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Article written

  • on 03.07.2009
  • at 10:27 PM
  • by admin

How to pour into a test tube from a bucket? 0

Jul3

Have you ever tried pouring water into a narrow test tube from a bucket? Surely! You must have never tried such a thing and there is actually no need to do so even now. It is just that successive governments in India have attempted to do the just that with subsidies. That an overwhelming majority of subsidies are wasted is now an accepted fact. But yet, the enormity of this waste as well as the public apathy to such a waste is appalling. The consequences of this waste go much beyond wastage of public money. It has created huge inefficiencies in our systems that prevent the debottlenecking of our true potential.

Take the case of petroleum subsidy.  There is hardly a justification for the large differential between international and domestic prices for the entire population. Neither is there a logic for the artificial differential in the prices of petrol, diesel and kerosene. Just because the government is unable to target subsidies to the ‘needy segments’ of the populace it has opened the flood gates for everyone. But the resultant price subsidy is giving rise to monumental inefficiencies while providing very little succour to the marginal sections of society.  In case of kerosene subsidy, it is well established that the bulk of the subsidy comes to rest in the pockets of the black marketers and the corrupt officials from the lowest to the highest levels. Even the neediest sections of the society are unable to escape paying a premium above the government administered price for any extra kerosene beyond their limited quota. The differential in prices of Petrol and Diesel is forcing Car companies to divert precious resources for launching Diesel variants of their cars instead of experimenting with hybrid technologies, electrical cars, ethanol blended petroleum etc. We are about the only country in the world where Diesel is being promoted for passenger vehicles. Why would Indian manufacturer or consumer think about blended fuel when diesel works out to be cheaper than that – only because the government has mandated it  .
The fertiliser subsidy also is largely pocketed by the industry and the intermediaries whereas the farmer has to contend with peak season shortages and black marketing. Similar is the case with food subsidies and most other subsidies provided by the government in the name of the poorer sections of society.

Government needs to realise that theirs is the costliest delivery mechanisms around. It should be used with extreme caution for only targeting the ‘marginal sections’ of society. By opening the flood gates of the subsidy for the large sections of society, the government creates a huge bureaucracy which further adds to its inefficiency and raises the cost of delivery even more. Corruption thrives wherever there is an unnatural difference between the market price and administered price. Every participant in the chain demands his pound of flesh. So much so that a significant part of the differential is siphoned off before it reaches the intended recipient. This is in stark contrast to the efficiencies of the competitive forces in market economy where every player is competing with each other to lower their delivery cost and increase the value for their customers. The success of this model has been most recently evident in the successive drop of prices of the telecom services. Moreover with Dr. C. K. Prahlad’s ‘Bottom of the Pyramid’ theory gaining currency, every company is vying to launch products for the lowest segment of the population and searching for a fortune at the bottom of the pyramid. In such a scenario government has to give way to the private sector and only focus on the neediest sections of the society who desperately need government succour and are in no position to pay for their needs. Just like in the 90’s when the government embarked on the process of liberalisation and unshackled the economy from the ‘license quota raj’, there is now a dire need to do the same with subsidies. The self appointed custodians of the subsidies will do well to recall the rhetoric of the pre-liberalisation era to realise how out of synch they were then and now.

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