Poor State of India's Subsidies

By MANU JOSEPH

MARCH 4, 2015

NEW DELHI — The latest economic survey of India contains cheerful prose. India’s immediate future is “propitious.”

But there are grim bits, too. If the rich reach the third chapter of Volume 1, they may groan with exasperation, because it addresses subsidies for the poor. The chapter is titled “Wiping every tear from every eye,” which the elite would translate as “Using cash as tissues for the poor.” There is a view among the urban upper classes that such subsidies are wasteful.

If they continue to read, however, it may change their inner emoticons.

The chapter is not just a lament about the abject inefficiency of India’s attempts to subsidize the lives of the poor, but an argument that these huge subsidies benefit the rich more than the poor. The assistance meant for the poor has in fact contributed to the reality that it is cheap to be rich in India.

The survey was an analysis by India’s chief economic adviser, Arvind Subramanian. He considered a set of commodities and utilities that India subsidizes, including rice, wheat, sugar, fuel, electricity, water, fertilizers and rail travel. The cost of these subsidies in fiscal 2014-15 was 3.78 trillion rupees, or $61 billion — almost enough, he implied, if distributed wisely, to lift every Indian household above the official poverty line.

While subsidies protect the poor from price volatility of essential goods, the benefits, Mr. Subramanian argued, are chiefly for the rich, because they consume more or are more able to exploit the services.

For instance, rich households gain more from the electricity subsidy than the poor because they have the means to consume more. Most of the poor households do not have electricity in the first place, or use very little of it. Indian Railways loses money on every passenger because the price of train tickets is kept artificially low. But, the survey pointed out, the poorest 80 percent of Indian households constitute less than 30 percent of the railways’ income through fares. The subsidy for liquefied petroleum gas, which is widely used for cooking, also benefits the richer, because the wealthiest 50 percent of Indian households consume 75 percent of the gas.

The rich have not cornered the high-carb diet that the government subsidizes in the form of cheap or free wheat and rice. But significant portions of these grains never reach the poor because of “leakages,” which is a euphemism for theft and inefficiencies in the distribution system. The survey estimated that about 54 percent of the wheat and nearly 50 percent of the sugar meant for the poor never get there.

Although Mr. Subramanian has contempt for subsidies, he does not dispute that the poor need help. He suggests that India replace subsidies with direct cash transfers to the poor, an idea that has been debated over the past few years. There are concerns among intellectuals that this might lead to inflation, or undesirable domestic situations where, for instance, the rogue man of the house would use the cash to buy inessential, though pleasurable, goods like liquor. Also, some worry that once the state starts putting money into bank accounts, the poor will never let it be stopped or reduced. And, democracy forces politicians to be so populist that India might end up with the burden of both price subsidies and cash transfers.

After decades of spending trillions of rupees on subsidies, India still has a vast population that is impoverished, undernourished and hopeless. India’s failed economic experiments, its bleak prospects in agriculture and the economy’s inability to create low-skill manufacturing jobs have ensured that hundreds of thousands of rural migrants head to cities every year. They are usually fleeing the fate of becoming poor farmers. So, they instead become drivers, guards and maids in the city at low wages, further subsidizing the charmed lives of India’s upper classes.

When the new Indian elite say, “I love India,” it does mean “I love India.” But it also means, in no small part, “I love my subsidies.”

Follow Manu Joseph, the author of the novel “The Illicit Happiness of Other People,” on Twitter at @manujosephsan.