Where have all the subsidies gone?

Of course, perfect targeting is not possible, and all the money saved from elimination of subsidies should not go to the poor. Indeed, it should not go to anybody, but should go to help make India look more like a modern economy than a poor cousin of Hugo Chavez's Venezuela. And Venezuela has oil

to squander.

This simple analysis has several implications for Indian policymaking and the budget. For starters, all this talk about raising tax rates, imposing commodity taxes, increasing dividend taxes, etc, is shown plainly to be what it is utter and glib nonsense. The gains to be made for the Indian economy are by drastically reducing "in the name of the poor (INP)" expenditures. The talk should not be in terms of motherhood reductions of the fiscal deficit, but reductions in the even more politically correct motherhood expenditures on the poor.

The big story, the big debacle, the big policy mistake, is the irresponsible increase in the combined (state and Centre) fiscal deficits of about 2 to 4 percentage points of GDP. This had averaged 6.3 per cent of the GDP in the "good" years, 2003-04 to 2007-08. For the last five years, the fiscal deficit has averaged 8 per cent, or 1.7 percentage points higher than the 2003-04 to 2007-08 average. Is it just a coincidence that this increase is almost identical to the increase in populist subsidies alone 1.6 percentage points between NDA-Vajpayee and UPA 2?

It is time we recognised the debate on INP policies. Several people will lose if a re-orientation is made. Many of these people are politicians, many more are in major political parties and I would conjecture that a large amount of the leakage ends up in the coffers of political parties as election financing. These men and women are powerful and stand a lot to lose if money meant for the poor reaches the poor. How much is this leakage or "corruption"? Rajiv Gandhi had conjectured (Congress party leaders please note) way back in 1985 that 85 per cent of the money meant for the poor was lost in transition. And Rajiv Gandhi was a raging optimist. Fifteen per cent of Rs 3,01,000 crore is Rs 45,000 crore, and even if this fraction of money did actually reach the poor, poverty in India today would be less than 5 per cent, if not zero! In other words, money for the poor leaks away indeed, floods away.

... contd.

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