in the interests of national self-sufficiency in foodgrains.
This study contests this and argues for growers of foodgrains other than those
in the small and marginal category absorbing the market cost of fertilisers along
with all other farm costs calculated on the basis of market-determined prices.
10
(II B) A CRITIQUE OF ERC REPORT
The recommendations of the Expenditure Reforms Commission on food and
fertiliser subsidies and the Government’s follow-up action.
1. WHAT THE ERC WANTED
a)
Food Subsidy
While the Expenditure Reforms Commission (ERC) had expressed strong views
on food and fertiliser subsidies and advocated drastic changes in the
Governments’ approach, the official response has been one of neglect – even
repudiation – in respect of various matters bearing on food subsidy and tokenism
on issues of fertiliser pricing.
The ERC wanted a food security buffer stock of six million tonnes of rice and
flour million tonnes of wheat only (as against the present stockpile of 30 million
tonnes of rice and 40 million tonnes of wheat). The Commission’s assessment of
the average stock needed for managing the PDS was only seven million tonnes
annually.
The ERC had put the total average stock necessary at 24 million
tonnes. The fact that the total stockpile of foodgrains (rice and wheat) presently
is 70 million tonnes is nothing but a repudiation of the Commission’s wisdom.
The Commission’s demand for a freeze of the Minimum Support Price (MSP) for
wheat and paddy was also rejected. The Commission had been critical of excess
stocks and, even more so, of what it called the “very generous” MSP-based
procurement policy. It pointed out that the elimination of buffer stocks would
itself lead to a saving of Rs. 1,300 crore (at 2000-01 MSP obviously) annually by
way of carrying costs.
This saving will be more at 2004-05 MSP. The Commission was concerned about
leakages in the PDS and demanded a concerted effort to target the subsidies to
the poorest of the poor. This concern has also been ignored. In a bitter attack
11
on the system of support prices, this august body noted that the minimum
support price was, in fact, becoming the maximum support price and that the
FCI had become the buyer of the first resort instead of being the buyer of the
last resort as it should be. It advocated moderation of the annual increase in
price as a step towards bringing in state governments and the private sector
back into the picture. The Commission wanted the Government to announce in
advance that in the event of a drop in foodgrains production in any year it would
resort to imports to meet the requirements.
The Expenditure Commission duly acknowledged that the cost of holding stocks
in excess of food security and PDS requirements could appropriately be called
the producers subsidy as it was the direct off-shoot of price support based
procurement operations.
It wanted “the cost of holding these stocks to be
considered a subsidy to the producers and reflected as such in the budget”. This
has been overlooked by the Government. The Commission, no doubt, did not
seek to narrow down the ambit of PDS to a critical sub-sector of the poorest
strata of population but its calculations on the average stock necessary signalled
a narrowed thrust of the PDS. The Government did not heed this signal also.
The Commission asked for changes in the calculation of the economic costs.
This also has been ignored.
b)
Fertiliser Subsidy
Coming to fertiliser subsidy, the Commission recommended the dismantling of
the control system in a phased manner, leading at the commencement of the
fourth stage, (1/4/2004) to a decontrolled fertiliser industry, which can compete
with import, albeit with a small level of protection and a feedstock cost
differential compensation to naphtha / LNG based units to ensure selfsufficiency. The transition, however, was to be gradual. The transition was to
begin with the discontinuation of the RPS with effect from February 1, 2001 and
introduction of a group wise concession scheme. The number of groups was to
12
be reduced from five to two by April 1, 2006. At that stage all units except those
based on naphtha / LNG were expected to be viable at the price of about Rs.
7,000 per tonne of urea.
For naphtha / LNG-based units, a Feedstock
Differential Cost Reimbursement (FDCR) of Rs. 1,900 per tonne of urea was to
be given.
The Government responded to this recommendation by deciding that by the end
of the eighth pricing period of the RPS on March 31, 2003, a new pricing policy
for urea units based on the ERC package would come into effect.
After the
commencement of stage I and also beyond stage II, there was to be neither any
reimbursement of the investment made by a unit for improvement in operations
nor any mopping of the gains of the units as a result of operational efficiency.
The declared goal of the changed fertiliser policy was to promote efficiency in
production through measures of cost saving and efficient economic practices at
par with international norms by the domestic urea producers. A beginning was
also made towards greater decontrol and liberalisation. Allocation of urea under
the Essential Committee Act, 1955 was limited to 75 and 50 per cent of the
installed capacity (as re-assessed) of each unit in kharif 2003 and rabi 2003-04
respectively.
Thereafter, the units are free to sell the balance urea at the
designated MRP.
During stage II commencing April 1, 2004, urea
distribution is to be totally decontrolled after an evaluation of the
performance in stage I.
The ERC noted, “The fertiliser policy needs to be reformed. The goal of the new
policy should eventually be to bring fertiliser prices charged to farmers to the
level of the import parity price. It should protect small farmers’ real incomes,
but not lead to a slump in food production and also promote a balanced use of
N, P and K.” However, the Commission acknowledged, “A sudden increase in
farm-gate of urea to import parity price, without increasing procurement prices,
could lead to a fall of 13.5 million tonnes of foodgrains production. This, thus, is
13
not a feasible option”. The Commission pointed out, “if procurement prices are
raised along with farm-gate prices of fertilisers, the fall would be much smaller”.
2. WHAT THE ERC FAILED TO SAY
The Commission wanted to protect the small and marginal farmers, “for whom
self-consumption is a large part of their output” and who “would suffer a loss in
their real incomes”. The Commission, obviously, was in a dilemma whether to
avert a possible fall in foodgrains production or cut the fertiliser subsidy.
Ultimately, it let itself be guided by the expert view that a hike in the real price of
fertiliser would lead to a decline in fertiliser consumption and, thereby, in
foodgrains production. Significantly, the NIPFP study by Prof. D.K. Srivastava
and Dr. Tapas K. Sen (1997) cited an estimate made in 1991 by Sidhu & Sidhu
that a 30 per cent hike in the real price of fertiliser would lead to a 18 per cent
decline in fertiliser consumption, and thereby, a 5.4 per cent fall in foodgrains
production. This must have weighed heavily with ERC. Otherwise, how can one
explain the recommendation that all cultivator households should be given 120
kgs of fertiliser at subsidised prices? No doubt, large farm holders would have
found the concessional supply grossly inadequate and would have had to buy
much of their requirement outside the concessional scheme.
But then, fertiliser is heavily underpriced as per calculations by the Fertiliser
Association of India. These are as follows:
Farmer Subsidy =
Farm Gate Cost of imported fertiliser minus the price paid by the farmer
multiplied by the quantum of fertiliser consumed
Producer Subsidy =
Budget allocation minus farmer subsidy
14
Notified Cost
(Maximum Retail Price) of Urea : Rs. 4,830 per tonne
Farm Gate cost of imported urea (Delivered cost)
(CFR – cost of freight)
= $ 200 –
Rs. 9,000/- per tonne
dealer’s margine
Rs. 180/-
handling charge
Rs. 1,200/__________
Rs. 10,380/__________
Indigenous price =
Average cost of indigenous urea = Rs. 9,000/- per tonne
Producer subsidy is, therefore, negative (minus Rs. 1,380/- per tonne)
15
(II C) THE AGENDA FOR END MARCH, 2010
In response to the Finance Commission’s D.O.NO.TFC-12025/14 – 10154 of
5/4/2004
1. FOOD SUBSIDY
To be targeted only to two crore households covered by the Antyodaya Anna
Yojana: As of 1/4/2005 :Rs. 6,300 crore – based on a monthly supply of 35
kgs wheat and rice per household at an average price of Rs. 2.50 per kg.
The explanation is provided in Chapter – VI.
As of 31/3/2010 :Rs. 6,300 crore
Assumptions:
1) Coverage under the Antyodaya Anna Yojana 2 crore families.
2) The average price of wheat and rice of Rs. 2.50 per kg
3) Monthly supply of 35 kgs of wheat. These assumptions represent no change
from 1/4/2005, consistent with the discipline on subsidy that is necessary for
fiscal rectitude. While a higher price, a lower quantity supplied under the yojana
and a reduced coverage should have been projected, if only fiscal discipline had
remained an exclusive goal, this has been eschewed in the light of the concern
voiced by the 12th Finance Commission for the most needy and deserving
segments of the population.
In Chapter-VI, reference has been made to the interest charged on credit
provided to FCI for food procurement and to the subsidy element in interest rate
relief given to the Corporation. Given the imperative of reining in subsidies,
16
explicit as well as implicit, the 12th Finance Commission should recommend that
the interest charged on food procurement credit should be on par with FCI’s
credit rating based on its collateral and not because it is a PSU.
2. OIL SUBSIDY
The subsidy on LPG should be removed effective 1/4/2005. There should be no
subsidy on LPG supply on 31/3/2010. On kerosene, as discussed in Chapter-V
the total subsidy on supply under PDS to 6.05 crore BPL families would out to Rs.
2,178 crore.
This must be narrowed to 2 crore households covered by the
Antyodaya Anna Yojana. On the basis of a subsidy of Rs. 3 per litre of kerosene
and a supply under PDS of 10 litres every month, the annual subsidy for 2 crore
Antyodaya Anna Yojana families work out to Rs.720 crore. We propose retention
of this arrangement as of March 31, 2010, again consistent with the worry voiced
by the Commission over the most needy and deserving of the population.
3. FERTILISER SUBSIDY
The ERC was concerned about the small and marginal farmers but this was out
weighed by fears of foodgrains production falling because of reduced fertiliser
consumption. As I mentioned earlier (under the Chapter II B, “A Critique of
ERC”), the Commission recommended a concessional supply to all farm
households.
My calculations in the same chapter show a negative producer
subsidy and a consumer subsidy that is more than half the landed cost of
imports of urea. Logically, since small and marginal farmers do not have a role
in national food security (they generally produced only for self-consumption)
there can be no case for extending the preferential treatment to the
economically weaker strata recommended in regard to food and oil subsidies to
fertiliser. The ERC was committed to total decontrol of urea distribution during
stage II starting April 1, 2004. Consistent with this, there can be no rationale for
17
retention of the user subsidy in the case of fertiliser.
The 12 th Finance
Commission should assume an end to the subsidy by end March, 2010.
18
(III) ABOUT THE AUTHOR
Mr. K.S. Ramachandran has served as Senior Consultant, Indian Council for
Research in International Economic Relations (ICRIER), Senior Editor, Financial
Express, Secretary, Steel Furnace Association of India, Director of Research &
Publications, Institute of Cost & Works Accountants of India and Senior Research
Assistant, National Atlas Organisation. He was also associated with the Institute
of Management Technology, Ghaziabad as Chief, Project Research Work and had
besides held the Fellowship of the Institute of Advanced Studies and the
Geographical Society of India.
Mr. Ramachandran has authored over 40 books as well as research studies.
Some of his works are: Capital Mirage (1988), Inflation: Critical Issues (1991),
Power of Motivation (1993), Challenge of Fiscal Management (1995), Subsidies:
Piercing the Veil (1997), Development Under Transition (1999), Managing Global
Economic Reform (2001), Managerial Challenges in Banking (2002), Politics of
Economics & Economics of Politics (2002) and India Incorporated – The Missing
Link (2003). One more book, “India Farm Inc.: A Realistic Agenda?” will be out
shortly and another, “Rural uplift: From Government to Corporates” is to follow.
He brought out six research studies for the Institute of Management Technology.
19
(IV)
SUBSIDY PHASE-OUT:
WHY THE FINANCE COMMISSION SHOULD DO THIS: THE
DEMANDS OF THE COMMISSION’S OWN AGENDA
In pursuance of the provisions of Article 280 of the Indian Constitution and those
of the Finance Commission (miscellaneous provisions) Act 1951, the Twelfth
Finance Commission was constituted.
The Commission is mandated to make
recommendations on the distribution of the divisible pool of net proceeds of
taxes between the Union and the states and the allocation between the states of
such proceeds, principles governing grants-in-aid of the revenues of the states
out of the Consolidated Fund of India and grants under Article 275 of the
Constitution and the measures needed to augment the consolidated fund of a
state to supplement the resources of panchayats and municipalities.
The
Commission is required to review the state of finances of the Union and states
and to suggest a plan by which the governments collectively and severally may
bring about a restructuring of public finances, restoring budgetary balances,
achieving macro-economic stability and debt structuring along with equitable
growth.
Besides, the Commission has to review the fiscal reforms facility
introduced by the Central Government on the basis of the recommendations of
the Eleventh Finance Commission and suggest measures for effective
achievement of its objective.
The agenda set for the Commission is such that a tough process of time-bound
de-subsidisation is implicitly laid down. It is obvious that this constitutional body
has been entrusted with the authority to incorporate a specific plan for phasing
out the explicit subsidies on petroleum products, food and fertilisers in its
recommendations, and, in doing so, put the nation firmly on course towards
minimisation of the implicit subsidies as well.
In fact, subsidy reforms are
mandated to be built into the computation of the divisible pool and its
distribution between the Centre and states and among the different states
20
effective April 01, 2005. The quenquennial period ending March 03, 2010 should
be a critical phase of the reform effort with subsidies cut to the bare minimum.
The various projections must be subject to subsidies (open and declared) being
progressively brought down from April 01, 2005 onward, with the end of fiscal
year 2009-2010 marking the minimisation – to the barest level and targeted only
the most needy as well as the most deserving – of the subsidy burden.
Table II
Aggregate Expenditure of the Centre
2003-04
(BE)
2002-03
(BE)
1
Total Expenditure
(1+2=3+4)
1. Non-Plan
Expenditure
2
4,38,795
(16.0)
3,17,821
(11.6)
3
4,04,013
(16.3)
2,89,924
(11.7)
Interest Payments
1,23,223
(4.5)
65,300
(2.4)
49,907
(1.8)
1,20,974
(4.4)
3,66,227
(13.3)
72,568
(2.6)
of which
Defence
Subsidies
2.
Plan Expenditure
3.
Revenue Expenditure
4.
Capital Expenditure
RE: Revised Estimates
Note: Figures in brackets are percent of GDP.
21
(Rupees Crore)
Variation
(2 over 3)
Amount
percent
4
5
34,782
8.6
27,897
9.6
1,15,663
7,560
(4.7)
56,000
9,300
(2.3)
44,618
5,289
(1.8)
1,14,089
6,885
(4.6)
3,41,648
24,579
(13.8)
62,365
10,203
(2.5)
BE: Budget Estimates.
6.5
16.6
11.9
6.0
7.2
16.4
Table III
Central Expenditure on Subsidies by Major Heads
Year
1
1990-91
Food
2
2,450
(0.4)
2,850
(0.4)
2,800
(0.4)
5,537
(0.6)
5,100
(0.5)
5,377
(0.5)
6,066
(0.4)
7,900
(0.5)
9,100
(0.5)
9,434
(0.5)
12,060
(0.6)
17,499
(0.8)
24,200
(1.0)
27,800
(1.0)
Fertiliser
Interest
Petroleum
3
4
5
4,389
379
0
(0.8)
(0.1)
1991-92
5,185
316
0
(0.8)
(0.1)
1992-93
6,136
113
0
(0.8)
1993-94
5,079
113
0
(0.6)
1994-95
5,769
76
0
(0.6)
1995-96
6,735
34
0
(0.6)
1996-97
7,578
1,222
0
(0.6)
(0.1)
1997-98
9,918
78
0
(0.7)
1998-99
11,596
1,434
0
(0.7)
(0.1)
1999-2000
13,244
1,371
0
(0.7)
(0.1)
2000-01
13,800
111
0
(0.7)
2001-02
12,595
210
0
(0.5)
2002-03 (RE)
11,009
765
6,265
(0.4)
(0.3)
2003-04 (BE)
12,720
179
8,116
(0.5)
(0.3)
RE: Revised Estimates.
BE: Budget Estimates.
Note: Figures in brackets are percent of GDP.
Table IV
Central Subsidies (April-September 2003)
April - September
Subsidies
2003
2002
Food
16,006
11,595
Urea
5,576
3,916
Decontrolled fert.
1,126
1,246
Petroleum
3,730
Total subsidies
26,495
16,751
* Net direct tax collections
38,758
32,674
* Refunds
18,633
13,978
* April to October
22
(Rupees crore)
Total Subsidies
7
12,158
(2.1)
12,253
(1.9)
10,824
(1.4)
11,605
(1.4)
11,854
(1.2)
12,666
(1.1)
15,499
(1.1)
18,540
(1.2)
23,593
(1.4)
24,487
(1.3)
26,838
(1.3)
31,207
(1.4)
44,618
(1.8)
49,907
(1.8)
Others
6
4,940
(0.9)
3,902
(0.6)
1,775
(0.2)
876
(0.1)
909
(0.1)
520
633
644
1,463
(0.1)
438
867
903
2,379
(0.1)
1,092
-
% Change
38
42.3
-9.6
58
18.6
33.3
(Rs. Crore)
(V) THE PETROLEUM SECTOR
A major step forward in reforms in the petroleum sector was the dismantling of
the Administrated Pricing Mechanism (APM) on April 1, 2002.
Under the
amended regime: (i) the pricing of indigenous crude oil and petroleum products,
except for PDS kerosene and domestic LPG, were to be market–determined. The
oil pool account and the oil coordination committee were to be wound up. (ii)
Subsidies on PDS kerosene and domestic LPG were put on a specified flat rate
basis on April 1, 2002, to be covered by the Consolidated Fund of India. These
were to be phased out in 3 to 5 years from the date of termination of APM. As
long as the subsidies were in force, after adjusting the flat rate of subsidy, the
retail prices of PDS kerosene and domestic LPG were to fluctuate in accordance
with the price of crude oil in international markets (iii) PDS kerosene and
domestic LPG supplied in far flung areas were to get a freight subsidy (iv) The
private sector was to be allowed to market transportation fuels subject to
specified guidelines and (v) There was to be a regulator in place to oversee the
downstream petroleum sector.
However, it is very doubtful if the crucial part of the reform – the phase out of
the subsidy on PDS kerosene and domestic LPG between 2005 and 2007 – is
really on. The Union Cabinet when it met in September, 2003 did not declare
itself on the phase out date. Contrary to the Petroleum Minister, Mr. Ram Naik’s
claim that the deadline was set at March, 31, 2007, the Cabinet had only okayed
the Ministry’s proposal that the oil companies be directed to share the increase
in subsidies instead of hiking the retail prices of both LPG and kerosene. For the
record, the Finance Ministry early in 2003 had told the Petroleum Department
that although the Cabinet had approved a time frame of three to five years for
the subsidy phase out, the actual implementation would be in three years’ time
i.e., by 2004-05. The combined subsidy had been projected at Rs.4,495.8 crore
23
for 2002-03.
With the spurt in crude prices in October, 2002, the Finance
Ministry approved a flat subsidy rate of Rs.67.75 per cylinder for LPG and
Rs.2.45 per litre in kerosene. This was later reduced to Rs. 45.17 per cylinder of
LPG and Rs. 1.64 per litre of kerosene. Despite the outgo being estimated at
around Rs.2,200 crore, no extra provision had been made in the revised estimate
for 2002-03. In the 2003-04 budget, a provision of Rs.8,116 crore was made.
This was reduced to Rs. 6,300 crore in the revised estimate, with the oil PSUs
sharing the burden.
In the interim budget for 2004-05, the provision is Rs.
3,500 crore, again with the public sector petroleum companies accepting an
enhanced share of the subsidy burden.
However, there was a freeze of LPG and kerosene prices in September 2003, for
a year.
A Committee was set up soon after to work out the modalities of
subsidy-sharing between oil producing and marketing firms as well as look into
the losses accruing from the price freeze in the face of rising costs. Clearly, the
intention was to hold down the fiscal subsidy. One obvious option in the burdensharing mechanism was that two-thirds of the cost could be borne jointly by the
Oil and Natural Gas Commission, the Oil India Limited – the two upstream
producing firms – and by the Indian Oil Corporation Limited, Hindustan
Petroleum Corporation Limited and Bharat Petroleum Corporation Limited – the
downstream retailing companies – with the balance being made up by way of
margins on other petroleum products.
Another was that the costs could be
divided equally between the Oil & Natural Gas Commission, the Oil India Limited
and the Gas Authority of India Limited on the one hand and the Indian Oil
Corporation Limited, Indo-Burma Petroleum (IBP) the Bharat Petroleum
Corporation Limited and the Hindustan Petroleum Corporation Limited on the
other. Recently, there have been other policy developments that were no less
grave. The Union Cabinet put off at its meeting on January 7, 2004 a proposal
by a ministerial panel to raise natural gas prices by Rs. 350 per thousand cubic
24
metres – a move that would have, no doubt, pushed up the prices of cooking
gas, fertiliser and electricity as well as auto, bus and taxi fares.
When the Government in September 2003 announced a freeze of LPG and
kerosene prices for a year, it was not wanting in concern over the fiscal
repercussions. But by passing the buck on to the oil sector PSUs, it was only
papering over the cracks.
Even as Dr. C. Rangarajan, Chairman of the 12 th
Finance Commission pressed for hard decisions at the conference on “Issues
before the 12th Finance Commission” held on September 28, 2003, and referred
pointedly to the ‘distant’ target of reducing the Central revenue deficit to one
percent by 2004-05 and the overall deficit to 6.5 percent set by the Eleventh
Finance Commission, the oil PSUs were being asked to bail out the Centre for an
indefinite period. Reliance was kept out of this arrangement as it bought crude
at import parity prices from ONGC and sold LPG to oil marketing companies at
import parity prices. For the future also, things are going to be tough on oil
PSUs, with pressure mounting on the oil marketing companies to take a hit on
the marketing margins on petrol and diesel. Knowing that private players in the
oil sector like Shell, Essar and Reliance can never be dictated to in that fashion,
any squeeze on margins on products like petrol and diesel (which have risen
from Rs. 250 to Rs.950 a kilolitre, following the dismantling of the administered
price regime) to keep the petro subsidies out of the budget will not only make a
mockery of deregulation of the petroleum sector but also defeat a major priority
of the 12th Finance Commission – instilling true discipline into fiscal policy and
management.
The confirmation on October 8, 2003 by the Union Petroleum Minister that the
IOC, HPCL, BPCL and IBP would together lose Rs. 8,300 crore during 2003-04
because of not hiking domestic cooking gas and kerosene prices despite the rise
in cost was virtually a declaration of defiance targeted not only against the
Indian Parliament that had, after a lot of persuasion, adopted the Fiscal
25
Responsibility Bill but also the Twelfth Finance Commission entrusted, as part of
its constitutional duties, with the task of injecting the much needed restraint in
the management of Central and state finances. International price parity would
have meant pushing up the LPG price by Rs.105 per cylinder and the kerosene
price by Rs.3 per litre. Even with a Government subsidy of Rs.45.17 per cylinder
of LPG (this is to be extended to private sector companies on par with the PSUs,
Indian Oil Corporation, IBP, Bharat Petroleum Corporation and Hindustan
Petroleum Corporation) and Rs. 1.64 per litre of kerosene, oil companies are
selling LPG at Rs.105 per cylinder below the cost and kerosene at Rs. 3 per litre
below the cost.
The agenda of the Twelfth Finance Commission stands to suffer with this
continuing act of expediency. In respect of LPG, large investments were made
after it was put on OGL in the hope that a commercial return would make good
the investment. No investor could have anticipated the kind of situation that
emerged subsequently of continuing subsidies on the one hand and large scale
diversions of domestic LPG to non-domestic establishments on the other. No
investment can be commercially worthwhile if the product is vastly under-priced.
There can be no raison det’re for LPG being heavily subsidised for consumers
from the affluent sections of the community. The logic of excluding income
tax payers from the facility of below cost supply of kerosene
necessarily has to be extended to subsidised supply of LPG as well.
There can be no escape from this if the Commission is to be able to make
possible a meaningful distribution of resources between the Centre and the
states and among the various states themselves. Apart from critical questions of
good fiscal management, there can be no room in a reforming economy for
goods in short supply – and paid for in foreign exchange and on terms that are
fully dictated by market conditions – being kept open for ready access at prices
that are not just consumer-friendly but reflect undue pampering.
While the
Government itself shells out market prices to ensure easy availability, it makes
26
for a sound economic policy to treat the consumer – unless he or she is
economically depressed – likewise, with a pricing policy that the market
legitimately demands.
The Government should stop asking oil producers and retailers to take on the
burden and assuming in the process that it has taken care of this part of the
subsidy problem. With consumption and demand mounting, the subsidy element
will only grow and, going by the present dispensation, the margins of the oil
PSUs will progressively fall, precisely at a time when private competition is
emerging strongly. It is true that unlike earlier oil producers in the oil sector will
share the burden with the marketing PSUs, but the fact to be faced is that
private rivals like Reliance which take crude from the ONGC at import-parity
prices will remain free to sell LPG to the oil marketing outfits in the public sector
again at import parity prices, and not on the same subsidised terms that the
latter themselves have to supply to the consumer. The debate over the delay in
disinvestment is not entirely futile when we consider that the two concerned
PSUs, the Hindustan Petroleum Corporation Limited and the Bharat Petroleum
Corporation Limited would be enjoying a level playing field with Reliance if only
the Supreme Court had not stood in the way.
While the fiscal fall-out is by no means negligible, the reasoning that is being
advanced that with their huge profits, the oil companies can take care of the
burden on the (not so) common man is truly preposterous. This is populism
that, obviously, is justified on electoral grounds, but runs entirely counter to the
mechanics that the 12th Finance Commission is quite rationally pressing for.
There is really no valid basis to justify the subsidy, all the more one that is
targeted indiscriminately towards that strata of the nation’s population which can
very well afford to pay the globally dictated market price. The amount of oil
subsidy could, indeed, turn out to be quite staggering by the targeted deadline
for re-focusing the subsidy on kerosene and LPG to the poorest of the poor if
27
only we leave out the impact of the Government’s expedient transfer of the
burden to the oil producing and retailing companies in the public sector. This
alone would do to justify the targeting of the subsidy on LPG as well as
PDS kerosene to the people covered by the Antyodaya Anna Scheme as
against the present system of support for those coming under the BPL
category in respect of kerosene and the universal subsidisation of LPG
supply.
A distinction is also necessary between a poor hawker or a small
shopkeeper and a rich non-domestic user of cooking gas. Knowing that nondomestic LPG is very expensive, there should be no parity between a poor
commercial user and others like hotels and restaurants.
The 12 th Finance
Commission, obviously, would not recommend ways to ensure making heavily
subsidised domestic LPG available to the poorest of the poor, but it would
certainly see that there is a substantial price reduction for the supply of nondomestic LPG to poor hawkers and small traders. A much stronger case can be
legitimately made for the narrowed focus in defence of the essence of deregulation, which should demand a total commitment to the dismantling of the
Administered Price Mechanism (APM) on April, 1, 2002 on the one hand and
parity in the treatment of oil PSUs and private oil companies on the other. The
entire subsidy could be brought down to a fiscally manageable order of
Rs. 720 crore. The accompanying statement explains the calculation of the
saving.
THE EXPLANATORY STATEMENT
The beneficiaries of the Antyodaya Anna Scheme: Total number of households
on the verge of destitution: 1.5 crore, effective April 1, 2003
The targeted public distribution system (TPDS) covers 6.05 crore below poverty
line (BPL) families. The total subsidy on TPDS kerosene supplied to BPL families
works out to as follows:
28
Rs. 3 per litre for 6.05 crore families or Rs.18.15 crore for supply of kerosene of
one litre to each of these families. On the basis that annually 120 litres are sold
to every BPL household, – with a strength of 5 members – (the five member
household norm is assumed consistent with the austerity on family welfare
demanded for purposes of subsidy management) the total subsidised sale every
year works out to 780 crore litres for all the 6.05 crore BPL families together. At
Rs.3 per litre, the combined subsidy bill is of a staggering order, Rs.2,178
crore. PDS sale of kerosene is closed to income tax payers as well as those
households with access to LPG supply. One must presume that the beneficiaries
of the Antyodaya Anna Scheme are so poor that they rely only marginally on PDS
kerosene supply and also that their economic vulnerability cannot legitimately
permit LPG connections. Among the remaining segments of the BPL households
also, it would be rational to assume that only a few use cooking gas since even
the heavily subsidised price could be beyond their limited means. Here, it is a
moot question –
whether the Antyodaya Anna households do have to be
provided PDS kerosene as well as LPG at still more concessional prices. While it
may seem harsh to decide in favour of retaining only the availability of
PDS kerosene and leaving out provision of still cheaper (in terms of
energy used) LPG for those coming under the Antyodaya Anna Scheme,
such an omission is justified in the overall context of economic
discipline. Admittedly, the human face cannot be allowed to become
much too human.
LPG prices should be allowed to rise as per the
diktat of the April 1, 2002 reform. As for PDS kerosene, this facility must be
confined only to the 2 crore households and be shut out for the remaining 4.05
crore BPL families coming under TPDS. This should minimise the total oil
sector subsidy to a level (Rs. 720 crores annually) where there will be no
need for the Government to tax the oil PSUs, leaving the latter to enjoy a level
playing field with the private sector players in this sector.
The 12th Finance
Commission would want such parity since the margins that the public sector get
29
on their sales consequent on the closure of the ARM would be duly reflected in
enhanced tax revenue to the Government and, thereby, in a larger divisible pool.
30
(VI) FOOD SUBSIDY
There is an equal justification, if not more, for the food subsidy to be focused on
the most needy among the poor – those coming under the Antyodaya Anna
Yojana. The reform, in fact, must go deeper than this. The foodgrain stockpile
must be gradually minimised to the level needed to take care of the Antyodaya
Anna Yojana beneficiaries and emergencies. The procurement scheme must be
phased out, so should the system of statutory fixation of farm goods prices, and
as for the small and marginal farmers they should be helped out through a
limited price support policy, financed by a small subsidy, with the whole
operation being confined only to a few selected mandis. Such a policy can be
extended to the main as well as supplementary crops, provided there are
safeguards against misuse. The cost of the facility of subsidised supply of
rice/wheat to 1.5 crore beneficiaries (household) of Antyodaya Anna
Yojana annually can be projected at Rs. 4,725 crores. This will go up to
Rs. 6,300 crore during 2004-05 with the beneficiaries of the scheme being raised
to two crore household effective April 1, 2004.
The process is explained as
follows:
During WTO negotiations on farm subsidy reduction, transparency in public
procurement operations has justifiably received some attention. India has to be
explicit on the major beneficiaries of the procurement price/support mechanism.
Clearly, if farm subsidies in the European Community and the United States have
to go over a limited time frame, then India must also get ready to phase out
procurement as well as price support and limit these facilities only to the
economically vulnerable among growers. It would be logically acceptable to pick
out crop producers among families in the BPL and APL (above poverty line)
categories for this benefit. How do we segregate the producer segment? We
can, with reason, leave out farmers who are covered by the Antyodaya Anna
Scheme on the presumption that their proximity to a condition of destitution
would rule out their meaningful occupation even as small/marginal farmers.
31
Presently, the subsidy incurred on the supply of foodgrains through the
PDS at below FCI’s economic cost constitutes the consumer subsidy,
while the producer subsidy is the direct offshoot of the price supportbased procurement operations of the Government.
The producer
subsidy together with the cost of maintaining the buffer stock accounts
for the cost of buffer stock operations. The consumer subsidy together
with the buffer carrying cost constitute the food subsidy. This has to
be narrowed on the lines suggested here.
In this context, reference must be made to the recommendations of the Johl
Committee set up by the Punjab Government, particularly that if one million
hectares of land is switched from wheat and rice to other crops there will be a
cut in subsidy of Rs.3,800 crore. In the event of a third of this amount going to
foodgrain growers in Punjab alone by way of an incentive not to cultivate wheat
and rice, the national subsidy on foodgrains would be less by Rs.3,800 crore
annually.
The Central Food Ministry recently adopted a non-populist posture
about continued public procurement of foodgrains being the villain in subsidy
growth. Addressing the 63rd Annual General Meeting of the Roller Flour Mills
Association of India on September 27, 2003, the Minister in charge, Mr. Sharad
Yadav rhetorically conceded – but without obviously meaning it, as, we will see
later – that the monopolisation of the procurement operations by the Central and
state government agencies had institutionalised inefficiency and pointed out that
private sector participation in procurement and, not just storage and movement,
of foodgrains, would not only cut the overall food subsidy bill but also improve
the quality of wheat for the milling units. But, the political realities are such that
the proclaimed villain in subsidy acceleration will remain and even gain added
strength until the next Lok Sabha poll is over.
The Ministry is conveniently
entertaining fears of grain buffer stocks falling below the minimum required and
even contemplating a ban on grain exports. Ironically, exports have been taking
place hitherto on the basis of subsidised prices – even below BPL supply rates for
32
inferior varieties of wheat (This should rule out private purchases for grain
export, a measure of liberalisation designed to put a stop to the system of FCI
sale to exporters at less than the cost of public procurement. Even though the
Government is moving towards WTO-compatible subsidies on par for both public
and private procurement, exporters of grains are quite unlikely to give up the
cushion that goes with FCI). Any meaningful reform package on subsidies should
incorporate domestic market – determined prices for supplies within and global
prices for export sales. Such a package, however, should rule itself out
knowing the electoral compulsions, and it is left to the Twelfth Finance
Commission to insist on an early adoption of the package.
In this bleak scenario, what could really trigger the much needed reform in this
respect is the growing support for contract farming, which could indeed form the
basis of yet another green revolution. First launched in 1989 by Pepsi Co. in
Hoshiarpur, Punjab in 1989 this is now the core of decentralisation efforts in key
procurement states, possibly paving the way for substantial savings in foodgrains
procurement. Recourse to liberalised land lease agreements and formation of
land share companies through an amendment of the Companies Act have come
up for serious consideration.
With the Indian Tobacco Company’s efforts
towards direct procurement of crops on the net – courtesy e-choupal initiative already having made substantial headway, there are others breaking into the
farm economy and the list of corporates taking up farming is encouraging, if not
staggering, Escorts, Graintec, Rallis, Pepsi Co, Mahindra and Mahindra and DCM
Shriram. Such a measure of corporatisation is designed to facilitate growth of
private procurement of commercially viable crops including foodgrains. When
this takes place, support prices will inevitably be de-linked from state
procurement.
Krishi Bhawan, in projecting a truly stupendous scale of farm
credit, Rs.7,36,570 crore, during the Tenth Plan period has given priority to
financing of contract farming by the banking system. In a paper submitted for
discussion at a workshop organised some time ago by the Rural Development
33
Institute, Seattle, the Ministry of Agriculture called for a paradigm shift from
subsistence farming to market-oriented commercial agriculture, with the
participation of industry and small and marginal land holders. It was explicit on
the direction of reform: “Unless we promote contract farming (as opposed to
corporate farming) and legalise land leasing, the much desired vertical
integration leading to rural transformation is unlikely to come about in India”.
Obviously, the 12th Finance Commission should not remain insensitive to people
coming within the Antyodaya Anna Yojana, a scheme introduced on December,
25, 2000. Targeting one crore (and 50 lakhs more since April 1, 2003) poorest
of the poor families coming under the Targeted Public Distribution System
(TPDS) – a measure taken earlier to make PDS more focussed – under the
scheme, the beneficiaries are provided 35 kg foodgrains per family monthly at a
highly subsidised price of Rs. 2 per kg for wheat and Rs. 3 per kg for rice. The
targeted population cannot and should not be left to the uncertain mercy of the
free market. The Commission must endorse a scheme of continued protection to
the poorest of the poor families and even tread cautiously on official claims on
the success of poverty alleviation measures and take a close look at data
implicitly or explicitly suggesting a drop in the number of people classified as the
beneficiaries. The cost of maintaining this scheme is worked out as follows:
Since April 1, 2003 the number of households covered by the scheme has risen
to 1.5 crore. At a monthly rate of 35 kg, the annual supply is 420 kg/per family.
At an average of Rs. 2.50 per kg of wheat and rice, the cost per family
will be Rs. 1,050 every year.
For the 1.5 crore beneficiaries of the
Antyodaya Anna Yojana, the cost works out to Rs. 1,575 crore. This
will rise to Rs. 2,100 crore with the number of households covered by
the scheme rising to 2 crore effective April 1, 2004.
Assuming an
average market price of Rs. 10 per kg for both rice and wheat of the
cheapest category, the cost will be four times what the beneficiaries
pay, Rs. 8,400 crore. After deducting from this the payment made by
34
the beneficiaries, the cost to the Government on the scheme should be
Rs. 6,300 crores. Compare this with the burden that the exchequer bears on
behalf of all the people under the BPL coming within the purview of PDS
numbering 6.05 crores and the APL (above poverty line) families on the one
hand (this constitutes effectively the consumer subsidy) and the producer
subsidy paid to wheat and paddy growers, equivalent to the total subsidy of Rs.
27,800 crore (the budget estimate for 2003-04).
If we subsidise foodgrain
supplies only to those coming within the Antyodaya Anna Yojana, we could save
Rs. 23,075 crore during 2003-04 after deducting the net cost to the Government
of Rs. 4,725 crore incurred on 1.5 crore households covered up to March 31,
2004. Since under reform the producer subsidy must be restricted only to small
marginal
farmers
we
could
save
considerably
by
ending
the
public
procurement/support price mechanism in respect of the rich/middle income
farmers. The Expenditure Reforms Commission in its report in 2000 assumed
that the funds required to protect the small/marginal farmers would be 38.5 per
cent of the total budget subsidy for fertilisers.
In 1998-99, the Commission
noted that there were about 105 million cultivator households in the country, of
which, apparently, 40 million could have been classified as small/marginal
farmers.
What the latter produced should only be covered by public
procurement / price support operations. The producer subsidy for 2002-03 for
wheat was Rs. 137 per quintal (this is discussed with reference to the minimum
support price (MSP) and cost concepts in Chapter-VI). The subsidy is defined as
MSP minus C2 (includes all expenses in cash and kind incurred in production by
the actual owner plus rent paid for leased land plus the imputed / value of family
labour plus interest on the value of owned capital assets – excluding land – plus
rental value of owned land – net of land revenue). Such generosity even the
small and marginal farmers do not deserve. No wonder, the Expenditure
Reforms Commission assailed the whole approach in these blunt words: “As the
excess stocks are solely due to the very generous minimum support
price-based
procurement
price
policy
35
being
followed
by
the
Government the cost of holding these stocks could be considered a
subsidy to the producers and reflected as such in the budget”. There
has to be a review not only of the cost computation but also the costs forming
the basis of MSP. All farm inputs must be market price-determined – fertiliser,
irrigation water, electricity, diesel and credit – and these costs must be absorbed
by the bigger growers. Rebates, if any, should be available only to small and
marginal farmers. Imputation of costs demands a drastic re-appraisal and we
should not have a situation where all manner of costs are thrown in under an
expansive MSP.
Discrimination must become the core of the food subsidy scheme. A strong line
has to be taken also on non-food subsidies, direct as well as indirect.
The
Central package of market borrowings of Rs. 1,885 crore and soft loans bearing
a rate of interest of four percent (with an initial moratorium of three years and
repayable in three years) amounting to Rs. 678 crore totalling Rs. 2,563 crore to
be provided to UP, Uttaranchal, Haryana, Punjab and Bihar to clear sugarcane
arrears for 2002-03 must be strongly objected to. Maharashtra has maintained a
monopoly cotton procurement scheme for no economically justifiable reason –
the only concession the State Government has made to market reform has been
the stoppage for the second consecutive year of payment of bonus over the
minimum support price to cotton growers as fixed by the Centre – and, likewise,
sugarcane growers have been pampered – and sugar mill managements
harassed – leading to a pile of surplus stocks of sugar that is quite as irrational
as the foodgrain stockpile.
pampering.
If food subsidies have to go so should all this
The statutory minimum price for the sugarcane is itself quite
generous to growers and unfair to sugar manufacturers and consumers. Yet,
there was more generosity and greater unfairness by way of the states’ advised
price (SAP).
The Commission on Agricultural Costs & Prices (CACP) had
recommended that the cane support price should be freezed, but the Centre
chose to hike the price to Rs. 73 per quintal at a recovery rate of 8.5 percent for
36
2003-04 against Rs. 65.50 mooted for the last season. Rightly, the sugar mills
have pressed for a freeze at Rs. 65.50 per quintal. The question has never been
asked whether sugarcane should not yield place to other commercial crops like
oilseeds as well as pulses, even in the face of a grim reminder of a severe glut in
the 1978-79 sugarcane crushing season when retail prices had plunged to as low
as Rs. 1.50 a kilo. Along with the food subsidy being phased out, the sugarcane
regime must be brought down to earth – with a thud – and the Maharashtra
monopoly cotton procurement scheme must exit as well. When a serious effort
is on to divert wheat and paddy growing fields to other crops, this effort must
include a similar treatment in respect of sugarcane and cotton (in Maharashtra)
also. We cannot, obviously, have a situation where food subsidies are being
addressed effectively while other aberrations are allowed to pass muster.
The reform of food subsidy would be incomplete without the Government –
Central and State – seeking not to maximise efficiency in the working of various
poverty alleviation and employment-oriented schemes. The goal should be to
minimise largesse in any form. It is true that in sharp contrast to floods whose
impact is limited to one crop season, the adverse effect of drought is felt over
three successive seasons until a good monsoon intervenes to normalize the crop
cycle. The drought-affected people have to go through four months of the kharif
season (July-October), followed by another four months of the rabi season
(November-March) and lastly, the next four kharif months up to October. The
various Yojanas are critical to the poor – and not the poorest of them alone – not
turning into destitutes. No reform, however meaningful it is, can be blind to the
harsh reality of poverty (Indeed, we would do well to remember that the BPL
and APL population is only marginally better off than the segment covered by the
AAY. Yet, for purposes of subsidy, only the poorest strata should be in focus).
The known and acknowledged fact that the magnitude of poverty gets weakened
with liberal – even indiscriminate – drought relief to the extent of some pockets
of the population moving above the poverty line,
37
albeit temporarily, only
underscores the gravity of poverty and, equally so, the imperative of well
focused employment schemes against the backdrop of a time-bound action plan
to narrow the ambit of the food subsidy.
No reform can gloss over rural
economic disparities. The revelation of the RBI rural debt and investment survey
released in early 1977 that the assets of the richest in the rural milieu were 164
times those of the poorest is history all right, but we must remember that rural
India has not turned egalitarian in the quarter of a century that has followed.
Clearly, the various poverty alleviation and employment generation programmes
have to be strengthened. These are: The Swarnajayanti Gram Swarozgar Yojana
(SGSY), Sampoorna Grameen Rozgar Yojana (SGRY), Pradhan Mantri Gramodaya
Yojana (PMGY), Pradhan Mantri Gramodaya Yojana (Gramin Awas), Pradhan
Mantri Gramodaya Yojana-Rural Drinking Water Project, Pradhan Mantri Gram
Sadak Yojana (PMGSY), Antyodaya Anna Yojana, Annapurna, Indira Awaas
Yojana (IAY), Jai Prakash Rozgar Guarantee Yojana (JPRGY), Swarna Jayanti
Shahari Rozgar Yojana (SJSRY) and Valmiki Ambedkar Awas Yojana (VAMBAY).
Simultaneously, these schemes must be given a sharper edge. The offtake of
foodgrains – wherever these are provided – must be improved, subject to
thorough checks on utilisation.
Such special schemes are: Annapurna,
Earthquake, World Food Programme, Sampoorna Grameen Rozgar Yojana,
Indigent People, Nutrition programme, Hostel SC/ST/OBC, food for work and
mid-day-meal.
Returning to the foodgrains stockpile, we must just keep enough supplies to take
care of the needs of these schemes.
We should remember that the buffer
requirement was 16.8 million tonnes, while the actual stock as of January 2003
was 48.2 million tonnes (the level later was as much as 63 million tonnes). We
do not have to go into the various measures taken to reduce the stocks over the
last few years. What matters is that even as the stockpile is at an unmanageable
level, more and more is being added at a huge cost to the Government. This
38
has to be truly liquidated and stocks must be kept only at a level needed to cater
to the requirements of the various welfare schemes and the Antyodaya Anna
Yojana (AAY) only. (The Expenditure Reforms Commission had called for a food
security buffer stock comprising six million tonnes of rice and four million tonnes
of wheat.) The latter, as we noted earlier, provides 35 kg of foodgrains per
family per month at heavily subsidised prices. The offtake under the designated
welfare schemes was 74.58 lakh tonnes only during 2002-03(up to December,
2003).
Even in the event of all BPL (below poverty line) families
continuing to be provided for, at 6.05 crore families (inclusive of two
crore AAY families), the stocks needed would be well below the buffer
stock norm of 16.8 million tonnes in January, 2003 and 15.8 million
tonnes in April, 2003 (see Table VII, in Chapter-VI). The real villain is public
procurement on an indiscriminate basis.
This must stop.
To start with,
procurement must be confined to production by small and marginal farmers only.
The stocks must be, in phases, brought down to the norm and then cut to the
level needed for AAY families, also in phases. This could be completed in ten
years starting April 1, 2004. After the conclusion of this period, only the AAY
families should be targeted by PDS. As for procurement, the Government
must stop price support/procurement operations from the Kharif
season of 2004-05, starting July 2004. The PDS has long been used as a
convenient excuse for price support/public procurement operations.
This
mockery must stop and India must go through the rigours of WTO’s regime of
transparency on PDS.
The temptation to circumvent the post – 1995 global
trading discipline – by claiming that PDS for the poor could only be maintained
with an indiscriminate public procurement of wheat and rice – must be stoutly
resisted.
But, all this would demand the strongest political will, which,
unfortunately is not in evidence, judging by the Union Food Ministry’s plan to
enhance public procurement of wheat and rice on the customary ground of
production rising; the plan tells its own story and needs no elaboration.
39
Even as a strong case exists for drastically cutting the foodgrains stockpile and
phasing out public procurement, the Centre remains firmly on course on
retaining the massive stockpile and the subsidy.
The Food Ministry, despite
proclaiming its interest in private procurement, has projected for 2004-05 a
public procurement of wheat of the order of 20 million tonnes (4.2 million tonnes
more than in 2003-04) consistent with an estimated increase in production. As
for rice, the procurement in 2003-04 is estimated at 22 million tonnes.
The
earlier position on Central stocks is truly alarming: 20.7 million tonnes of wheat
and 7.12 million tonnes of rice, against a total buffer stocking norm of 15.8
million tonnes (April, 2003) (the opening stock of foodgrains as of June, 2003, as
per the RBI annual report was 39.8 million tonnes).
With an estimated
procurement of 22 million tonnes of rice in the 2003-04 kharif season and 20
million tonnes of wheat in the rabi season of 2004-05, the stocks of rice and
wheat could be 29 and 40 million tonnes respectively.
The Centre had drawn up a plan of reducing the food subsidy by as much as Rs.
12,000 crore annually through a farm income insurance scheme.
Since the
insurance cost was estimated at Rs. 15,000 crore there should have been a
saving of this order in the subsidy bill which is budgeted at Rs. 27,800 crore for
2003-04. Insurance was to be provided against any possible fall in the price of
farm produce compared to the previous year, instead of the Government
purchasing all the produce on the basis of full price support. This would be an
ideal way of de-subsidisation but then, state governments have yet to fall in line
with the Central proposal. The result was that the subsidy bill would have been
of the staggering order budgeted, but for another act of policy intervention.
One aspect of the food subsidy arrangement is the commercial bank credit
provided to the FCI for food procurement operations. While as a PSU entrusted
with the task of food security the FCI could claim a credit rating on par with
triple A rated borrowers and secure its needs at a rate of interest of around 7
40
percent, the consortium of banks headed by the SBI has been charging a rate
only marginally less than 11 percent (10.95) and in the process pushing up the
food subsidy cost by nearly Rs. 1,800 crore. The Government earlier mooted a
bond issue by the FCI and on January 9, 2004, it confirmed the arrangement –
but less to help out FCI and more to help itself – by way of a cut of Rs. 2,000
crore in the food subsidy, in terms of an interest saving on the funding of FCI’s
buffer.
(The banks reduced the rate to 9.45 percent immediately thereafter,
besides approving a bond issue by FCI for Rs. 5,000 crore). Here, the wider
issue is whether the FCI is entitled to either a sovereign rating or a commercially
prime rating.
After all, the FCI has to fight things out and should not take
shelter under the Government’s umbrella and even more so, under the pretence
of supporting PDS. In fact, any interest rate relief provided to FCI must
be treated as an addition to what the Government has to bear by way
of food subsidy.
Table V
Food subsidy
(Rs. Crore)
6,066
7,900
9,100
9,434
12,060
17,612
21,200
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03 (BE)
Source : Budget documents
41
Table VI
Procurement of wheat and rice
(Central Pool)
(Million tonnes)
Marketing
Year
Wheat
Rice
(April – March)
(Oct – Sept)
Qty.
Percent change Qty.
Percent change
1995-96
12.33
3.9
9.95
-25.7
1996-97
8.16
-33.8
12.22
22.8
1997-98
9.30
14.0
14.33
17.3
1998-99
12.65
36.0
11.84
-17.4
1999-00
14.14
11.8
17.27
46.5
2000-01
16.35
15.6
19.10
10.6
2001-02
20.63
26.2
21.28
11.4
2002-03*
19.03
12.23
* As on February 5, 2003
Source: Department of Food and Public Distribution.
Table VII Management of Food Stocks
Month
1
April 2002
May
June
July
August
September
October
November
December
January 2003
February
March
April
May
June
Openi Buffer
ng
Stocking
Stock Norm $
of
Foodgrains
2
51.0
62.6
64.8
63.1
59.9
55.4
51.4
53.6
51.5
48.2
40.1
36.2
32.8
41.3
39.8
3
15.8
24.3
18.1
16.8
15.8
FoodStocking
Procurement
4
14.3
6.1
2.5
0.2
0.2
0.6
7.1
1.3
1.3
2.0
1.4
0.9
13.1
3.6
1.0
Foodgrains off-take
PDS
OWS
5
1.2
1.5
1.6
1.5
1.8
1.5
1.8
1.5
2.0
1.8
2.1
1.9
1.4
1.8
1.2
6
0.4
0.8
1.3
0.6
0.5
0.5
1.2
0.8
1.2
1.3
1.1
1.7
0.9
1.6
2.5
42
OMS
Exports
(excluding
Exports)
7
8
0.2
1.0
0.2
1.2
0.2
0.9
0.4
1.1
1.1
1.5
0.7
1.4
0.7
0.9
0.4
0.8
0.4
0.9
0.8
0.8
0.4
0.9
0.3
1.1
0.2
0.6
0.1
0.9
0.2
1.1
(Million Tonnes)
Closing Food
Food
Stock
Credit
Subsidy
@
#
9
62.6
64.8
63.1
59.9
55.4
51.4
53.6
51.5
48.2
40.1
36.2
32.8
41.3
39.8
35.2
10
52,484
60,669
61,008
59,077
56,400
53,362
52,705
54,346
51,947
49,784
50,227
49,479
44,589
51,047
50,066
11
1,754
1,632
1,703
2,490
1,734
2,283
2,601
1,924
2,653
2,261
23
3,117
1,462
2,209
2,830
$ Represents the total minimum stocks to be maintained by public agencies on the first day of the quarter
under buffer stocking policy with effect from October 30, 1988.
@ Outstanding in Rupees crore as on the last reporting Friday of the month.
# Monthly expenditure on food subsidy in Rupees crore.
PDS: Public Distribution System.
OWS: Other Welfare Schemes.
OMS: Open Market Sales.
Source: Ministry of Food, Consumer Affairs and Public Distribution; Ministry of Finance, Government of India.
Table VIII
Minimum Support Prices: A historical perspective
The price policy of the Government is directed at providing insurance to agricultural producers
against any sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor
below which market prices cannot fall. Till the mid 1970s, the Government had in force two
types of administered prices:
(i)
Minimum Support Prices (MSP)
(ii)
Procurement Prices
The MSPs served as the floor prices and were fixed by the Government in the nature of a long-term
guarantee for the investment decisions of producers, with the assistance that prices of their commodities
would not be allowed to fall below the level fixed by the Government, even in the case of a bumper crop.
Procurement prices were the prices of kharif and rabi cereals at which the grain was to be domestically
procured by public agencies (like the FCI) for release through PDS. It was announced soon after harvest
began. Normally, the procurement price was lower than the open market price and higher than the MSP.
This policy of two official prices being announced continued with some variation upto 1973-74, in the case
of paddy. In the case of wheat, it was discontinued in 1969 and then revived in 1974-75 for one year only.
Since there were too many demands for stepping up the MSP, in 1975-76, the existing system was evolved
in which only one set of prices was announced for paddy (and other kharif crops) and wheat being
procured for buffer stock operations.
43
Table IX
FCI’s economic cost of rice and wheat
Rice
A. Acquisition cost
(i) Pooled cost of grain
(ii) Procurement incidentals
B. Distribution cost
Economic cost (A+B)
(Rupees per quintal)
1999-00
2000-01
2001-02
2002-03
887.30
831.24
56.06
187.50
1074.80
1014.04
930.41
83.63
166.43
1180.47
1052.66
961.16
91.50
151.61
1204.27
1072.69
981.01
91.68
133.68
1206.37
2003-04 (BE)
1248
Wheat
A. Acquisition cost
685.51
716.60
739.13
757.64
(i) Pooled cost of grain
518.08
580.66
571.93
585.76
(ii) Procurement incidentals
117.06
135.94
167.20
171.88
(iii) Carry over charges to
50.37
State Governments
B. Distribution cost
202.00
141.66
132.17
121.52
Economic cost (A+B)
887.51
858.26
871.30
879.16
921
Source: Food Bulletin, Department of Food and Public Distribution, Economic Survey 2002-03
Table X
Foodgrains allocation and offtake under Public Distribution System
(Million tonnes)
Wheat
Rice
Year
Allocation
Offtake
Allocation
Offtake
1992-93
9.25
7.47
11.48
9.55
1993-94
9.56
5.91
12.41
8.87
1994-95
10.80
4.83
13.32
8.03
1995-96
11.31
5.29
14.62
9.46
1996-97
10.72
8.52
15.10
11.14
1997-98
10.11
7.08
12.83
9.90
1998-99
10.11
7.95
12.94
10.74
1999-00
10.37
5.76
13.89
11.31
2000-01*
11.57
4.07
16.26
7.97
2001-02*
13.14
5.68
17.23
8.16
2002-03*
29.45
6.12@
27.35
7.39@
* including Antyodaya Anna Yojana
@ upto December, 2002
Source: Department of Food and Public Distribution, Economic Survey, 2002-03
44
Table XI
Surplus foodstocks – Fundamental resource for drought relief
During 2002-03, 17 major states including Andhra Pradesh, Chattisgarh, Haryana, Himachal
Pradesh, Karnataka, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu and UP faced a drought
like situation. Unlike floods where the impact is limited to only one season, the impact of
drought lasts not only through the four months of kharif (July-October) but also through rabi
(November-March) and the next kharif upto October when the new harvest arrives and incomes
begin to accrue. Distress due to drought, therefore, lasts three seasons.
Fortunately, in 2002-03, the Economic Survey, 2002-03 pointed out, the country’s godowns
were overflowing with surplus stocks of foodgrains, which constituted the fundamental
resources for providing timely relief to the states under the various welfare schemes of the
Government. The total stock of foodgrains as on January 1, 2003 was 48 million tonnes as
against a minimum norm of 16.8 million tonnes. The surplus stock helped mitigate the adverse
effects of the drought, according to the survey. Further, FCI and its agencies had adequate
foodgrain stocks located in the drought-affected states where there were 3.04 lakh fair price
shops, the survey noted.
Table XII
Offtake of foodgrains (rice+wheat) under welfare schemes
Welfare schemes
Annapurna
Earthquake
World Food Programme
Sampoorna Grameen Rozgar Yojana
Indigent People
Nutrition Prog.
Hostel SC/ST/OBC
Food-For-Work
Mid-Day-Meal
Total
2000-01
2001-02
0.25
10.72
0.05
0.33
0.00
0.18
0.00
5.44
14.93
31.91
0.93
0.12
0.50
18.83
0.17
1.35
0.83
28.36
20.76
71.85
(Lakh tonnes)
2002-03
(upto Dec. 2002)
0.87
0.00
0.32
54.76
0.08
1.22
1.02
1.18
15.11
74.58
Offtake under the various welfare schemes picked up considerably during the current year and was 7.46
million tonnes upto December, 2002. Offtake under SGRY and Mid Day Meal Scheme had been very
good. Surplus stocks of foodgrains were well utilised to provided relief to the drought-affected states.
Source: Economic Survey, 2002-03
45
Table XIII
CACP’s methodology for cost calculation
The minimum support prices for major agricultural products are announced each year after
taking into account the recommendations of the Commission for Agricultural Costs and Prices
(CACP). The CACP, while recommending prices takes into account all important factors
including cost of production, changes in input prices, input/output price parity, trends in market
prices, inter-crop price parity and demand and supply situation, parity between prices paid and
prices received by farmers. Among these multiple factors that go into the formulation of
support price policy, the cost of production is the most significant. Thus, for making the
support price policy functionally meaningful, the minimum guaranteed price ought to cover at
least the reasonable cost of production in a normal agricultural season obtained from efficient
farming.
The CACP analyses the cost of production data for various states in respect of various
commodities in consultation with the states. After a meeting of the State Chief Ministers, the
MSP/procurement prices are declared. With costs of production for the same crops varying
between regions and also across within the same region and for different producers, the level of
costs that could be accepted as a norm poses enormous difficulties.
Cost concepts
In fixing the support prices, CACP relies on the cost concept, which covers all items of expenses
of cultivation including the imputed value of inputs owned by farmers such as rental value of
owned land and interest on fixed capital. Some of the important cost concepts used by CACP
are the C2 and C3 costs.
C2 cost
C2 cost includes all actual expenses in cash and kind incurred in production by the actual owner
plus rent paid for leased land plus the imputed value of family labour plus interest on the value
of owned capital assets (excluding land) plus rental value of owned land (net of land revenue)
C3 cost
Cost C2+10 percent of cost C2 to account for managerial remuneration to the farmer.
Costs of production are calculated both on a per quintal and per hectare basis. Since cost
variations are large over states, CACP recommends that MSP should be considered on the basis
of C2 cost. However, increases in MSP have been so substantial in case of paddy and wheat,
that in most of the states MSPs are way above not only the C2 cost but the C3 cost as well. For
instance, the weighted average of C3 costs of eight wheat growing states is presently only Rs.
532 per quintal while the weighted average of C2 cost is Rs. 483 per quintal as against which
the CACP recommended MSP 2002-03 is Rs. 620 per quintal. The producer subsidy at C2 cost
is, therefore, Rs. 137 per quintal (MSP minus C2 cost) and Rs. 88 per quintal at C3 cost (MSP
minus C3 cost).
46
Table XIV
Central foodgrain stocks and minimum buffer stock norms
(Million Tonnes)
Wheat
Rice
Beginning of the Min.
Actual
Min.
month
norm
Stock
Norm
January-1996
7.7
13.1
7.7
April
3.7
7.8
10.8
July
13.1
14.1
9.2
October
10.6
10.5
6.0
January-1997
7.7
7.1
7.7
April
3.7
3.2
10.8
July
13.1
11.4
9.2
October
10.6
8.3
6.0
January-1998 (P)
7.7
6.8
7.7
April
3.7
5.1
10.8
July
13.1
16.5
9.2
October
10.6
15.2
6.0
January-1999
8.4
12.7
8.4
April
4.0
9.7
11.8
July
14.3
22.5
10.0
October
11.6
20.3
6.5
January- 2000
8.4
17.2
8.4
April
4.0
13.2
11.8
July
14.3
27.8
10.0
October
11.6
26.9
6.5
January-2001
8.4
25.0
8.4
April
4.0
21.5
11.8
July
14.3
38.9
10.0
October
11.6
36.8
6.5
January-2002 (P)
8.4
32.4
8.4
April
4.0
26.0
11.8
July
14.3
41.1
10.0
October
11.6
35.6
6.5
January-2003 (P)
8.4
28.8
8.4
(P) Provisional
Source: Department of Food and Public Distribution.
47
Actual
Stock
15.4
13.1
12.9
9.3
12.9
13.2
11.0
7.0
11.5
13.1
12.0
9.0
11.7
12.2
10.6
7.7
14.2
15.7
14.5
13.2
20.7
23.2
22.8
21.5
25.6
24.9
21.9
15.8
19.4
Total
(Wheat and rice)
Min.
Actual
norm
Stock
15.4
28.5
14.5
20.9
22.3
27.0
16.6
19.8
15.4
20.0
14.5
16.4
22.3
22.4
16.6
15.3
15.4
18.3
14.5
18.2
22.3
28.5
16.6
24.2
16.8
24.4
15.8
21.9
24.3
33.1
18.1
28.0
16.8
31.4
15.8
21.7
24.3
42.2
18.1
40.1
16.8
45.7
15.8
44.7
24.3
61.7
18.1
58.3
16.8
58.0
15.8
50.9
24.3
63.0
18.1
51.4
16.8
48.2
Table XV Minimum support/procurement price of wheat and paddy
(Rs/quintal)
Wheat
Paddy
Crop year
MSP
Percent
Common Percent Fine
Super
Grade ‘A’
change
change
fine
1992-93
330
20.0
270
17.4
280
290
1993-94
350
6.1
310
14.8
330
350
1994-95
360
2.9
340
9.7
360
380
1995-96
380
5.6
360
5.9
375
395
1996-97
475
25.0
380
5.6
395
415
1997-98*
510
7.4
415
9.2
455
1998-99
550
7.8
440
6.0
470
1999-00
580
5.5
490
11.4
520
2000-01
610
5.2
510
4.1
540
2001-02
620
1.6
530
3.9
560
2002-03
530 $
0.0 $
560 $
* Effective 1997-98, MSP is fixed for only two varieties of paddy, common and grade-A.
$ One Time Special Drought Relief of Rs. 20/- per quintal has been given in case of paddy in
2002-03 over and above the existing MSP.
Source: Ministry of Agriculture
Year
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
BPL
APL
1998-99
BPL
APL
1999-2000
BPL
APL
2000-01
BPL
Table XVI PDS issue price of wheat and rice
(Rs. per quintal)
Wheat
Percent
Rice
Percent
change
change
234
289
280
19.7
377
30.4
280
0.0
377
0.0
330
17.9
437
15.9
402
21.8
537
22.9
402
0.0
537
0.0
402
0.0
537
0.0
250
450
-
350
700
-
250
650
0.0
44.4
350
905
0.0
29.3
250
682
0.0
4.9
350
905
0.0
0.0
415
66.0
565
61.4
48
APL
830
21.7
2001-02
BPL
415
0.0
APL
610
-26.5
2002-03
April
BPL
415
0.0
APL
510
-16.4
July
BPL
415
0.0
APL
610
19.6
BPL- below poverty line; APL-above poverty line
Economic Survey – 2002-03
49
1130
24.9
565
830
0.0
-26.5
565
730
0.0
12.0
565
830
0.0
13.7
(VII) FERTILISER SUBSIDY
Presumably, the subsidy policy in regard to fertilisers has been prompted by two
considerations: providing an essential input to farmers at economic prices and
ensuring an adequate return on investment to producing plains.
During the
Eighties, kharif crops had accounted for nearly a third of the total fertiliser
consumption in the country, but rabi crops accounted for a much larger share.
In recent years, however, consumption has been evenly spread between the two
sowing seasons, possibly reflecting an enhanced availability of irrigation water
during the kharif season. In 1980-81, the rabi season’s share was 61.2 percent,
while the kharif season accounted for only a modest 38.8 percent. By 2000-01,
the kharif season reported an application of 48.1 percent as compared to the
rabi season’s 51.9 percent. This proportion was, more or less, kept in 2001-02,
with 46.6 percent for kharif and 53.4 percent for rabi. Between 1980-81 and
1999-2000, the consumption of fertilisers rose by more than three times from 5.5
million tonnes to 18.07 million tonnes. In 2000-01, however, the consumption
fell to 16.7 million tonnes, which the Government attributed to inadequate
rainfall in many parts of the country, but rose significantly in the following year
to 17.36 million tonnes, thereby increasing the per hectare fertiliser consumption
to 90.12 kg in 2001-02 from 86.71 kg in 2000-01.
A higher increase in the
consumption of phosphate (3.96 percent) and potassic fertilisers (3.57 percent)
in 2001-02 was perceived as a welcome trend towards a balanced use of
nutrients.
Table XVII
Consumption of fertiliser in nutrient terms
Fertilisers
1997-98
Nitrogenous Fertilisers
10,901
Phosphatic Fertilisers
3,914
Potassic Fertilisers
1,373
All Fertilisers (NPK)
16,188
Percentage increase
13.14
Source: Ministry of Chemicals & Fertilisers.
1998-99
11,354
4,112
1,332
16,798
3.77
50
1999-00
11,592
4,799
1,678
18,069
7.57
(‘000 tonnes of nutrients)
2000-01
10,920
4,215
1,567
16,702
-7.56
2001-02
11,310
4,382
1,667
17,360
3.90
Table XVIII Per hectare consumption of fertilisers for cropped area
during 2001-02
S. No.
State / U.T.
2001-02
1.
Andhra Pradesh
143.46
2.
Karnataka
101.48
3.
Kerala
60.72
4.
Tamil Nadu
141.55
5.
Gujarat
85.52
6.
Madhya Pradesh*
39.96
7.
Maharashtra
78.24
8.
Rajasthan
38.88
9.
Haryana
155.69
10.
Himachal Pradesh
41.40
11.
Jammu & Kashmir
64.55
12.
Punjab
173.38
13.
Uttar Pradesh**
130.44
14.
Bihar
87.39
15.
Orissa
40.91
16.
West Bengal
126.82
17.
Arunachal Pradesh
2.88
18.
Assam
38.81
19.
Tripura
30.45
20.
Manipur
104.94
21.
Meghalaya
17.16
22.
Nagaland
2.13
23.
Mizoram
13.72
24.
Sikkim
9.72
All India
90.12
* Includes Chhatisgarh
** Includes Uttaranchal
Source: Ministry of Chemicals & Fertilisers
Table XIX : Season-wise consumption of fertilisers
(‘000 Tonnes of nutrients)
Percent share
Year
Kharif
Rabi
Total
Kharif
Rabi
1970-71
830
229
629
1980-81
2,138
3,378
5,516
38.8
61.2
1990-91
5,741
6,805
12,546
45.8
54.2
2000-01
8,034
8,668
16,702
48.1
51.9
2001-02
8,085
9,275
17,360
46.6
53.4
Source: Ministry of Chemicals and Fertilisers
51
In 2002-03, fertiliser production in the country (nitrogen & phosphates) was
projected at 15.23 million tonnes (11 million tonnes of nitrogen and 4.23 million
tonnes of phosphate).
As for potash (murate of potash MOP), the entire
requirement is imported, as the country has no commercially exploitable sources
of MOP. The farm-gate price of urea was fixed at Rs.4,830 per tonne in 200203. On an average, a subsidy amounting to more than Rs.4,100 per tonne is
presently borne by the Government on every tonne of urea sold to farmers. The
subsidy in 2002-03 (BE) was Rs. 7,004 crore. Coming to phosphatic and potassic
fertilisers, one must recall the decontrol effected on August 25, 1992 and the
sharp rise in prices as well as an equally sharp fall in consumption that followed
it.
The price concession (subsidy) was consequently enhanced and by a
substantial margin. It is under this facility that the Government announces the
indicative maximum retail price (MRP) for DAP, MOP and complex fertilisers. As
for the MRP of SSP, this was left to the respective state governments, leading to
price variations.
At the outset, we mentioned the dual reasoning behind the subsidy policy. In
outlining the core areas of the research study, reference was made earlier to the
imperative of policy makers putting an end to the regime of rewarding
inefficiency and punishing efficiency.
It was, in fact, acknowledged by the
Government that the individual retention price scheme (RPS) for urea producers
had led to certain aberrations. Over the years, primarily, the scheme contributed
to the adoption of a cost-plus approach in reimbursing the cost of production to
the urea producers.
This was reinforced by the Expenditure Reforms
Commission. Invariably, the approach generated no compulsion for producers to
improve their efficiency. This should be our basic objection, given the thrust of
this study for the Twelfth Finance Commission.
52
Table XX
Fertiliser production, imports and subsidies
Imports*
Subsidy
Year
Production*
Imported Domestic Decontrolled
Nitrogen
Phosphate N+P+K
Urea
Urea
Fertiliser
(‘000 tonnes)
(Rs. Crore)
1960-61
98
52
419
1970-71
830
229
629
1980-81
2,164
841
2,759
335
170
1990-91
6,993
2,052
2,758
659
3,730
2000-01
10,962
3,743
2,090
1
9,480
4,319
2001-02
10,768
3,860
2,398
47
8,257
4,504
2002-03 (BE)
10,876
4,356
1,004*
505
6,499
4,224
(BE) Budget estimate
*Upto 31/10/2002
Source: Ministry of Chemicals & Fertilisers.
P&K Total
Rightly, policymakers concluded that the RPS was totally out of tune with
economic reality, characterised by a thrust on international competitiveness,
global marketing, import liberalisation, import price parity and free trade. The
decision was taken that by end of the eighth pricing period of the RPS on 31st
March, 2003, a new pricing policy for urea units based on the recommendations
of the Expenditure Reforms Commission (ERC) would come into effect.
A key goal of the amended policy regime is to gradually move in the direction of
parity with international prices based on the use of the most efficient feedstock
and state of the art technology. The policy is in the form of a group-based
concession scheme. The urea units have been placed in six groups based on
vintage and feedstock. The scheme is being implemented in three stages. Stage
I covers the fiscal year 2003-04. Stage II would be for two years ending March
31, 2006. The concluding stage will come into effect on April 1, 2006 and the
modalities are to be decided by the Department of Fertilisers (DoF) before April
1, 2006 after a review of the implementation of stages I & II as well as the
prospects of availability of gas and LNG to be supplied by public/private sector
companies. The changed dispensation has been designed to promote efficiency
in production through measures of cost saving and efficient economic practices
53
505
4,389
13,800
12,808
11,228
at par with international norms by the domestic urea producers.
Further, a
beginning has been made towards greater de-control and liberalisation.
Allocation of urea under the Essential Commodities Act, 1955 is to be restricted
up to 75 percent and 50 percent of the installed capacity (as reassessed) of each
unit in kharif 2003 and rabi 2003-04 respectively; thereafter, the units will be
free to sell the remaining urea at the designated MRP.
During stage II
commencing 01/04/2004, urea distribution will be totally decontrolled after an
evaluation of the performance in stage I. This is to be done in consultation with
the Ministry of Agriculture. The ERC scheme is designed to make farmers pay
market-determined prices but the process spelt out is hardly re-assuring on this
aspect. The Commission does not dare say that farmers can consume fertiliser
on commercial terms and still suffer no disincentive
to add to the nation’s
production of foodgrains without the helping hand of the Government.
The
same reluctance is noticeable in the reports of other expert bodies. This study
advocates a firm shift to unsubsidised use of fertiliser by all farmers except those
in the small and marginal strata.
54
FERTILISER SUBSIDY: ANNEXURE
1. CHANGE IN PRICING POLICY FOR UREA MANUFACTURERS
The Government approved on January 30, 2003 a new pricing policy for urea
units to replace the Retention Price Scheme and to come into effect from
1.4.2003.Salient features of the policy as also the modalities for implementation
of the Scheme were as follows:
The primary consideration and goal of the new pricing policy is to encourage
efficiency parameters of international standards based on the usage of the most
efficient feedstock, state-of-art technology and also ensure a viable rate of return
to the units.The new scheme will come into effect from 1.4.2003 and will be
implemented in stages.Stage-I would be of one year duration, from 1.4.2003 to
31.3.2004.Stage-II would be of two years duration, from 1.4.2004 to
31.3.2006.The modalities of Stage-III are to be decided by the Department of
Fertilisers (DoF) after review of the implementation of Stage-I and Stage-II.
There will be six groups based on vintage and feedstock for determining the
group – based concession under the new Scheme, namely, pre-1992 gas based
units, post-1992 gas based units, pre-1992 naphtha based units, post-1992
naphtha based units, fuel oil/low sulphur heavy stock (FO/LSHS) based units and
mixed energy based units.The mixed energy based group shall include such gasbased units that use alternative feedstock/fuel to the extent of more than 25
percent as admissible on 1.4.2002.
Classification of units among different
groups so determined shall remain unchanged during Stages-I and II.
During Stage-I, the following measures are to be put into effect:
Rates of concession for the units in each group to be determined in two steps. In
Step-I, the weighted average retention price and the dealer’s margin of the units
55
in the respective group as applicable on 1.4.2002 would be computed. Units
having an exceptionally high or low retention price, i.e. deviation of 20 percent
and above with reference to the group average computed in Step-I are to be
treated as ‘outliers’ in their respective groups.
In Step-2, the final weighted
average group retention price after excluding the ‘outliers’ will be computed.
The group concession rate on 1.4.2003 would be computed on the data of the
units on 31.3.2003 as applicable.
To determine that, the retention prices as
notified for the half year up to 30.9.2002 are to be taken as the base and the
adjustment on the basis of 8th pricing period for the remaining period, i.e.
1.10.2002 to 31.3.2003, to be made before the end of financial year 2003-2004.
Effective 1.4.2003, the units in each group are to receive the concession after
adjustment on account of escalation/de-escalation in the variable cost related to
changes in the price of feedstock, fuel, purchased power and water. The
modalities for this purpose are to be worked out by DoF for Stage-I and Stage-II
on the basis of group energy data and efficient consumption patterns of the units
keeping in view the data of 8th pricing period.
Those units which have a lower retention price than the weighted group average
(estimated after excluding the ‘outliers’ as final group retention price) are to get
the concession as per their individual retention price.
The remaining units
(excluding ‘outliers’) are to get the concession based upon the weighted group
average retention price computed after excluding the outliers. This basis is to be
valid for Stage-II also.
After the commencement of Stage-I and also beyond Stage-II, there is to be
neither any reimbursement of the investment made by a unit for improvement in
operations nor any mopping up of gains of the units as a result of operational
56
efficiency. The parameters outlined in the new scheme are to be the inputs for
computation of concession.
The ‘outliers’ having a retention price higher than 20 percent or more from the
group average in their respective group are to be granted an adjustment phase
of one year, i.e. Stage-I.During Stage-I, the ‘outliers’ are to get a rate of
concession based upon the group weighted average (after excluding ‘outliers’)
and a structural adjustment – 50 percent of the difference between their
respective retention price and the group average computed as Step-II –
mentioned in para 3.1.
Group concession rates are to be calculated excluding the incidence of sales tax
on inputs to be computed and compensated on the basis of rates effective on
1.4.2002 for each unit. However, the compensation is to be proportionately
reduced if the rates are reduced by any state.
During Stage-II, i.e. from 1.4.2004, the following measures are to be put into
effect :
There will be no special treatment for the ‘outliers’ and all the units are to get
the group rate of concession as outlined earlier for Stage-I.The units having a
lower concession rate than the group average are to continue to get the
concession as per their individual concession rate. The six groups are to remain
as in Stage-I.
The concession rates are to be adjusted for reduction in capital – related
charges.
Further, the group energy norms are to be enforced on efficiency
considerations. The Department of Fertilisers is to take into consideration the
recommendations of the Gokak Committee in determining the group energy
norms. The scale of reduction on account of capital – related charges (CRC) are
57
also to be finalised by the Department of Fertilisers. Thus, the adjustments on
account of CRC and group energy norms effective in Stage-II are to be made
known to the units so that they have reasonable time for making necessary
technological and other structural adjustments.
Under the new Scheme, there is to be no capping on production of urea. The use
or sale of by-products such as ammonia, CO2 etc. is to be permitted if considered
surplus beyond the reassessed capacity for urea production. The final concession
is to be determined on the reassessed installed capacity. The additional
production beyond the installed capacity is to receive a concession if it is mopped
up
under
the
ECA
(Essential
Commodities
Act
1955)
allocation.
The
feedstock/fuel ratio for the entire production is to be taken into consideration for
assessing the concession.
PHASED DECONTROL OF UREA DISTRIBUTION/MOVEMENT
In Stage-I, i.e. from 1.4.2003 to 31.3.2004, the allocation of urea under the ECA
is to be restricted up to 75 percent and 50 percent of installed capacity (as
reassessed) of each unit in kharif 2003 and Rabi 2003-04, respectively.
The
Department is to be left free to make necessary adjustments in determining the
ECA allocation in case of the estimated/actual production during the year being
below the reassessed installed capacity. The remaining urea production is to be
available to the manufacturers for sale to the farmers at MRP anywhere in the
country. Manufacturers are to be entitled to sell urea to complex manufacturing
units on the principle of import parity price or to export, with the condition that
no subsidy/concession will be payable on that quantity and it will be computed
towards the quantity permitted for decontrolled sale. (Urea export has potential,
more so now with domestic prices ruling at $ 170 a tonne against $ 200 globally.
The few low cost plans alone can capitilise on the opportunity, those operating
58
on gas as feedstock.
Those using naphtha do not stand much of a chance.
Exports this year can touch 5 lakh tonnes if controls are eased on trade). The
DoF is to reserve the authority to make suitable adjustments, in view of demandsupply positions in the ECA allocation, and de-controlled urea up to 15 percent
over and above the reassessed installed capacity in case their applicable
concession rate is financially and economically efficient thereby contributing to a
reduction in the subsidy burden. During Stage-II, urea distribution is to be totally
decontrolled after having evaluated the Stage-I and with the concurrence of the
Ministry of Agriculture. (Quite clearly, fertiliser should cease to be in the ambit
of ECA, under a reform of subsidies).
FREIGHT
During 2003-04, equated freight is to be worked out for the urea quantity under
ECA allocation on the basis of average normative lead and rail-road mix of each
unit for the last three years i.e. 2000-01, 2001-02 and 2002-03. Suitable
adjustments are to be granted in the event of rail freight revision during the
course of 2003-04. Secondary freight will remain the same as fixed for the 8 th
pricing period. For the quantity outside ECA allocation, a reduction of Rs. 100 per
metric tonne is to be made from the equated freight. The same levels of
payment are to be made in Stage-II as well. Regarding the road component of
the primary freight, appropriate adjustments are to be made as per annual
increase/decrease in the wholesale price index of diesel in the previous year for
the fuel part and indices of other components are to remain unchanged in the
composite index.
The existing scheme for special freight subsidy is to continue for supplies to the
North Eastern States and Jammu & Kashmir. The Government also is to have the
right to issue a special movement order under the EC Act as per the demand –
supply situation, particularly for difficult and remote areas.
59
The chief executives of various urea manufacturing companies were to execute
an undertaking in a prescribed proforma to confirm their participation in the
amended scheme.
2.
ENERGY
NORMS,
RAW
MATERIAL
MIX
AND
MECHANISM FOR PROVIDING ESCALATION/DE-ESCALATION
IN PRICES OF INPUTS FOR UREA UNITS.
On January 30, 2003 the Government had stated that the group energy norms
would be enforced on efficiency considerations during Stage-II of the new pricing
scheme (NPS). Accordingly, the following decisions were taken with regard to
energy norms, raw material mix (feedstock, fuel, purchased power and water)
and the mechanism for providing escalation/de-escalation in the prices on inputs
for urea units during Stage-II commencing from 1.4.2004.
Pre-set energy norms for urea units during Stage-II of NPS are to be as given in
Table XX.
As regards the raw material mix during Stage-II, the actual ratio/proportion of
the mix of each unit will be considered, subject to a ceiling of the pre-set energy
norms as indicated while computing the escalation/de-escalation in the
components of variable cost related to feedstock, fuel and purchased power. As
regards water, the consumption norms fixed for the 8th pricing period will
continue.
During Stage-II, escalation/de-escalation on the cost of the components of
variable cost will be worked out by the Fertiliser Industry Co-ordination
Committee (FICC) exclusive of sales tax. The sales tax will be calculated to the
60
level of pre-set energy norms and paid separately as per the formula contained
in the policy statement of 30.1.2003. Escalation/de-escalation will be carried out
on a quarterly/annual basis. However, if the actual energy consumption of a unit
is lower than the pre-set energy norms, the resultant excess would be valued for
escalation/de-escalation at the basic rate (excluding sales tax, transportation cost
etc.) of the cheapest input, as per the existing practice followed by the FICC.
There is to be no reworking of the concession rates for urea units determined as
on 1.4.2003 (i.e. beginning of Stage-I of NPS). In Stage-II, beginning 1.4.2004,
the concession rates are to be adjusted only for the pre-set energy norms and
escalation/de-escalation in the components of variable cost based on pre-set
energy norms as indicated below.
Table XXI
Pre-set energy norms for urea units during Stage II of New Pricing
Scheme
S. No.
Name of the urea unit
Pre-set energy norm
(Goal/MT of urea)
Group-I: Pre-1992 Gas
1.
BVFCL-Namrup-III
9.264*
2.
IFFCO – Aonla-I
5.938
3.
INDOGULF – Jagdishpur
5.874
4.
KRIBHCO-Hazira
5.952
5.
NFL-Vijaypur-I
5.952
6.
RCF-Trombay-V
9.569*
Group-II: Post-1992 Gas
1.
NFCL-Kakinada-I
5.712
2.
CFCL-Gadepan-I
5.712
3.
TCL-Babrala
5.507
4.
OCFL-Shahjahanpur
5.712
5.
NFCL-Kakinada-II
5.712
6.
IFFCO-Aonla-II
5.660
7.
NFL-Vijaypur-II
5.712
Group-III: Pre-1992 Naphtha
1.
SFC-Kota
7.847
2.
DIL-Kanpur
7.847
3.
IFFCO-Phulpur-I
7.847
4.
FACT-Cochin
9.529*
61
5.
MCFL-Mangalore
7.356
6.
MFL- Chennai
8.337*
7.
SPIC-Tuticorin
7.475
8.
ZIL-Goa
7.585
Group-IV: Post-1992 Naphtha
1.
IFFCO-Phulpur-II
5.883
2.
CFCL-Gadepan-II
5.678
Group-V: FO/LSHS
1.
GNVFC-Bharuch
7.989
2.
NFL-Nangal
9.517*
3.
NFL-Bhatinda
10.203*
4.
NFL-Panipat
9.654*
Group-VI: Mixed Feedstock
1.
GSFC-Baroda
6.935
2.
IFFCO-Kalol
6.836
3.
RDF-Thal
7.004
* These norms are on the basis of the lowest of energy consumption achieved in
2000-01, 2001-02 and 2002-03 or the 8th pricing period norms. The data of
2002-03 are provisional and the final data could influence the pre-set energy
norms.
3.
Reduction in rates of concession during Stage-II
As per the Fertiliser Department’s policy statement of 30.1.2003, the concession
rates payable during Stage-II of NPS, i.e. w.e.f. 1.4.2004, were to be adjusted
for reduction in capital – related charges. Accordingly, on August 6, 2003 it was
decided that the concession payable on account of reduction in capital-related
charges would be reduced as given below during Stage-II of NPS, w.e.f.
1.4.2004:
S.No.
1.
2.
3.
Table XXII
Name of the units/groups
Three units of pre-1992 gas–based group
(i)
Indo Gulf Fertilisers Ltd. Jagdishpur
(ii)
National Fertilisers Ltd., Vijaipur-I
(iii)
Indian
Farmers
Fertilisers
Cooperative Ltd. – Aonla-I
All units of post-1992 gas–based group (seven
units)
All units of post-1992 naphtha–based group
(two units)
62
Rate of reduction
(Rs./MT of urea)
120
170
170
There is to be no reduction in concession rates on account of reduction in CRC
during Stage-II on NPS in respect of the remaining twenty units.
The Government’s package of incentives announced in January, 2004, for urea
producers should facilitate feedstock utilisation on a more rational basis and cut
down costs. The policy thrust is acceleration of a shift to natural gas from high
cost naphtha. This could explain the Union Cabinet’s shelving of a proposal by a
ministerial panel to raise natural gas prices – see Chapter-V - , but the urea
plants should not forever subsist on props of one kind or the other. Yes, urea
alone is globally price competitive and DAP, SSP and MOP can hardly ever lure
buyers abroad. But, this should justify less, not more, of subsidies.
63
(VIII)
SAFETY NET CONCEPTS AS EVOLVED
BY THE WORLD BANK
THE TRUTH !
As per WTO regulations, direct income transfers, not related to production, will
fall in the green box (exempted category). However, in India, food subsidy
is production-related, although because of costs and other issues, till
recently, food subsidy calculations according to WTO norms were
negative.
WHY SUBSIDIES ?
Subsidies are often chosen as an alternative to (or to supplement) income
transfers:

Through pricing, to shift demand patterns towards socially acceptable
norms and to ensure consumption of basic minimum needs – food, health,
education etc. Apparently, this may also facilitate more decision making
by women with subsidies rather than income transfers.

Politically expedient (middle class with voting power will also benefit). Also
difficult to dislodge because of interest groups.

Administratively convenient

Lack of faith in the “hidden hand” of Adam Smith – commodity markets
(black marketing/hoarding etc) as also poorly developed markets.
However, subsidies often distort production incentives in unintended ways
without consideration of true economic costs (E.g. growing rice in Punjab, which
requires huge quantities of water – available at zero cost, and probably, thus,
not available to other needy states for household consumption or for irrigating
other less water-hungry crops.).
64
WHO BENEFITS FROM FOOD SUBSIDIES?
In India, are subsidies producer subsidies or consumer subsidies?
Effectively, food subsidies in India are production subsidies, not really
consumer subsidies. If they were consumer subsidies, you would be
subsidising retail purchase/ consumption, not FCI procurement.

One reason peculiar to India is that producer subsidies were intended for
(a) national self-sufficiency (and not depend on foreign food imports in an
open economy) and provide base support for farmers (b) provide a net for
poor monsoons. But, in that case, the minimum support price should be a
support price marginally below the “fair” market price, and the FCI should
be a ‘procurer’ of last resort, not as is the case now, where it is the first
resort for non-premium rice and wheat from Punjab.

How is leakage / diversion to be measured, let alone tackled ? What about
political will e.g. there was a move to make household kerosene blue in
colour, but that would have made it more difficult to sell on the black
market – not so far accepted. (This has been accepted and the kerosene
that is for non-PDS sale is, indeed, blue in colour. The World Bank must
change its safety net concepts accordingly – KSR)

Who benefits from producer subsidies – rich, medium or poor producers?

In terms of rationing, consumption is rationed, but are producer subsidies
similarly rationed within and across states? Why do Punjab and AP corner
the vast majority of food subsidies?

If nothing else, restriction of ration cards for the poor brings down the
total volume available for purchase, but does it do so for procurement?

Are energy subsidies justified? How are they targeted? Electricity,
kerosene and LPG in the Indian context – different targets.
[Taken from the report of the World Research Institute]
65
(IX) SUBSIDIES: THE INTERNATIONAL EXPERIENCE
(Taken from “Price and tax subsidization of consumer
goods”, June-2002, World Research Institute)
Generalized Consumer Subsidies
Whenever a commodity or service is subsidised in a manner that does not
impose quotas, there is an implicit, or de facto, targeting of the benefits. These
benefits accrue to a household in proportion to the amount of that good that the
household purchases. For those commodities that are what economists term
normal goods (defined as goods with income elasticities – income elasticity
measures the percentage change in the commodity purchased with a one
percent change in income – between zero and one), the wealthier the
household, the greater the absolute value of the subsidy it receives. However,
with commodities in this category, the poorer the household, the larger the
subsidy is as a share of household income. Most commonly consumed grains
tend to fall in this group. However, occasionally a Government chooses to
subsidise goods for which the income elasticity is greater than one. This is the
cut-off by which luxuries are commonly defined. Despite the term “luxury,” many
commodities that are considered part of a normal diet such as meat and dairy
products often fall in this category.
The economic definition of a luxury,
however, implies that the amount spent on the good increases as a share of total
consumption as income rises. This also means that the amount transferred by a
subsidy on a good is both absolutely and relatively greater for the well off than
for the poor.
In contrast, there may be goods that are consumed in greater amounts by the
poor than by other segments of the population. While technically these
commodities are referred to in economic literature as inferior goods, this
designation pertains to the purchasing pattern (or negative income elasticity)
66
and not the physical attributes of the commodity. Thus, in some circumstances
coarse grains may be inferior goods in the sense that the absolute as well as the
relative value of the benefit of a subsidy is greater for the poor than for the nonpoor.
Nevertheless, from the standpoint of the nutritional qualities of these grains,
they are considered superior to the more popular highly polished or refined
grains.
Subsidies on commodities with low and, ideally, negative elasticities, if such
commodities are available, will be progressive. Subsidies on such commodities
are often referred to as self-targeted.
Self-targeting can also be used for
services such as subsidised clinics and—via wages—for determining who takes
up public work opportunities. This targeting can also be achieved if there are
grades of the subsidised good that consumers recognise as distinct. For example,
coarse (high extraction) flour is more likely to be consumed by the poor while
consumption of low extraction flour may be more evenly distributed through a
population. However, as purchases of a commodity are disaggregated into
different grades, each good will represent a comparatively small share of a
consumer’s budget.
This small share poses a limit on the amount of income
that can be transferred via a self-targeted commodity subsidy.
If the incidence of subsidy benefits were determined wholly by purchases in
integrated markets (and, as discussed below, it often is not), the amount of
subsidy going to households in different income quartiles would parallel
consumer demand and could be identified in advance using consumer
expenditure surveys. Most countries have consumer expenditure surveys that
can provide a reasonable guide to the distribution of general subsidies. Indeed,
such analysis can often be undertaken prior to a policy change to anticipate its
likely impact.
67
While the discussion so far has indicated some well-known patterns in the
relative magnitude of demand elasticities—for example, that grain consumption
is more evenly distributed across a population than is the consumption of meat—
there are few general patterns across all consumer groups. For example, sugar
and cooking oil may be consumed in virtually equal amounts across income
groups in a given country or region or they may be regarded as luxury
commodities.
Studies of subsidies in Egypt have found that the poor consume more sugar and
subsidised bread than the well-off do and that flour and cooking oil consumption
increases slightly with income (Ali and Adams, 1996 and Adams, 2000). An
earlier study found that the value of subsidised flour and bread consumed by the
poorest urban quartile in 1982 was 15 percent less than that purchased by the
rich. At that time, the poorest rural quartile bought 20 percent less from
subsidised government channels than did the richest rural quartile, whose
consumption was nearly the same as the urban poor (Alderman and von Braun,
1984). This implies that the former distribution was slightly biased towards the
well-off (although it contributed more to the poor as a share of income). A
decade later, government subsidies were somewhat more targeted to the poor.
In the interim, the government had implemented a policy that restricted
subsidies on refined flour and the bread made from such flour and concentrated
on bread made from high extraction flour.
This contrasts with how the subsidies on flour in Algeria were distributed among
income groups. In 1991, eight percent of subsidies on flour went to the poorest
quintile, while 36 percent went to the richest (Grosh, 1994). However, semolina
(couscous), for which the benefit ratio of 9:11 was more equitable, was the
principal staple in the economy rather than flour. The importance of the context
of the subsidy can also be illustrated by comparing the distribution of rice and
68
wheat in urban Belo Horizante, Brazil with the same commodities in Sri Lanka
prior to the introduction of a targeted programme in Sri Lanka in 1978. In Brazil,
the poor and the rich consumed similar amounts of the commodities and, thus,
the subsidy was only slightly regressive. In Sri Lanka, however, the poor
consumed only half as much wheat as the well-off. This is probably because in
Sri Lanka rice is the main staple for the majority of the population. Thus, urban
non-poor households as well as the comparatively few poor estate workers who
ate bread were the primary beneficiaries of the untargeted wheat subsidy.
MARKET ACCESS AS A DETERMINANT OF THE INCIDENCE OF
SUBSIDIES
The use of budget shares to subsidise commodities as an indication of the
distribution of benefits presumes that all segments of the population use the
same market channels. Otherwise, the redistributive nature of the subsidy will
differ according to whether the consumer purchased the good from the channel
that was subsidised rather than a parallel channel or consumed the good out of
home consumption. While rural residency is not synonymous with participation in
agriculture or, indeed, with self-sufficiency in production, a substantial share of
the rural poor do not benefit from consumer subsidies since they either produce
their own food or obtain what they need by direct trade with and purchases from
neighbours. This is not an insurmountable barrier to using subsidies as a
component of rural social protection; both Sri Lanka and Egypt have managed to
include the rural population in their subsidy systems. Nevertheless, it is an
obstacle that must be considered.
The poor also may be precluded from benefiting from subsidies by cash
constraints. If subsidised commodities are pre-packaged or only available for a
few days a month, the poor may be unable to make the scale of purchase
necessary to take advantage of the subsidy. This was the case with a rice
69
subsidy in urban Burkina Faso (Delgado and Reardon, 1988) and is often
presumed to limit utilisation of the subsidised public distribution system (PDS) in
India. A recent study has provided evidence that supports the contention that
the need of the poor to make small purchases influences which market channels
they choose. The study in question documented the small size of purchases
made by the poor in south India and the relatively higher prices that they paid
due to this cash flow problem (Rao, 2000).
Are Energy Subsidies Substantially Different from Food
Subsidies?
Many of the justifications for energy subsidies are similar to those outlined above
for food subsidies. Indeed, in many countries, energy subsidies may utilise far
more resources than are currently devoted to food or other commodities. This is
currently the case in the countries of the former Soviet Union and Eastern
Europe (World Bank, 2000b). There is also a tendency to subsidise energy when
a country is an exporter of gas or oil, often ignoring the opportunity cost of the
gas or oil. In other words, countries neglect the forgone export revenues that the
oil would otherwise bring in when they choose to set the domestic price of
energy. Azerbaijan, for example, a country that falls into both of these
categories, devotes 13 percent of its GNP to energy subsidies (World Bank,
2000c). Energy subsidies are frequently examined independently from other
subsidies such as food, partly because of the scale and partly because the range
of instruments for subsidising energy differs from food subsidies.
However, it is useful to highlight some key similarities and differences. As with
food prices, the incidence of energy subsidies and a first-order approximation of
their impact on welfare can be derived from a consumer survey that indicates
expenditures on the commodity by income group. Alderman and del Ninno
(1999), for example, used such an analysis to find out whether a VAT exemption
70
for kerosene in South Africa would be progressive. In contrast, a kerosene
subsidy in Indonesia favoured well-off consumers since the commodity is a
necessity rather than an inferior good in urban areas and is virtually unavailable
in rural communities (Pitt, 1985). Similarly, in most low-income countries,
electricity subsidies would be largely skewed to the well-off since poor
households are not connected to the national grid in many areas. This is not the
case, however, in much of the former Soviet Union and Eastern Europe (World
Bank 2000b), where energy subsidies can, thus, be more equally distributed.
Indeed, where connections to the grid are available, subsidies on electricity
usage can be rationed with prices increasing as the amount of electricity used
increases. In other countries, governments have set different prices for different
neighbourhoods depending on their level of prosperity. While these subsidy
mechanisms have counterparts in the area of food subsidies, other means of
providing energy subsidies—for example, by abstaining from suspending service
for non-payment in the case of poor households or by subsidising connections
but not usage—have no such parallel. Other characteristics of energy subsidies,
such as the fact that these subsidies may go to producers rather than
consumers, are not unique to that sector; yet these are potentially more
important in the design of an effective safety net than in the case of other
subsidies. As with any general subsidy, there is a danger that untargeted
production subsidies may dominate public expenditures on consumer subsidies
for the poor. Moreover, the distortions that such subsidies entail give interest
groups a reason to oppose such reforms.
HOW MUCH DO SUBSIDIES CONTRIBUTE TO
STABILISATION?
In addition to lowering the cost of food, price subsidies generally reduce price
fluctuations as well. Indeed, many governments have stabilisation as their stated
71
objective for introducing subsidies and ration programmes, though few, in fact,
concentrate only on price variability without also attempting to lower the mean
price. In many economic calculations, the value is low of reducing the variance of
prices while preserving the same average price. However, the value of stability
may reflect imperfections or frictions in the market. For example, producers
acquire and utilise new information at a cost. Similarly, consumers’ habits may
make it easier for them to adjust to a price decrease than to a price rise.
Moreover, as price fluctuations increase the risk of making investments, they
may lead to less than optimal investment in production and storage. Finally, as
Timmer (1991 and 1996) has argued, the preference for such stability is revealed
in the political marketplace.
In many circumstances, a general subsidy can moderate fluctuations in the cost
of living. However, in principal, a subsidy that reduces the cost of a good can
increase the variability in its price. For example, if a commodity is currently
subsidised at half the international price, a 25 percent increase in the world price
would lead to a 50 percent increase in the local price if the fluctuation was
passed through—that is, if the per unit subsidy remained constant. In contrast,
a fixed price, whether generalised or rationed, would stabilise the nominal cost to
consumers, but would pass on the instability to the budget. Thus, the potential
gains from stabilising wholesale and retail price may be offset by instability
transmitted to the macro-economy (Scobie, 1988).
A similar situation arises with price stabilisation programmes that use market
purchases and releases to keep prices within a given range. It is difficult to
provide the operating ministries with an annual budget for these activities since,
if run effectively, their costs will be unpredictable. In order to justify keeping
prices within this range, ministries must make storage agents commit to buying
whatever quantity of the good would be necessary to keep prices above the
trigger point. Similarly, storage agents must commit to selling as much as is
72
demanded at the ceiling price that they need to defend. Unlike private traders,
they are not able to offset losses that they incur when prices do not rise
sufficiently high to cover their storage costs with profits earned in other years.
Often, when governments cannot defend a price floor, they often put in a de
facto or de jure quota system with the inevitable result that a two-tier market
emerges to the disadvantage of smaller producers. Similarly, there have been
situations when budgets have been insufficient to produce as much grain as
needed for price stabilisation. In these cases, not all traders (or food processors)
were given access to stocks in the post-harvest season; instead, access was
granted preferentially to middle-income consumers. For example, in Zimbabwe,
maize in government storage is more likely to be processed in roller mills than in
the cheaper hammer mills. Thus, the cheaper source of maize becomes scarce
both as the post-harvest season lengthens and when the amount of domestic
production decreases. Thus, the weighted average cost of meal (from both roller
and hammer mills) is more volatile than the cost of the grain itself.
This is not to say that all stabilisation attempts assist only those fortunate
enough to benefit from quotas. Pakistan, for example, has maintained a
programme that handles a large share of the marketed surplus and of the
wholesale demand for wheat. The government’s storage policies—as well as
relatively low variability in production due to an extensive irrigation network—
have contributed to comparatively low price variability (Pinckney, 1989).
Accepting the desire for inter- as well as intra-annual price stability, Pinckney
then indicates the fiscal costs of policies that aim to achieve a desired level of
stability.
Indonesia has also been among the few countries that have been successful in
stabilising prices through its procurement and sales through its logistics agency,
BULOG (Timmer, 1991 and 1996). Unlike Pakistan, however, BULOG has
traditionally avoided getting involved in direct distribution to households.
73
Instead, it has used the open market. Periodically, it injects supplies of rice into
urban markets to put downward pressure on prices. Indonesia’s experience also
differs from other countries in that it has at various times imported a sufficiently
large share of the rice traded on the world market so that its policies actually
affect international prices. Dawe (1998) used the Indonesian Government’s
market interventions following the drastic devaluation of the rupiah in 1997 as an
illustration of the potential for price stabilisation. Timmer (1996) argued that this
kind of stabilisation enhances equity since it provides an environment that
encourages investment and this contributes to the macro-economy. However,
the interplay of consumer price stabilisation and macro-economic growth is a
controversial issue with little empirical evidence, in part because few countries
have been successful at stabilising prices. Indeed, to summarise, the benefits of
stabilisation are far harder to quantify than are the costs. Nevertheless, there
may be substantial macro-economic benefits to finding more efficient ways to
achieve a certain degree of price stabilisation.
Having said this, even Indonesia had to abandon its use of open market sales to
stabilise prices in the wake of the 1997 devaluation. Subsidising rice at well
below import prices proved fiscally unsustainable and encouraged smuggling and
re-export. However, Indonesia subsequently managed to implement a fairly well
targeted safety net consisting of the provision of a quota of subsidised rice to
poor households on the basis of a simple formula.
Thus, changes in its
exchange rate that turned a policy geared to producer subsidies into one that
required consumer subsidies prompted Indonesia to institute targeting to achieve
its food pricing objectives.
THE POLITICS OF SUBSIDY REFORMS
Who advocates food policy reform and who resists? (Among the few published
case studies or reviews of the process of subsidy reform are Bienen, and
74
Gersovitz (1986), Nelson (1985), Alderman (1988), Tuck and Lindert (1996),
Adams (1998), and Chowdhury and Haggblade (2000).) While a few countries
have introduced general food subsidies in recent years, many countries have
reformed their existing systems. The nature and timing of such reforms depend
on many factors, including the interplay of diverse interests expressed by local
groups and international agencies. For example, often support for subsidy reform
comes from Ministries of Agriculture, which represent farmers’ interests, as
opposed to Ministries of Food (or Supply), which represent consumers’ interests.
However, these two interests are often allies in lobbying for subsidies as this is
an option that allows the reduction of implicit taxation of farmers (or increased
subsidies) without increasing consumer prices. Finance Ministries, however, are
more likely to see these explicit costs as destabilising the national budget.
Other key groups in promoting or resisting food policy reform are food
processors and marketers. In the USA, food retailers and processors joined with
farm groups in opposition to changing the food stamp programme to an income
transfer. The retailers and processors stood to lose 14,000 to 25,000 jobs
together with the loss of 3,000 to 6,000 farm sector jobs if there were a 20
billion dollar reduction in total food stamp programme benefits (Kuhn et al,
1996).
An early, unsuccessful reform attempt in Bangladesh was stymied by millers. In
1955, the then province of East Pakistan attempted to eliminate rural rations and
to lay off the employees of the Civil Supply Department (CSD), only to reverse its
decision the following year. Interest groups, such as the CSD workers, are often
able to coordinate their efforts since their stake in perpetuating government
distribution is comparatively large and their numbers are sufficiently small that
each worker can envisage the personal benefits that may accrue from a joint,
well-organised response. Yet, the small numbers in each interest group often
also implies that these interest groups have to seek allies. In the case of the
75
1955 attempted reform, the CSD workers were able to recruit wider support
when the harvest failed and prices began rising.
This contrasts with successful reforms in Bangladesh in the 1990s and in
Pakistan in the 1980s. In these examples, new coalitions between supply
department workers and the general public were formed to oppose the reforms
because consumers were receiving few benefits due to poor administration and
other leakages and, thus, found little reason to defend their stake (Adams, 1998
and Alderman, 1988). Also, in Bangladesh, the urban ration was curtailed
because of a lack of supplies of the subsidised good at the local level. This meant
that there was only a narrow margin between the subsidised good and
alternative goods, which, again, reduced the value of the programme to
consumers, who were, thus, even less inclined to fight to keep it.
Market reforms can pre-empt consumer resistance by providing direct benefits
that offset the fact that consumers will no longer benefit from the lost subsidies.
Zimbabwe’s experience in removing subsidies on roller maize meal in 1993 is one
example of this. When the Zimbabwean Government cut its subsidies on roller
milled maize, it simultaneously liberalised private milling and trade. The net
result was that the cost of meal for poor consumers was lowered since they were
able to switch to cheaper hammer-milled meal (Jayne and Jones, 1997). This
separated the millers’ interests from those of the wider population and
contributed to the public’s acceptance of the reforms.
Mismanaged food price reforms weaken governments and often destroy the
careers of their advocates. While violent responses occur in the wake of only a
minority of food policy reforms and widespread consequences follow in even
fewer, most governments are well aware of the potential for this to happen. The
riots following a selective raising of commodity prices in Egypt in 1977 are
particularly well known; more recently, in 1997, food riots occurred in the wake
76
of currency devaluation (and subsequent increases in the costs of traded
commodities) in Indonesia and Zimbabwe.
Yet, because these are rarely relative to the number of price changes and
systematic reforms that have been introduced, policymakers have an interest in
assessing what contributes to public acceptance of reforms. A few general
patterns emerge from country experiences.
First, the public is more likely to accept a policy change if they are told the
rationale behind it, perhaps through advanced publicity. For example, they could
be told that the government is seeking to make fiscal savings (presented in
concrete terms such as the share of oil revenues, overall taxes, or the number of
schools that could be built) or to minimise economic costs such as corruption and
the burden on farmers. Early publicity in this regard may prevent some interest
groups from hiding their self-interested aims by arguing that the reform will
impose hardships on a wider community. To various degrees, this strategy has
been used in Bangladesh, Pakistan, and Zimbabwe.
The Government of Egypt, which failed to prepare the public for its abolition of
subsidies in 1977, regularly compared the cost of the subsidy in the 1980s to the
overall size of revenues from the Suez canal in order to impress its magnitude
upon the population. Similarly, in Tunisia, which has a history of violent protests
against subsidy cuts, the government preceded the reforms in the 1990s by a
public relations campaign. The campaign stressed the cost of the system and the
services—such as the number of hospital beds—that could be purchased with the
same resources.
Alternatively, an intense media campaign can be used during the first months of
a programme. In Jamaica, generalised food subsidies were replaced by food
stamps almost immediately after this change was announced by the
77
Government. In the following six months, an extensive media campaign was run
using radio, television, handbills, a public address system, and a series of inserts
in a major national newspaper to announce and explain the system and to
publicise how the public could sign up for food stamps.
Second, Governments can mute opposition to subsidy reform from coalitions of
the poor and ideologically motivated groups by introducing credible policies to
protect the most vulnerable groups. This does not necessarily have to be in
terms of food subsidies as cash transfers can have a similar, or greater, impact
on poverty. Nor does it have to consist of direct compensation to all individuals
for the costs of the reforms. Indeed, compensation as opposed to redirecting
funds is ill-advised; if all groups who lose out as a result of a policy change are
compensated fully for their loss, not only will there be no fiscal savings but any
mistargeting will be perpetuated. Public acceptance is likely to be enhanced if the
Government introduces safeguards for the poor that are perceived to be
equitable as well as credible.
If the safety net programme is in place at the time when the inefficient
programme is reformed, then the Government’s credibility is guaranteed.
Constituents can then assess the fairness of the benefits of the safety net as well
as the impact of the market reforms. Credibility can also be enhanced if the
programme is part of a popular mandate or election manifesto. In some
countries, such as Jamaica and Sri Lanka, the reform of untargeted price
subsidies was debated in election campaigns. In other countries, the new
Government has used the grace period that often follows an election to make
reforms in keeping with the party’s election platform.
Third, these coalitions of public support may be needed to offset opposition from
interest groups who benefit from the subsidies that are due to be abolished. This
suggests that Governments need to pay particular attention to institutions and
78
merchants who have a vested interest in the economic distortions that many
subsidy programmes create. This is a very different issue than protecting poor
consumers who will see their real income decline when food prices rise. Small
interest groups tend to be able to mobilise to protect their concentrated benefits.
Whenever possible, Governments should try to change administrative structures
to shift the economic rents that these groups receive to the general population,
even if there are no obvious savings to the treasury. Similarly, reducing many
price distortions and indirect subsidies will not yield explicit budgetary savings
although the economic gains may be appreciable.
Fourth, changes in international prices will influence the costs of a subsidy
programme.
Often when world prices are low, a food subsidy provides little
benefit to the population. This may be an opportunity to change market
structures and, thus, allow the Government to consider other options including
targeted programmes or income transfers should prices rise. (In India, the
Government, evidently, takes no notice of global price movements in dealing
with food subsidy – related issues even in respect of foodgrains exports.
Ironically, exports take place at prices that are on par with PDS rates for BPL
buyers or even less, regardless of a global buoyancy – KSR)
The Albanian Government failed to take advantage of one such opportunity in
the mid-1990s. While it eliminated many price subsidies and instituted a targeted
income transfer in its place as it opened its economy, it neglected to remove
administrative price ceilings on bread. For a few years, these ceilings were moot
as they were higher than the market price. However, when world grain prices
shot up in 1995, in order to defend the ceiling on bread prices, the Government
had to put restrictions on flour prices and to provide subsidised wheat to millers.
This entire series of interventions were unplanned and expensive. The system of
setting prices was eventually scrapped when prices reverted to trend. Had the
Government taken this step earlier, it would have been able to compensate poor
79
households for the sharp price through its targeted public assistance
programmes.
There is less of a consensus on a fifth issue, the pace at which food policy
reforms should be introduced. Egypt has been able to reduce the overall costs of
its subsidies by making gradual changes in unit costs as well as in the number of
products that it subsidises.
Whether this can be applied in other contexts,
however, is questionable. Some policymakers favour making small price changes
because these are too incremental to be likely to provoke organised protests and
can be accommodated by comparatively minor adjustments in household
budgets. However, repeated price changes may convey the impression that the
Government has no plan, or capacity, to hold the line. Thus, the credibility of the
Government may be called into question. Moreover, if merchants anticipate price
changes, they may withhold their products until the changes are implemented.
Also, it is difficult to introduce incremental changes in a targeting system or in
the method of distribution. However, there are some steps that can be taken to
phase in the overall reform package. As mentioned above, this includes ensuring
that there is initial publicity spelling out the rationale for the reform. Similarly, in
many circumstances, a new targeted poverty programme can be introduced, or
at least piloted, prior to the abolition of the general subsidies.
Finally, there is a global tendency to assume that two-tier price structures lead to
two tier accounting, in other words, that, over time, ways are found by
producers and rent seekers to divert lower priced goods into higher priced
channels. Thus, reforms that separate the Government’s role as
financier from the market’s role of providing services have the
potential to be the most effective reforms and, perhaps for that very
reason, are often resisted by an entrenched bureaucracy.
If, in addition, Governments recognise that food policy objectives are often
achieved more effectively by delivering income support without any direct or
80
indirect ties to food commodities, reforms can be separated from the
consumption of a given commodity or use of a given market channel. This
increased flexibility often allows for better targeting as well as an increased
likelihood that the transfers will result in the poorest beneficiaries being lifted out
of poverty.
THE PROCESS OF SUBSIDY REFORM IN TUNISIA
In Tunisia, fiscal pressures from a food subsidy bill that reached four percent of
GDP in 1984 made the food subsidy programme unsustainable. An initial attempt
to reduce the budgetary costs of the programme was made in 1984 and
subsidies on several food items were eliminated, effectively doubling their prices.
Violent riots erupted in response to these sudden reform efforts, forcing officials
to rescind the measures and delaying the adoption of significant reforms until the
end of the decade.
Disturbed by the violent responses to earlier cuts in the programme, the Tunisian
Government adopted an innovative approach in 1990 to reduce the budgetary
costs of these transfers in a manner that was politically acceptable and that
protected the purchasing power and nutritional status of the poor. These reforms
self-targeted the food subsidies by (a) shifting subsidies to items that were
perceived by consumers as "inferior" (though their nutritional value was
preserved) and were, thus, consumed primarily by lower-income groups; and (b)
liberalising the sale of unsubsidised higher-quality varieties that appealed to the
more well-to-do, who would then consume less of the subsidised foods. Rather
than drastically reducing subsidies all of a sudden, the Government introduced
the self-targeting reforms (and associated subsidy cuts) gradually by raising the
prices of certain goods in some months and others in other months. Also,
subsidies on the most sensitive products were reduced during the summer when
the students (who were pivotal in the earlier riots) were not in school.
The
Government also used a media campaign to prepare Tunisians in advance for the
81
reforms and introduced compensating measures to ease political pressure and
the impact of adjustment on the poor.
The results of these reforms have been impressive. Self-targeting had halved the
cost of the programme by 1993 (from four to two percent of GDP). It also
improved the incidence of the programme – subsidies benefited the richest
groups two times more than the poorest groups in 1985 but by 1993 the poor
benefited 1.1 times more than the rich. Self-targeting also protected recipients’
nutritional (caloric) intake more than comparable across – the – board subsidy
cuts would have. Finally, widely publicised polls showed that most Tunisians
understood, accepted, and agreed with the necessity of the reforms.
Source: Tuck and Lindert (1996)
Table XXIII An International Comparison of Leakage from Food Subsidy
Programmes
Type of Programme
Country
Untargeted Food Subsidies
Egypt (early 1980s)
Morocco,
Tunisia,
Yemen
Untargeted Food Subsidies
Brazil
Untargeted Food Rations (i.e., ration shops)
India, Pakistan
Ration Shops Targeted Geographically
Brazil, India
Self-targeting Food Rations
Bangladesh (sorghum),
Pakistan
Food Stamps – Targeted by Income
Colombia, Sri Lanka
(post-1979),
United
States
Food Stamps – Targeted by Health Status
Colombia, Indonesia,
Honduras
Targeted Feeding Programmes
Dominican
Republic,
Colombia, Pakistan
Supplementation Schemes – On-site or Take- India, Indonesia
home, Preschooler plus Mother
Supplementation Scheme – On-site, most India, Tamil Nadu
Vulnerable Group Targeting
Supplementation Schemes – Take-home, India
Nutritionally Vulnerable
82
Leakage to Nonneedy
High (60-80%)
High (81%)
High (50-60%)
Low (5-10 %)
Low (10-20%)
Low-Moderate
30%)
(10-
Low (3-10%)
Negligible
Low
Moderate (30-60%)
Low (3-10%)
Low
Food-for-work Programmes
Bangladesh,
India, Low-Moderate (3-35%)
Indonesia
Targeted Food for Education Programme (free Bangladesh
Low (7%)
ration for school enrollment of children)
Targeted Vulnerable Group Development Bangladesh
Low (8-14%)
Programme
(free ration for training of destitute women)
Sources: Subbarao et al (1997), Ahmed (2002), Kennedy and Alderman (1987), Mateus (1983).
Types of Price and Tax Subsidies

Unlimited direct price subsidies

Tax and VAT exemptions

Unlimited indirect price subsidies

Dual exchange rates
Export taxes
Producer quotas
Subsidies on transport and storage
Domestic sales below international opportunity cost
 Rational subsidies (quotas)
Untargeted parallel market channels for the general population
Targeted access to subsidised goods
Coupons, vouchers, and stamps
[It is certain that as and when – if at all – several drastic changes are made in
the food subsidy programme, this will encounter strong resistance from several
vested interests – the bureaucracy, farmers and the intended beneficiaries and
even more so, those people who take out the benefits in the name of those
targeted, ironically because of the latter’s lack of purchasing power. Since 1991,
when reforms started the political resistance to subsidy cuts have ensured
exclusion of this aspect from the reform agenda itself.
India’s comparable
experience is nothing to boast of because policy makers have not even dared
test the waters – K.S.R.]
83
(X) FROM REPORTS OF EARLIER FINANCE
COMMISSIONS
NINTH COMMISSION (SECOND REPORT)
Subsidies in the Central Budget have been rising rapidly. Subsidies might have
to be targeted in future towards the poor only, and with only a moderate rate of
inflation it would be possible to adjust issue prices (for foodgrains) when
procurement prices are raised.
The manner in which the fertiliser subsidy is
being determined and granted should be re-examined or else the fertiliser
subsidy would become unbearable in the near future. Food, fertiliser and export
subsidies account for a major share in the total subsidies in the Central Budget.
TENTH COMMISSION
There is no justification that can be reasonably adduced for power and irrigation
rates to be so heavily subsidised. The Commission recommends that a national
consensus on irrigation and power rates should be evolved sooner rather than
later, to stem the rot in these sectors.
ELEVENTH COMMISSION
A major item of expenditure that had grown steadily in the eighties were
subsidies. Apart from the subsidies implicit in underpricing of public services,
Government budgets also provide subsidies in an explicit form. These formed
1.98 percent of GDP and 18.6 percent of the Centre’s net revenue receipts in
1991-92.
Although the level of subsidies had come down to less than 1.5
percent of GDP during 1999-2000, these still formed 14.3 percent of the Centre’s
revenue receipts.
84
(XI) FROM EARLIER STUDIES ON CENTRAL
SUBSIDIES
1. REPORT OF THE EXPENDITURE REFORMS COMMISSION
(A) FERTILISER SUBSIDY
1.
Fertiliser subsidies have grown dramatically and continue to increase
rapidly. The green revolution technology is now widely accepted and the need
to subsidise fertilisers to induce farmers to increase their usage has gone down.
2.
The Retention Price Scheme (RPS) has led to the development of a large
domestic industry and near self-sufficiency. However, the unit wise RPS is a
cost plus scheme. It results in high cost fertilisers, excess payments to
industry and provides no incentives to be cost efficient. Moreover, it is
extremely difficult, if not impossible, to administer it without these
disadvantages.
3.
The fertiliser policy needs to be reformed. The goal of the new policy
should be to eventually bring fertiliser prices charged to farmer to the level of
import parity price. It should protect small farmers’ real incomes, but not lead to
a slump in food production and also promote a balanced use of N, P and K. At
the same time, the RPS needs to be dismantled and replaced by an easily
enforceable system that provides incentives to manufacturers to be cost efficient,
and ensures a desired level of self-sufficiency with minimal support from the
Government.
4.
A sudden increase in farm-gate price of urea to import parity price,
without increasing procurement prices, could lead to a fall of 13.5 million tonnes
of foodgrains production. This is, thus, not a feasible option.
85
5.
If procurement prices are raised along with farm-gate prices of fertilisers,
the fall would be much smaller. However, small and marginal farmers, for whom
self-consumption is a large part of their output, would suffer a loss in their real
incomes. They should be protected. Two possible ways are:
(a)
Introduction of a dual price scheme under which all cultivator
households are given 120 kgs of fertilisers at subsidised prices and
(b)
Expansion of Employment Guarantee Scheme and rural works
programmes to provide additional incomes to small farmers.
If
such rural programmes are directed towards improvement of land
and development of minor irrigation schemes, they will in addition
to providing wage income, increase productivity of land and income
to farmers even when fertiliser prices are increased.
7.
A complete decontrol of the producer price for urea would have been
possible, were all our plants based on natural gas as feedstock. Unfortunately,
only 56 percent of domestic capacity is gas-based, 22 percent naphtha-based, 9
percent fuel oil-based and 12 percent is mixed feedstock-based, mostly naphtha
and natural gas.
8.
A sudden freeing of the urea industry could lead to most naphtha-based
units having to close down, as even their short run variable costs would be
higher than the import price. The resultant surge in the demand for imports
would push up import prices to levels which would lead to a much higher
quantum of subsidy than now, if the demand is to be maintained at 21 million
tonnes of urea.
9.
Since availability of natural gas is limited, a good proportion of the
production has to be based on other feedstock if a certain level of self-sufficiency
is to be maintained.
These plants would have to be compensated for their
higher cost of feedstock.
86
10.
The best possible alternative at present is imported liquefied natural gas
(LNG).
11.
In the circumstances, the Commission recommends the dismantling of the
control system in a phased manner, leading at the commencement of fourth
stage, to a decontrolled fertiliser industry, which can compete with import, albeit
with a small level of protection and a feedstock cost differential compensation to
naphtha/LNG based units to ensure self-sufficiency. The transition, however, has
to be gradual.
12.
The transition begins with the discontinuation of the RPS with effect from
February 1, 2001, and introduction of a group-wise concession scheme. The
number of groups is reduced from five to two by April 1, 2006. At this stage, all
units except those that are based on naphtha/LNG would be viable at a price of
about Rs. 7,000 per tonne of urea. For naphtha/LNG – based units, a Feedstock
Differential Cost Reimbursement (FDCR) of Rs. 1,900 per tonne of urea will be
given. The details of the various stages are as follows:
(i)
In the first phase beginning February 1, 2001, the following will be
done:
(a) The existing units will be grouped into 5 categories – pre-1992
gas based units, post – 1992 gas based units, naphtha – based
units, FO/LSHS – based units and mixed feedstock units. The
individual retention price scheme will be scrapped and in its
place a Urea Concession Scheme with a fixed amount of
concession for each of these groups will be introduced. At the
same time, plants would be free to get feedstock from
wherever they want including imports.
(b) The distribution control mechanism will be done away with.
87
(c) The maximum retail price arrangement will be continued, the
concessions for each group being so calibrated as to enable the
units to sell at the stipulated maximum retail price.
(d) Having regard to the large fluctuations in the import prices of
feedstock, it will be necessary to re-determine the concession
to these groups of units every three months with reference to
the prevailing import prices. When there is a reduction in the
import parity prices of this feedstock, the concession payable to
the units would go down. It may be noted that this, however,
is done only group-wise and not plant-wise. Whenever there is
an increase in the import parity prices of this feedstock, the
additional costs should be passed on to the consumers through
a suitable increase in the maximum retail price so that the total
amount payable by way of concessions does not go up
significantly. The revision in issue price to farmers, however,
should be done every season rather than every three months.
(ii)
In the second stage, beginning 1st April 2002, the concessions are
reduced to reflect the possibility of reasonable improvement in
feedstock usage efficiencies and reduction in capital-related
charges.
(iii)
The third phase will begin on 1st April 2005 and reflects the
feasibility of all non-gas based plants to modernise and switch over
to LNG. For plants, which do not switch over to LNG as feedstock,
only the level of concession that the unit would have been entitled
to if it had switched over to LNG would be allowed.
(iv)
The fourth phase begins on 1.4.2005 when the industry is
decontrolled. The Commission recommends a 7 percent increase in
the price of urea in real terms every year from 1.4.2001. This way
the open market price will reach Rs. 6,903 by 1.4.2006, a level at
88
which the industry can be freed from all controls and be required to
compete with imports, with a variable levy ensuring availability of
such imports at the farm-gate at Rs. 7,000 per tonne of urea.
While no concessions will be necessary from this date onwards for
gas-based, FO/LSHS and mixed feedstock plants, existing naphtha
plants converting to LNG, as also new plants and substantial
additions to existing plants, will be entitled to a feedstock
differential with that for LNG plants serving as a ceiling.
The schedule of concessions are shown in the Table XXIV.
Table XXIV: Schedule of concessions
Feedstock
1st stage concession (Rs./MT)
Based
on Savings
existing RPS import
II Stage
at Net
IV Stage
1.4.2002 to 1.4.2005 to from
Parity concession
and domestic Price
1.2.2001 to
Price
31.3.2002
of
III Stage
Inputs
31.3.2005
31.3.2006
1.4.2006
(Rs./MT)
1
2
3
4
5
6
Pre-1992
1,300
0
1,300
1,050
800
0
Post-1992
2,900
0
2,900
2,450
2,000
0
Naphtha
8,400
1,900
6,500
5,800
3,900
1,900
FO/LSHS
6,400
3,250
3,150
2,200
2,200
0
Mixed feedstock
4,000
600
3,400
3,000
2,450
0
Natural Gas
New Plants: Non-gas based new plants or substantial additions to existing plants would be given
appropriate feedstock differential subject to the feedstock differential for LNG plants acting as the
ceiling.
89
NOTES:
(a)
The concessions in column (1) are so determined that along with
the net receipt of Rs. 4,000 from the farm-gate price of Rs. 4,600, the
concession gives nearly the weighted average retention price to each
group.
(b)
Column (3) shows the savings that can result in stage I, if
feedstock is at import parity prices. Freeing of imports will ensure that
plants get the feedstock at such prices by February 1, 2001.
(c)
The reduction in column (4) compared to column (3) reflects
change in feedstock use efficiency in stage II. Modest achievable targets
have been assumed and plants are expected to attain them by 31st March,
2002.
(d)
Column (5) reflects the concession in the third stage, incorporating
the further reduction on account of non-gas based units switching over to
LNG as feedstock.
(e)
Column (6) reflects the concession, by way of feedstock
differential, only in the fourth stage commencing 1.4.2006 when the
industry is decontrolled and imports are made available at Rs. 7,000 per
tonne at the farm-gate.
(f)
In all the three stages, the final concession levels, as determined,
also take into account the progressive reduction in capital recovery
charges.
90
(g)
The Commission has recommended a price increase of seven
percent per annum from 1.4.2001, reaching Rs. 7,000 on 1.4.2006. To
the extent of price increase in earlier years, the concession indicated in
columns 3, 4 and 5 would stand reduced.
14.
The schedule of subsidy outlay under various stages is given in Table XXV.
Table XXV: Urea subsidy outlay in different phases
(Rs. Crores/year)
a) No
increase
in
issue
2000-
2001-
01
02
2002-05
2005-
Apr. 1,2006
06
onwards
price
Farm-gate price – Rs./mt of urea
4,600
4,600
4,600
4,600
4,600
Concession to Industry
9,155
7,204
6,159
4,656
5,837
Farm-gate price – Rs./mt of urea
4,600
4,922
5,267 to 6,030
6,452
7,000
Concession to industry (net)
9,155
6,556
4,817 to 3,280
927
1,004
270
560
1,556
2,016
b) Increase in issue price @ 7% p.a.
c) Cost of coupon system:
Coupons to 105 million farmers
At 80 kgs of urea per family to
be supplied at Rs. 4,600 per Mt
to
-
1,201
PHOSPHATIC AND POTASSIC FERTILISERS:
15.
The farm-gate prices of nitrogenous, phosphatic and potassic fertilisers
should be set to promote a desired balance of fertiliser use.
In the
circumstances, the ERC will only suggest that once the urea price is redetermined every six months, the prices of potassic and phosphatic fertilisers
should be suitably adjusted, as advised by the Ministry of Agriculture, to ensure
the desired NPK balance. It will be useful if the Government could announce in
91
advance the formula to be adopted for fixing the prices of P & K fertilisers with
reference to a given urea price.
16.
Phosphatic fertilisers are already decontrolled and operated with a
concession scheme.
With one more unit commissioned in 2000 for the
manufacture of 1.5 million tonnes of DAP based on imported rock phosphate and
sulphur, the proportion of DAP manufactured – based on imported ammonia and
imported phosphoric acid – will go down sharply.
The appropriateness of
continuing with the present arrangement of giving an uniform rate of subsidy to
all the units, with reference to the cost of production of DAP – based on
imported ammonia and imported phosphoric acid – needs to be examined
preferably by the Tariff Commission.
GENERAL
17.
The arrangements for the payment of concessions to industrial/importing
firms need to be streamlined so as to ensure payment of the amounts due to the
units within three to four weeks from the time of sales. Once such arrangements
are in place, then in the case of urea also the payment of concessions could be
shifted from ‘despatch’ to ‘sales’.
18.
As it is basically a question of dealing with industrial units – at least in the
case of DAP – these subsidies should appropriately be administered by the
Ministry of Chemicals and Fertilisers, along with the concessions for the urea
units.
The Ministry of Agriculture will continue to have a major role in the
fixation of the maximum retail/indicative prices for all types of fertilisers, be it N
or P or K.
19.
The Commission recommends that if a state government imposes any
additional burden, by way of excessive levies on the inputs or on finished
92
fertilisers manufactured/sold in the state, then these costs should be passed on
to the farmers in the state.
TO CONCLUDE:
20.
The Commission wishes to emphasise that the suggested scheme to take
the fertiliser industry on to a liberalised competitive set-up:
-
Retains self-sufficiency
-
Preserves viability of existing units
-
Protects small farmers
-
Reduces subsidy outlay and
-
Is implementable.
(B) FOOD SUBSIDY
5.
While examining the food subsidy bill, which has increased from Rs. 19.91
crore in 1948-49 to Rs. 9,200 crore in the Revised Estimates for 1999-2000 and
to Rs. 8,100 crores in the 2000-01 budget, it would, therefore, be necessary to
undertake the study in a disaggregated manner adopting the following structure:
(a)
Consumer Subsidy – i.e. subsidy incurred on the supply of
foodgrains through the PDS at below FCI’s economic cost. (In this
report, the budgetary concept of subsidy has been adopted in
preference to that of determining the subsidy as the difference
between world trade prices and the PDS sale price).
(b)
Cost of buffer stock operations –
(i)
Of this, one part is the cost related to maintaining a
minimum level of buffer stock as dictated by the national
food security requirements;
(ii)
Cost of holding stocks in excess of the food security and PDS
requirements
is
the
93
second
part.
This
could
appropriately be termed the producers’ subsidy, as it
is the direct off-shoot of the price support – based
procurement operations; and
(c)
The inefficiencies of the FCI, i.e. costs in excess of the permissible
limits in its various operations, which, thanks to the present full
cost reimbursement arrangements, translates into higher costs to
the consumer and to the Government.
6.
The need for such a disaggregated analysis becomes self-evident when
one looks at the emerging requirements. First, at the 2000-01 sale price to the
BPL population, the consumer subsidy bill could go up to Rs. 7,500 crore when
the off-take reaches 14 million tonnes.
Second, with the total stock levels
touching 44 million tonnes, the average buffer stock 2000-01 could be around 17
million tonnes imposing a carrying cost burden of around Rs. 3,100 crore on the
Government, even when estimated on the basis of the present methodology.
Third, the cost incurred by FCI on transport, storage, interest, staff overheads
etc. will be a staggering Rs. 6,500 crore, a level at which even if some savings
could be effected in each of the operations the net result will be a substantial
saving for the PDS consumer and for the Government.
7.
The foodgrains production level of over 200 million tonnes, stocks of
around 44 million tonnes with the FCI, and a comfortable foreign exchange
balance, all taken together provide a window of opportunity for a thorough
examination of the food policy package, in the quest for containing the
burgeoning food subsidy bill within acceptable levels.
8.
As far as consumer subsidy is concerned, commencing from the statutory
rationing system that prevailed at the time of Independence, there have been
major changes in the PDS. For most of the period, and until 1992, the PDS was
94
a general entitlement scheme at a slightly subsidised rate to all consumers
without any specific target. Then came the revamped public distribution scheme
in 1992 under which foodgrains were made available with a higher element of
subsidy to people in tribal, drought prone and desert areas spread over 1,775
blocks. This scheme was replaced in 1997 by the Targeted PDS, under which 10
kg. of foodgrains was allotted per family per month for the below poverty line
(BPL) population at highly subsidised rates while the foodgrains supplied to the
above poverty line (APL) population also carried an element of subsidy, though
at a much reduced level. From 2000-01 onwards, the sections of the population
below the poverty line are to be given 20 kg. per family per month at half the
economic cost while the sale to all others is to be only at the economic cost. In
other words, the subsidy is limited to only supplies made to the BPL population.
When the total off-take on this account reaches 14 million tonnes, then the total
consumer subsidy works out to about Rs. 7,500 crore. The Government has
announced fairly liberal allocations of foodgrains to be sold to below the poverty
line as well as above the poverty line population in the drought affected areas at
half the economic cost.
If such an allocation is also taken into account, the
consumer subsidy could go up to Rs. 8,000-8,500 crore depending on the offtake.
The two major policy changes from the past are the targeting of the
subsidy to only the below poverty line sections and indexing the sale price to
these sections as a proportion (50%) of the economic cost.
9.
More important than the total subsidy is the question whether this subsidy
actually reaches the intended beneficiaries in full. To start with, the difference
between the sale price to the BPL population and others being quite large – 50%
- the tendency for diversion of these stocks could increase.
Then, there is
considerable unevenness in the reach of the PDS among the States.
More
importantly, while the below poverty line population is estimated for the country
as a whole and for each state and region on the basis of consumption surveys,
the attempt at the state level is to identify these categories only on the basis of
95
incomes. Further, the efforts under the PDS in many states is to cater to as
large a section of the population as possible with emphasis on metropolitian and
urban areas, instead of limiting the subsidised supplies only to the targeted
sections. A major, independent survey conducted recently has come up with the
finding that “the PDS is untargeted”, that “it has an urban bias”, that “in rural
India 17 percent do not own ration cards”, that “18 percent of the below poverty
line households do not own ration cards” etc. Possibly, it is a politically sensitive
area as any attempt to give subsidies to only certain targeted sections of the
people, however poor and deserving they may be, could well alienate large
sections of the people who may be only slightly better off.
Given the
limitation of resources, there has, however, to be a concerted effort to
target the subsidies to the poorest of the poor even if large sections of
the population are to be considered to be poor. Seeking to cover much
larger sections of the population, at highly subsidised rates, might appear an
easier option, but is definitely not a sustainable proposition even in the short
term. It is necessary not only to constantly refine and update the estimate of
the size of the population below the poverty line in each state, so that the Centre
has better estimates for allocation of foodgrains to meet the requirements of
these sections in full in all the states but also build a consensus at the political
level that subsidies need to be better targeted and administrative arrangements
devised to ensure that the subsidised supplies do in fact reach the targeted
sections.
The Food-for-Work Programme and the Employment Guarantee
Schemes possibly secure better targeting, but their coverage tends to be
inadequate because of limitation of resources. Total coverage of those tribal,
drought prone and desert areas, where the proportion of the below the poverty
line sections is significantly high, say over 80 percent, could be another element
of such an action plan. The association of grassroots level empowered bodies
like Gram Sabhas and NGOs with a proven track record in the task of identifying
the poorest of the poor and in supervising the actual delivery of benefits to the
targeted sections might help.
Giving wide publicity to the arrival of the
96
foodgrains at the local PDS outlet is a method successfully adopted in some
states. It is only when a fully targeted delivery system is in place, would this
subsidy stand fully justified on merits.
10.
Thus, in the final analysis, there is no escape from identifying the BPL
population family-wise, giving each a ration card, have a PDS that reaches every
village and putting in arrangements, like supervision of actual distribution by
Gram Sabhas, NGOs etc, to ensure that the targeted sections do actually get the
foodgrains allotted for them and at the prices announced by the Government.
This responsibility rests squarely with the state governments. The Government
of India, on its part, should extend all assistance to the states in the early
completion of the above tasks, say within the next two years. Equally important,
the Government of India also needs to ensure that adequate stocks of foodgrains
are available at all FCI depots to meet the allocations made for the BPL
population in full.
There is considerable variation among the states in the
yardsticks adopted for defining the poorer sections of the population eligible for
subsidised foodgrains through the PDS. Throughout this report, the term ‘BPL
population’ is used as defined in the Lakdawala Committee report and adopted
by the Government of India when announcing in the 2000-01 budget that such
families would be allocated 20 kg. of foodgrains per month at half of FCI’s
economic cost.
11.
As far as the supplies to BPL population are concerned, there is a need to
ensure that these sections get these at the same price throughout the year and
in whichever part of the county they are located. For this purpose, it becomes
necessary to first determine the economic cost for the year as a whole, ironing
out the differences that crop up due to differences in transport cost, storage and
interest costs. However, as far as the open market operations of the FCI are
concerned there could be a case for having some flexibility in determining the
sale price. Likewise, when there is pressure on open market prices, the FCI
97
would be undertaking bulk sales and auctions.
Such sales should be at the
“economic cost” only, without there being any attempt at making a profit, taking
advantage of the situation. Similarly, with a view to liquidating excess stocks the
FCI could seek to export or sell domestically large quantities at prices below the
economic costs. It is but appropriate that all these stocks which are sold at
some point or other at prices, lower than the economic cost, are considered part
of buffer stocks and not as part of distribution stocks when determining the
economic cost, at 50% of which foodgrains are to be issued to the BPL
population.
The Expenditure Reforms Commission would, therefore, suggest
that only the quantities to be sold through the PDS to the BPL and APL
population and at the economic cost (technically, for FCI, the sales to the BPL
population are also at the economic cost, with the Government picking up 50
percent of the bill by way of subsidy) be treated as distribution stocks while
determining the economic cost.
12.
In those states, where a quantity larger than the allocation made by
Government of India for the BPL population in that state is distributed through
the PDS at prices equal to or less than half of FCI’s economic cost, the
Government of India could well make available to the states the cash equivalent
of the subsidy involved in distributing foodgrains to the BPL population at half
the economic cost. This way the state government would be free to take the
foodgrains required for the BPL population either from the FCI or procure it
directly or through traders either in its own state or from outside. This flexibility
is recommended as there is a widely held perception that FCI’s overheads are
quite high, thus pushing up the economic cost.
To the extent a state
government is able to procure at lower than FCI’s economic cost and use it for
meeting the requirements of the BPL population, it would be able to effect
savings in the subsidy amounts made available by the Government of India. This
should serve as an incentive to the states to undertake procurement in their own
98
account and such ‘competition’, in turn, would also force FCI to improve its
efficiency and reduce costs.
13.
However, in the case of states where the PDS sales to BPL population are
currently below the quantities earmarked for, the present arrangement of
making available the foodgrains required, based on the consumption norms in
the earlier year, should be continued along with strict monitoring on the one
hand to guard against misuse or diversion of foodgrains to other sections and
encouragement on the other to secure better coverage of the targeted sections.
The moment the PDS coverage exceeds the quantities as required for the BPL
population and it is established that the sale price is at or below half the FCI’s
economic cost, then these states could also be made entitled to the arrangement
suggested of receiving, in cash, the amount equivalent to the subsidy involved in
providing foodgrains at half the FCI’s economic cost to the BPL population in
their jurisdiction.
14.
The second major element in the total food subsidy bill is the cost of
carrying buffer stocks. This consists of two parts. The first part relates to buffer
stocks so very necessary for providing a food security cover the country,
particularly given the vagaries of the monsoon. The estimate of the buffer stock
to be so held has, however, varied from time to time.
The Technical Group
constituted in 1981 by the Department of Food under the then Food Secretary
recommended that the size of the buffer stock to be maintained by the public
agencies should be 10 million tonnes (5 million tonnes each of wheat and of
rice), which would be in addition to the operational stocks required for the PDS.
A more recent study (July 1999) by Prof. Kirti Parikh of the Indira Gandhi
Institute of Development Research, Mumbai, confirmed that a buffer stock level
of around 10 million tonnes could be considered adequate from the National
Food Security angle even today, notwithstanding the increase in population in
the last two decades.
The level of stocks could be considered as “insurance
99
requirement”. Unfortunately, the picture gets confused as FCI, in its documents,
uses the phrase ‘buffer stock’ in the larger context which includes the base
stocks (about 1 million tonnes or so distributed in small quantities over a large
number of depots and which cannot be accessed quickly for meeting the
requirements at any one point of time or place), the operational stocks estimated
at 1/3rd of the total required for distribution, mostly through the PDS and the
balance of stocks which is also termed ‘buffer stocks’.
Given the large
proportion of people depending on the PDS and also given the vagaries
of the monsoon, the Expenditure Reforms Commission would strongly
recommend that a level of 10 million tonnes (4 million tonnes of wheat
and 6 million tonnes of rice) be always kept as food security buffer
stock.
The Commission further noted: “As the excess stocks are solely due to the very
generous minimum support price-based procurement policy being followed by
the Government, the cost of holding these stocks could be considered a subsidy
to the producers and reflected as such in the budget”.
The report of the
Commission was critical of the sharp increases in support prices annually and
pointed out that the minimum support price was becoming the maximum support
price and that the FCI had become the buyer of the first resort instead of being,
as was originally intended, the buyer of the last resort.
2.
CAG REPORT ON PDS
According to the report covering the period 1992-99, the PDS had several short
comings, the most significant being targeting inefficiencies.
Leakages were
widespread. In effective implementation, poor administrative arrangements and
a blurred accountability structure impaired the effectiveness of delivery.
The
distribution infrastructure and the quality of foodgrains supplied needed
significant improvement. Besides, under PDS, the per capita entitlement was in
adequate and per capita off-take was still worse. It delivered food at a highly
100
subsidised cost to the poor in the states, which provided additional subsidy, but
state governments, which had the highest population of the poor and incidence
of poverty, did not fully utilise PDS. This impacted on the efficiency of PDS. This
was its assessment.
2. GOVERNMENT SUBSIDIES IN INDIA
By Prof. D.K. Srivastava and Dr. Tapas K. Sen, NIPFP, 1997.
The thrust of the background study prepared for the discussion paper brought
out by the Union Ministry of Finance in May 1997 (later updated into this book)
was on merit and non-merit subsidies. It drew attention to the massive draft
Government subsidies in India constituted on the nation’s budgetary resources.
The study noted that even if a reduction of five percentage points in the nonmerit subsidies to GDP ratio was brought about, the fiscal deficit to GDP would
be brought to a level below two percent. Specifically on petroleum subsidies, the
study observed that apart from the huge volume of subsidy, differential rates of
subsidy over the entire range of petroleum products also induced distortions in
the relative use of different petroleum products having serious implications for
allocative efficiency.
On food subsidy, the study pointed out that the PDS was poorly targeted and the
magnitude of the subsidy actually enjoyed by the poor was very small. It drew
attention to extensive leakages and to the fact that the operation of
procurement, storage, transportation and distribution was quite costly and had
become more inefficient over time. Dealing with the fertiliser subsidy, the study
took note of the fact that the burden was considerable. Yet, it recognised that a
reduction in the use of fertilisers might have a serious adverse impact on
agricultural production. It cited an estimate made in 1991 by Sidhu & Sidhu that
a 30 percent hike in the real price of fertiliser would lead to a 18 percent decline
in fertiliser consumption and, thereby, a 5.4 percent fall in foodgrains production.
The study noted that in the Central budget, explicit subsidies accounted for only
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30 percent of the total Central subsidies during 1994-95, pointing to the massive
magnitude of hidden/implicit subsidies that the exchequer had to bear.
4. CENTRAL BUDGETARY SUBSIDIES IN INDIA
By Prof. D.K. Srivastava & Dr. H.K. Amarnath of NIPFP (2001)
The study suggested that subsidy reduction could be approached through (i)
reducing Government participation in the provision of a service (ii) improving
targeting and (iii) increasing recoveries and reducing inefficiency, thereby
reducing per unit cost.
5. SUBSIDIES: PIERCING THE VEIL
By K.S. Ramachandran (1997)
This book based on a research project prepared for the Economic & Scientific
Research Foundation made projections of both explicit and hidden subsidies for
several major heads and set the agenda for phasing out both kinds of subsidies
over a limited period.
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(XII) WINDING UP
At the point of concluding, one cannot but feel that this study would have been
rendered unnecessary if only the Government
had acted on the various
recommendations of the Expenditure Reforms Commission, especially those
pertaining to the food subsidy and the entire gamut of public procurement
operations, the public distribution system and the price support mechanism. The
Commission had been blunt in responding to the manner in which issues of food
security were handled year after year and all the waste that was encouraged in
the name of ensuring easy and economical access to food of the poor segments
of the nation’s population. The Commission deemed only 10 million tonnes of
foodgrains (6 million tonnes of rice and 4 million tonnes of wheat) necessary for
the purpose of food security buffer stock.
The average stock needed for
managing the PDS, in its assessment, was only 7 million tonnes annually. The
total average stock necessary was put at 24 million tonnes. It wanted a freeze
of the minimum support price for wheat and paddy. The Commission was critical
of excess stocks and even more so of the “very generous” minimum support
price-based procurement policy. It pointed out that elimination of buffer stocks
would lead to a saving of Rs. 1,300 crore annually by way of carrying costs.
The Commission was concerned about leakages in the PDS and demanded a
concerted effort to target the subsidies to the poorest of the poor. This concern
has also been ignored. In a bitter attack on the system of support prices, this
august body noted that the minimum support price was, in fact, becoming the
maximum support price and that the FCI had become the buyer of the first
resort instead of being the buyer of the last resort as it should be. It advocated
moderation of the annual increase in price as a step towards bringing in state
governments and the private sector back into the picture.
The Commission
wanted the Government to announce in advance that in the event of a drop in
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foodgrains production in any year it would resort to imports to meet the
requirements.
This study for the 12th Finance Commission looks at the most economically
vulnerable segment of the population – the weakest of the weak and the poorest
of the poor. The Expenditure Commission acknowledged that the cost of holding
stocks in excess of food security and PDS requirements could appropriately be
called the producer’s subsidy as it was the direct off-shoot of price support-based
procurement operations. However, it did not seek to narrow down the ambit of
PDS to a critical sub-sector of the BPL segment, which, indeed, is the thrust of
this study. The World Bank shares this perception of the Commission, but it also
stops well short of seeking to reduce drastically the reach of PDS.
The real
problem segment is the one constituted by people at the destitution level, which
means that the PDS has to be strongly supported by a mechanism that would
provide the necessary purchasing power by way of a sustained generation of
employment and income. This is not in the terms of reference of the study. Yet,
without effective poverty alleviation, any reform of PDS-related issues may not
serve any useful purpose. This has to be underscored.
On fertiliser, policymakers do have to address imperative of global cost and
quality competitiveness among the different domestic producers, so as to
facilitate growth of export orientation over a period, though, quite obviously, the
sooner the better. From only subsidising imports, the policy must shift to making
exports a serious possibility. There must be both exports and imports depending
upon the international price situation. Going back to Chapter-VII, apart from
urea which is the prime candidate for regular and growing overseas sale, DAP,
SSP and MOP must be given a competitive edge.
On imports, who can (or
should) gloss over the massive scandal in urea imports perpetrated National
Fertilisers Limited in 1994-95? No meaningful reform, obviously, can proceed on
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the basis of an one-sided trade policy. If exports acquire as much importance as
imports the nation’s policy priorities, irregularities should get minimised.
K. S. Ramachandran
Monday, April 12, 2004
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