Submerge in subsidies

There are many arguments made in favour of subsidies, especailly energy subsidies. In a country like India, the most obvious argument is that they give a leg up to a huge mass of poor people who would otherwise find cooking, transportation and whatnot cripplingly expensive. Pro-people as Mamata Banerjee would like to say.

But there’s no such thing as a free lunch, as economist Milon Friedman said. Subsidies come with a price for the larger economy. They often boomerang on the people they are supposed to help. And they often go the wrong people.

The energy subsidy story in India is replete with such stuff.

One, subsidies add to inflation. The Indian government is wallowing in red ink. And there can be no doubt that this huge monetary outflow is a key reason prices are rising. In the case of fuel subsidies, the link is even more direct. Print lots of rupees, their value against the dollar will fall, and since oil and gas prices are dollar denominated, the price of such fuels will rise. And fuel subsidies are a key reason why the government is running such a fiscal deficit: the diesel subsidy (including the losses incurred by oil marketing companies and upstream assistance) alone is nearly equal to 20% of the government’s 2011-12 fiscal gap.

So its a circular trap: subsidies means government printing money, printing money jacks up prices, necessitating more subsidies.

Two, subsidies means less public services in another area. Government expenditure is a zero sum game. To pay for a subsidy, something else gets cut. The financial underrecoveries on petrol, diesel, kerosene and cooking gas in 2010-11 are little over one per cent of GDP. The combined expenditure of central and state governments on health is 1.27% of GDP. And as studies have shown it is poor health that is most likely to drag a marginal prson back into poverty: not the cost of cooking.

A more striking case has been how increased spending on agricultural subsidies has been matched by an equal cut in spending rural infrastructure. But the building rural roads and so on do much more to enrich the poor then any subsidy would.

Three, subsidies don’t go to the people they are supposed to. One there is theft and diversion. Estimates say 40% of subsidised kerosene in India is stolen. Diesel and cooking gas flood the neighbouring countries who sensibly don’t subsidise their systems. Cooking gas is so cheap it is diverted it to industrial use.

But the real sin of fuel subsidies in India is middle class capture. The poorest don’t use this stuff at all. India’s rural folk, who make up the bulk of the lowest quintile, barely use cooking gas cylinders. A TERI study put the figure at 9% of rural people use cylinders. The figure for their wealthier urban counterparts is 62%. Studies show within urban populations, it is not the poorest who benefit. The higher the income, the more likely the presence of a cylinder.

A similar development is happening in diesel with the growth of SUV fleets and diesel sedans.

Four, subsidies make people waste. It makes sense, if the stuff is cheap who will bother to conserve?

Forty % of rural people use kerosene for lighting. This is a very inefficient way to create light, but makes sense given the subsidised price.

All this makes it all the more absurd that the Indian government should be in crisis over fuel subsidies.

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