Welfare Vs Revadis, Some Fresh Thoughts
Governments deliver subsidies at a heavy cost. The central and state governments, the Election Commission and the Supreme Court may keep this first principle in mind when they try and distinguish between genuine welfare schemes and the distribution of free revadis (Indian candy made of sesame seeds).
The central government and the Election Commission have recently rekindled the controversy on this subject. A few days ago the Union Cabinet announced the extension of the Pradhan Mantri Garib Kalyan Aan Yojana (PMGKAY) for three months at an additional cost of Rs 44, 762 crore. This is over and above the budgeted expenditure of Rs 3.83 trillion provided for the period between April and December in this financial year.
Now contrast this with Prime Minister Modi’s statement on 16 July at the inauguration of the 296 kilometres - long Bundelkhand Expressway at Jalaun in Uttar Pradesh, at an outlay of Rs 14, 850 crore. The PM argued that a government that based its achievements on the amounts of freebies it gave away to its people would never have funds for expressways, ports and railway lines. Was he then justified in extending a food subsidy scheme necessitated by Covid that should have ceased when the pandemic ended?
Perhaps, yes. Although India is the fastest-growing economy today, the pandemic has left behind a trail of destruction by way of lost livelihoods. Too many people still have to find employment and continue to depend on this food subsidy. Currently, therefore, there is some justification for continuing this scheme.
Different considerations would apply when there is no such special reason. Providing subsidies is a form of state intervention. In a market-driven economy, which we embraced after the reforms of the 1990s, this is justifiable only as a last resort, when markets cannot deliver desired outcomes and all other solutions fail.
This is so for a number of reasons. There is first of all, the question of costs. All subsidies are financed by taxes. And all taxes involve some sacrifice by taxpayers. There is a direct loss of income for them, but even more than that, taxpayers also suffer many other hidden compliance costs of taxation ‒ such as the time, money and energy in maintaining records, hiring accountants, etc. These compliance costs are often three to four times higher than the administrative costs that the government incurs to collect taxes. There is thus, always an obligation on the part of the government to put tax revenues to optimum use. This is especially true in a resource strapped state like ours.
Both economic theory as well as past experience appear to suggest that subsidy schemes typically have unintended consequences. Witness, for example, the serious problem of depletion of the water table in Punjab, resulting from providing free water and electricity for cultivation of rice.
Even more importantly, subsidies tend to distort prices and confuse both producers and consumers. The minimum support price (MSP) for farmers, for example, has often ended up confusing farmers because at the beginning of every production cycle they have no clue about the actual state of demand and supply. As a result, in years of over-production, the economy suffers a glut, with the Food Corporation of India, often compelled to carry stocks far in excess of its capacity and the country’s need. On the other hand, when international demand is buoyant, as at the moment, farmers cannot realise higher prices because the government is compelled to ban exports.
For all these reasons, Vijay Kelkar and Ajay Shah, two eminent economists, have argued that subsidies are justified only when their benefits are at least three times their costs.
To provide assistance to deserving people, it would help if the government were only to transfer the subsidy to the bank accounts of the beneficiaries as a direct benefit transfer (DBT). This way it can ensure that the subsidy remains within its budget. “Costly thy habit as thy purse can buy,” said Shakespeare. This dictum applies as much to nations as it does to individuals.
(The writer was Chief Commissioner of Income-tax and is the author of the Moral Compass- Finding Balance and Purpose in an Imperfect World, Harper Collins India, 2022 )
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