Where have all the subsidies gone?

These simple calculations, assuming conservative historical trends, imply that the government needs to annually spend, in 2013-14, Rs 0.44 lc(obtained as the multiple of 220 million poor with an average poverty deficit of Rs 2000 per person per year). This fraction is 0.40 per cent of the GDP and what is needed to be spent on the poor in order to claim that "India is a land with NO poverty according to the official poverty line". This claim assumes perfect targeting. Further, the amount needed to eliminate poverty declines with economic growth. In 1983, the perfect targeting outlay was equal to 7.8 per cent of the GDP and in 2004-05, 1.6 per cent of the GDP.

Assume, for a moment, that the government was actually desirous of doubling the real incomes of every poor person in India. This will mean an outgo of nearly Rs 2,20,000 crore each year and will push every poor person in India to a consumption level above the poverty line. The table documents the actual expenditure on various inventive poverty reduction schemes that Indian politicians have offered and spent grandiosely on.

The trend in the averages is striking. Under Atal Bihari Vajpayee's tenure, when incomes were low, the government spent close to 1.6 per cent of the GDP on poverty reduction programmes. India was a lot poorer 10 years ago and could not afford the average perfect targeting requirement of 2.2 per cent of GDP. During UPA 1, this deficit turned into a surplus (India became less poor) but the populist government spent twice the amount "needed" to remove poverty. The situation has worsened considerably in UPA 2, and in 2012-13, the government is spending more than six times than what is "needed".

The criminally sad nature of our populist policies is brought out by the following calculations. We spend Rs 1,00,000 crore on diesel subsidies. I don't know about you, but I know precious few, indeed none and none by a few miles, poor people who consume diesel. If the diesel subsidy were to be eliminated and the money given to the poor, their consumption would increase by 50 per cent! If the food subsidy were to be eliminated (and only 23 per cent of the poor's food was accessed from PDS shops in 2009-10), the incomes of the poor would increase by 50 per cent. If all subsidies were to be eliminated and the money given to the poor, their incomes would be two and a half times their present income.

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