Page 327 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 25: Government Finance: Union and States

services, viz., agriculture, rural development, energy, industry and minerals, irrigation and flood Notes
control, science, technology and environment is 78.8 percent in the total subsidies. Although it is
possible to reduce subsidies in social services to some extent by raising recovery rates in university
and higher education and to some extent in some unnecessary youth and welfare programmes, but
this shall have to be compensated by increasing subsidies in compulsory elementary education and
expanding public health services for the poor. In short, the scope for reducing subsidies in social
services in practically negligible.
There is, however, enough scope for reducing subsidies in economic services. For instance, in
agriculture and rural development activities, subsidies of the order of ` 50,579 cores were provided
in 2003-04, but recovery rate was barely 1.3 percent. Similarly, in coal and lignite which is a non-
merit good, the recovery rate is only 3.3 percent. Another big area for reducing subsidies is industry
and minerals which receives a subsidy of ` 29,532 crores and the recovery rate is only 6 percent.
Besides bringing about an overall increase in recovery rate, there is a need to give pointed attention
to reducing subsidies in agriculture and rural development, coal and lignite and industry and minerals.
But the farm lobbies on the one hand and industrial lobbies on the other, besides the coal mafia
would put up resistance. Again, the decisions have to be taken at the political level.
Let us examine the issues at the level of the Central Government. Of the total Central Government
subsidies in 2011 -12 of the order of ` 1,43,570 crores, food subsidy accounts for ` 60,573 crores
(42.2%), fertilizer subsidy Rs, 49,981 crores (34.8%) and petroleum subsidy ` 23,640 crores (16.5%).
Taking food, fertilizer and petroleum, these three subsidies account for 93.5 percent of the total explicit
subsidies. Other Central Government subsidies on Railways, interest subsidy etc. account for barely
6.5 percent. Obviously, if explicit subsidies have to be reduced, then steps have to he taken to limit
these three subsidies.
Food subsidy
Food subsidy in India comprises of three components : (i) subsidies to farmers through support
prices, (ii) subsidies to consumers through public distribution system, and (iii) subsidies to the Food
Corporation of India (FCI) in its purchase and maintenance of buffer stocks. Data reveal that during
1997-98 and 2003-04, the Central issue price of rice was increased from ` 350 per quintal to ` 565 per
quintal - an increase by 61.4 percent and that of wheat was increased from ` 250 per quintal to ` 415
per quintal - an increase by 66 percent. However, the consumers price index for agricultural labourers
(CPIAL) increased by only 25.8 percent during this period. The purpose of raising the issue price at a
relatively higher rate than the rise in CPIAL was to subsidize the farmers to keep foodgrains production
at a comfortable level.
Since the FCI continues to purchase foodgrains without any limit, this has resulted in the creation of
buffer stocks in FCI godowns far in excess of the prescribed minimum norms. Food stock reached a
peak of 63 million tonnes in July 2002, more than 2.5 times the norm of 24 million tonnes. By April
2004, the stocks were brought down to 20 million tonnes, not by increasing PDS offtake of foodgrains,
but by exporting foodgrains at near BPL prices. The cost of handling and carrying costs of foodgrains
by the FCI over and above the minimum norm is met by the subsidy to FCI. Since FCI operations are
concentrated only in five states, viz., Punjab, Haryana, Western UP, Andhra Pradesh and Chhattisgarh,
the entire subsidy is available to farmers in these states only. Moreover, since the Minimum Support
Price (MSP) is limited to only two crops, rice and wheat, this has distorted the cropping pattern in
favour of these two foodgrains.
The Report has suggested the following policy reforms :
(i) Minimum Support Price (MSP) should correspond to CACP-determined C2 cost, which includes
all cash costs and the imputed value of family labour.
(ii) Before every sowing season, food procurement targets should be fixed on the basis of norms
and a margin of error of about 10 percent. FCI should suspend puchase of operations once the
targets are achieved.
(iii) A system of price insurance, similar to Farm Income Insurance Program introduced recently on
a pilot basis, may be developed.

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