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The UPA Gravy Train Wreck

The UPA Gravy Train Wreck

 

Between the years 2004-05, when the UPA took charge at the Center, and 2011-12, a span of 7 years, out of every incremental Rupee generated by the country as GDP, 9 paisa, or a little over 9%, has been given away as subsidy by this government.  No, this is not a poor joke.  A full 9%, if not more, of all incremental output over the last 7 years, is now being disbursed as subsidies to some lobby group or the other.  How can any country survive such profligacy and for how long?

 

But first let us consider the numbers themselves which are given in the attached spreadsheet.  Between 2004-05 and 2011-12, the GDP grew by a little over 75%.  The growth rate during the period, a shade under 9% in real terms, was truly respectable.  However, in the same period, subsidies to various groups, detailed in the attached sheet, grew by a little under 396%. Yes 396% against the growth in GDP of just 75%!  At the end of 2004-05, total subsidies as a %age of GDP stood at 1.74% a respectably “safe & sustainable” level that the UPA government inherited from NDA.  By 2011-12, subsidies had shot up to 4.9% of GDP.  Note India went bankrupt in 1990 when subsidies reached almost 3.5% of GDP.  We are already at nearly 5% of GDP.

 

The above figures do not include hard-to-calculate cross-subsidies such as those given to farmers on power, under recoveries of service charges in Government services and mispricing of such resources as water to households and farmers.  If these are taken into account, the subsidies would be much larger than the figures given here.  The enormous distortion in general prices by such a high level of subsidies is simply mind boggling.

 

As noted earlier, the UPA government inherited a fairly low and sustainable level of gross subsidies and fiscal deficit from its predecessor NDA government.  The mess that we are in is therefore entirely due to the utterly irresponsible way in which the UPA has cravenly caved in to demands for handouts from various pressure groups.  What is astounding is that almost 10% of all incremental output from the economy over the last 7 years is being doled out as a handout to some claimant or the other. Why has the UPA government been so supine to pressure groups given that it is the one that claims to be for reforming the economy and cutting out subsidies?  What went wrong?

 

Before you can answer that question let us take a look at what these subsidies are and whom do these subsidies go to.

As at the end of 2004-05, subsidies totaled R51,614 crores and were  1.74% of GDP made up of the following items.

 

By the end of year 2011-12, subsidies had grown by a whopping 396% from R51,614 crores to R256,296 Crores.  As a percentage of GDP, subsidies grew from 1.74% of GDP to 4.91% of GDP.  They were made up of the following items.

 

Note the change in composition carefully.  Petroleum subsidies which were negligible at the end of 2004-05 grew to 27% of total subsidies in 2011-12.  While food subsidies, which were 47.50% of the total subsidies in 2004-05, shrank, yes decreased, to just 28.4% of total subsidies in 2011-12.  In terms of composition of subsidies, the supposedly pro-poor UPA government has been shrinking food subsidies to the poor and substituting them with subsidies on fuel for the middle and upper middle classes!

 

Note just about R3500 crores is spent on fuel subsidies to below the poverty line families, and over the years, this figure is shrinking.  Most of the petroleum subsidy, now totaling R68,481 crores goes to the middle & upper classes including diesel subsidy to transport operators who by no means can be classified as poor.  Likewise, much of the fertilizer subsidy goes to the corporate sector, be it as production subsidy to urea manufacturers or to DAP importers.  If the subsidy were really intended for farmers, this can and should go directly to farmers but by design it doesn’t reach there.  For this analysis, we have assumed about 65% of the food subsidy goes to the actual poor rather than leaking to the middle class.  Note, of all the subsidies, only employment assurance does not “leak” if implemented honestly.  Government pretends it isn’t subsidy in the first place.  But the effort hardly creates any assets and leak it does albeit through corruption.  But we have assumed all of it does go to the poor.

 

On the above basis, as at the end of 2004-05, the subsidies were split as under among the poor and the rich, including the corporate sector.  Note subsidies to the corporate sector eventually end up as dividends to shareholders who aren’t poor.

 

Note, a little less than half the subsidy as at the end of 2004-05 did reach the poor.  Below is the data pertaining to 2011-12; UPA’s gorgeous pro-poor record in its entire splendor.

 

Lo and behold the UPA magic.  The share of the poor, in whose name all subsidy is created by liberal bleeding hearts, has shrunk from a little under half to just about a third.  Mind, total subsidy during the period grew by 396% and the share of the poor shrank from half to one-third!  What of the well off?  As usual they had smuggled themselves into the subsidy trough under the guise of the ubiquitous “common man” to grab over two-thirds of all subsidy after it had nearly quadrupled from the level prevailing in 2004-05.  Yet this very class of people is on twitter screaming itself hoarse about inordinate increase in food subsidies for the poor or the inequity of MNREGA.  Hypocrisy thy name is our vocal middle class.

 

Sonia Gandhi, and her Marxist kitchen cabinet at the National Advisory Council, may note that they have been roundly beaten in the subsidy game by the government using the guise of “common man”.  While MNREGA and Food Security Act etc require positive acts of Parliament to get through, open ended subsidies like petroleum and fertilizer need positive acts from Government to check.  If government does nothing, as is UPA’s wont, petroleum & fertilizer subsidies will increase merrily while Food Security Act languishes.  NAC has been outflanked by crowding it out of the subsidy trough.

 

We do not support open ended subsidies of any kind, be it food or unemployment mitigation schemes.  Subsidies should be merely a way of supporting people in training to integrate them into the mainstream economy.  Farmers can well be compensated for higher fertilizer costs through higher support prices for produce.  The reason this is not done is simply because the corporate sector would be deprived of its nest egg in the shape of assured post tax returns on net worth.  Similar is the case of petroleum subsidies and assured post-tax returns to refineries.  While it is difficult to explore the ridiculousness of the government’s assured post-tax return on net worth here, we may note that the formula is open-ended in time.  If a fertilizer plant or refinery’s entire plant is depreciated in say 10 to 15 years, then the subsidy on the same should also end in a similar period of time.  Instead, the subsidy continues in perpetuity!  That is the dirty little secret of assured post-tax return and why the corporate sector loves the scheme.  One wonders why the government has not woken up to the implications.

 

Subsidies need to be brought down to about 1.50% of GDP immediately if we are to avoid bankruptcy.  The government itself promises to bring subsidies down to 1.90% by the end of 2013.  How that may be accomplished with a looming draught and falling growth rate is uncertain.  We will return to this topic in another article.

 

Time Sonia Gandhi, government and the opposition, woke up to the imminent disaster.  Subsidies now total 4.90% of GDP and about 10% of all incremental output is being eaten up by subsidies.  If reforms are not forced through, and petroleum subsidies cut to zero forthwith, the country does not have the reserves to last beyond 2013/14.  Who-so-ever takes over government in 2014 will have a bankrupt economy with no latitude for any maneuver.  If we do not reform now, UPA will follow a scorched earth strategy in the ensuing election year in a bid to garner as many seats as possible.  So it is in the interest of all parties, no matter who wins 2014, to reform now and compete for votes on some other basis.  Stalling reforms is not an option any more.

 

Growth in subsidies under UPA

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