Subsidy - Economics or Politics ?

It’s 2018, India is just one year into the elections and parties have already blown the bugle. And like every other government keeping the elections in mind, Prime Minister Modi, in this year’s annual budget has allowed India's subsidy bill to balloon in the lead up to the crucial elections at the risk of breaching his budget deficit goals. In post liberalisation India, budget has always been used as a tool by the governments to accumulate votes, hereby ignoring the effect it has on the economy. Having had the reputation for reducing India's huge subsidy expenditure, reports suggest that he has failed to rein in subsidy. Moreover, as the government prepares for state and national elections, subsidy reforms remain a sensitive issue among India’s vast electorate. Finance Minister Arun Jaitley proposed a 15 per cent higher subsidies at Rs 2.64 lakh crore on food, fertilisers and petroleum products. The subsidy for the fiscal year 2018-19 on food, petroleum and fertilisers is estimated at Rs 2,64,335.65 crore in the last full budget presented by Mr Jaitley before the 2019 general elections. As per the Revised Budget Estimates, the subsidy on these three categories has been pegged at Rs 2,29,715.67 crore for the ongoing fiscal year. A sum of Rs 1,69,323 crore has been allocated towards food subsidy for 2018-19, as against Rs 1,40,281.69 crore in the Revised Estimate of the current fiscal year. The fertiliser subsidy has been raised to Rs 70,079.85 crore for 2018-19, compared with Revised Estimate of Rs 64,973.5 crore in the current financial year. What is interesting to know is that for 2018-19, Modi's overall expenditure rose by 10% but he allocated 15% more for major subsidies – food, petroleum and fertilisers compared to 12.6% last year. This is not just the current dispensation , but it has been observed that this has been the case with almost all the governments to increase the subsidies just before the elections in order to woo the voters. Despite having an anti-subsidy stance and having signalled that his administration would cut subsidy bill to boost the economy and attract investment, Finance Minister Arun Jaitley proposed to overhaul the food and fuel subsidies to narrow the fiscal gap, just two months after coming to power. So what changed in these four years? One of the possible reasons for this paradigm shift in the government's policy is how the BJP lost a number of votes in rural Gujarat and also the rising discontent among public after the poor implementation of demonetisation and GST.  Additionally, subsequent losses in the recent by-polls and upcoming elections in many states have forced the government to reconsider its stance on subsidies. Since then, the government has been quiet about phasing out subsidies. But herein arises a question : Why should we do away with subsidies if it benefits the public?

The answer, perhaps, lies in the short-sightedness of the voter, who cares more about living in the present, even at the cost of an uncertain future. This means that freebies doled out by the incumbent government actually work. And if this is common knowledge, then logic suggests that politicians would indeed dole out freebies. They are maximising their objective function, which is to get re-elected, often changing the nature and packaging of these freebies as the situation demands. Also, increasing the subsidies encourages inefficiency and increases the reliance of public on government for their needs. This leads to a sense of entitlement among people  that the government will take care of their needs. Although they may have extremely positive benefits, the government will have a difficult time measuring the success of subsidies to make an informed decision about their future implementation.

With the economy spiralling downwards and still recuperating from demonetisation and GST, the government, instead of handing out doles, could have provided relief to the corporate sector and industries by reducing the corporate tax , which in turn could have resulted in an increased employment, thus reducing the dependency on government.  Another disadvantage is that this leads to increased taxation since the subsidies need to be funded. With a populist budget and the flipping of its stance on socialist policies, it seems that the current dispensation is socialist in nature under the garb of capitalism.

- Adityaa Srivastava