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LATEST NEWS UPDATES | Subsidising through prices: A bad idea by Bibek Debroy

Subsidising through prices: A bad idea by Bibek Debroy

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published Published on Sep 23, 2011   modified Modified on Sep 23, 2011

The acronym LPG has several expansions. It stands for liquefied petroleum gas. It stands for liberalisation, privatisation and globalisation, a term of abuse used by those with Leftwing persuasions. It stands for life plundered by the government, sentiments associated with those who are against state intervention, but increasingly felt by the so-called middle class - however defined - because of price hikes, and proposed price hikes, for petroleum products.

Ostensibly, price hikes in petroleum products became necessary because of unsustainable fiscal subsidies - assuming losses by oil marketing companies are absorbed by government - spliced with rupee depreciation. That's a bad argument. Those subsidies are peanuts, when compared with much larger nuts squandered by government through public expenditure. Nor, taken in isolation, is one convinced about investments in the sector being deterred. Investments are fettered because of several other reasons.

The administered price mechanism (APM) is only one piece of the jigsaw. If we had incrementally reformed the APM, as was intended for petrol and diesel from 2002, we would have had small increases in prices, with marginal contributions to inflation, instead of the backlog that has now piled up. We would have had oil price hikes when inflation numbers were less damaging and citizens less disparaging about government attempts to control inflation.

But APM is only one piece. What is special about fuel? Why has every committee on indirect tax reform opted to keep petroleum products out of the unification ambit, together with liquor and tobacco? Why is there such lack of transparency about how import or trade-parity prices are calculated? Why is the chain from crude imports to retail prices so opaque? Let us forget the hogwash. Fuel price hikes are warranted. However, that doesn't mean we are ready to reform the sector. Let us now turn to the so-called middle class and the rich-poor debate.

Rich and poor are relative terms, like tall-short. These aren't absolute. Unfortunately, people don't understand the notion of averages - it doesn't matter whether we have mean, median or mode in mind. The average Indian has a certain IQ level. Let us use that as a surrogate measure for cleverness or stupidity, as the case may be. If you say that half the Indians are relatively stupid, you will be cursed. But if you say that half the Indians are relatively clever, you'll be blessed. It's the same with rich-poor.

India's average per-capita monthly income is roughly Rs 5,000. So, anyone with more than this is relatively rich. However, if you say this, the middle class will be up in arms. You will be showered with flowers if you say that those with less than Rs 5,000 are relatively poor.

Subsidising anyone through prices is a bad idea. If it is food and kerosene, there are leakages and we subsidise neighbouring countries. Subsidised kerosene is used for adulteration and subsidised LPG for commercial cooking and transport. A quota of subsidised LPG and non-subsidised non-quota LPG is also a terrible idea. We can't implement this.

This makes me wonder about public good. Economists have a technical definition. But when most economists indiscriminately use the expression public good, they don't have that definition in mind. They think of a good that must be subsidised or free. So, these economists will expect public toilets in India to be free, but pay for public toilets in developed countries. They will expect trolleys in Indian airports to be free, but happily pay for trolleys in developed countries.

After checkout, they will expect hotel concierges to keep their bags free, but happily pay for this service in developed countries. These aren't public goods. If they are being provided free, someone is paying. The socalled middle class is preying and the genuinely poor are paying the opportunity costs. With lower fiscal and administrative capacities in developing countries like India, we should expect fewer goods and services to be subsidised or free, compared to developed countries. But exactly the opposite happens, with arguments about India being relatively poor and markets underdeveloped. Historically, Indians never expected such doles from the state.

Many services were delivered by communities or groups, including law and order and skills. The state occupying commanding heights seems to have led to citizens occupying demanding lows. There is no case for subsidising anyone through prices. These interventions subvert resource allocation. It is better to have direct income transfers, not the conditional cash transfers we are talking about. But we go round and round identifying (actually nonidentifying) BPL (below the poverty line). And the conditional cash transfer idea, if ever implemented, is being applied to BPL indiscriminately. Other than old and disabled, there is no case for anyone receiving subsidies.

Others who are poor need interventions in physical and social infrastructure, financial products, law and order, technology, information and so on. However, these interventions are not subsidies. By offering subsidies to able-bodied, we have disabled them permanently, by inculcating a culture of handouts. Once any subsidy has made its entrance, it can never be eliminated. It perpetuates itself. Physicists have debated the existence of perpetual motion machines. India has perfected the art of perpetual immobile machinery.

(The author is professor, Centre for Policy Research)

The Economic Times, 23 September, 2011, http://economictimes.indiatimes.com/opinion/comments-analysis/subsidising-through-prices-a-bad-idea/articleshow/10086560.cms


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