Page 329 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 25: Government Finance: Union and States

application of fertilizers is “more dependent on technological and non-price factors than on price or Notes
agro-economic variables. These factor include irrigation facilities, cropping pattern, spread of high
yielding varieties (HYVs), effective fertilizer distribution and availability of credit.” The Report,
therefore, is of the view that the increase in urea prices may not translate into lower production. It
recommends public investment as “an effective instrument to promote the use of fertilizers.” Moreover,
rationalization of urea price would have a salutary impact on balanced application of N (Nitrogen),
P (Phosphate) and K (Potash).
Future Policy on Subsidies
It is now really over a decade that a comprehensive paper on subsidies was presented by National
Institute of Public Finance and Policy (NIPFP) in 1997. The situation has changed drastically since
then and there is a need to re-examine the issue. The main reasons are :
1. Implicit subsidies in various forms are growing both at the Central and State levels. Take for
instance, the large number of tax exemptions on Special Economic Zones (SEZs) granted by the
Government. They imply a big loss of tax revenues. Another instance is the role of the state
governments in acquiring land for SEZs and passing on to industrial houses.
West Bengal in its drive for industrialisation agreed to the following subsidies on its Singur
project to the Tatas. The land at Singur has been provided by the Government to the Tatas on a
90-year lease, with no downpayment. Secondly, for the first five years, Tatas will pay ` 1 crore
as rent and the yearly payment will increase by 25% for each year interval for five years for the
next 25 years. For the next 30 years, payment will increase by 33% at a five year interval and for
the final 20 years, the rent would be ` 20 crore per year. The West Bengal Government also
agreed to provide a loan to the Tatas of ` 200 crores at 1 percent rate of interest while the VAT
proceeds accruing from the sale of cars will be handed back to the Tatas against 1 % loan for the
first 10 year period. But as against this, the total compensation to the farmers will be of the
order of ` 200 crores.
The question raised by the crities of industrialisation paradigm of development is : Are we
following a policy of inclusive growth by taking away the livelihoods of farmers, sharecroppers
and other associated persons dependent on land ? On the other hand, are we providing heavy
subsidies of several kinds—land acquisition and development by the Government on behalf of
industry, subsidised power, generous tax holidays, financial support for purchase of equipment,
subsidised credit and exemption of waiver from exports etc. to industrialists.
Similarly, the state governments have been providing free or highly subsidised electricity for
agriculture which benefit mainly the rich farmers.
It has been estimated that various kinds of tax exemptions have resulted in revenue foregone to
the tune of ` 2,78,644 crores - a colossal sum indeed. The Government has been praising the
corporate sector for better tax compliance resulting in a sharp increase in corporation tax
revenues, but facts as they stand, reveal that although notionally, the corporation tax rate is
33%, its effective rate is only 19%. This sharp reduction in effective rate as against the prescribed
rate of 33% is the result of the plethora of exemptions granted to the corporate sector.
2. There is a need a consider the legitimacy of other subsidies as well which fall in the category of
non-merit subsidies.
3. There is a tremendous change in the situation with respect to petroleum subsidy since
international price of crude petroleum has crossed $ 110 per barrel. If the government provides
the subsidy fully to oil companies, then the subsidy amount is likely to reach 1.5 lakh crores this
years. As a consequence, the fiscal deficit could be pushed up by an additional 3.2% of GDP.
The Government could partially salvage the situation by providing 50% subsidy in the form of
bonds and thus, only the interest on bonds will be reflected in the budget as a cost. But when
the bonds mature at a future date, their redemption will exercise pressure on the fiscal deficit.
The situation in case of fertilizer subsidies is no better. The international price of fertilizers is 4-5
times the domestic price. The likely impact of fertilizers subsidy is going to be ` 80,000 crores as

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