Murderous subsidies

Cross-subsidies are one of the most favoured notions in socialist thinking: you charge the rich more than the poor for the same product (or similar class of product), and the rich therefore subsidise the poor. India's policy-making history is replete with instances of such cross-subsidy""in food grains, sugar, petroleum products, electricity, and so on. But while the idea is attractive in theory, its practical consequences can be of the entirely unintended variety, as seen in the murder of a young official of Indian Oil Corporation last week.

The link between murder and cross-subsidies is not obvious, until it is pointed out that cross-subsidies create market distortions that the crooked exploit. The sustained misuse of pricing gaps leads to massive scams and the birth of vested interests who make a killing (pun unintended). Anyone who then tries to address the problems that have been created ends up taking on well-organised mafias, with potentially disastrous consequences.

The government has for decades underpriced kerosene (on the grounds that it is the cooking fuel used by the poor), and charged much more for diesel. Diesel can be adulterated with kerosene, and surveys show that such adulteration accounts for up to 40 per cent of sales. The money made through such adulteration runs into thousands of crores of rupees every year, and is pocketed not just by petrol pump owners but by people up the supply chain, with the inevitable political linkages. Various stratagems have been attempted to stop this rampant practice (like colouring subsidised kerosene), but nothing has worked. The only solution is to rationalise pricing, but that is unthinkable for the political class, and so the massive scam continues. The death of the IOC official is one result, and the young man would have died in vain if the underlying issue is not addressed without further delay.

Cross-subsidies have caused similar distortions and massive scams in virtually every field where they have been attempted. The so-called transmission and distribution losses in the power grid are substantially caused by plain power theft, hiding in part under the cover of free or subsidised power supply to farmers. It is also well known that a substantial part of the subsidised foodgrain supplied through the public distribution system gets leaked into the open market, where prices are higher. The government pays the subsidy, private interests pocket the gain. One can go on with such examples but the point should be clear. These scams that flourish under everyone's nose do not hit the headlines because there is no specific individual who is the culprit, and there is no one deal that can be pinpointed; it is a whole system. That makes the situation worse, not better.

Should then the baby be thrown out with the bathwater, it may be asked""and should the poor pay more for everyday goods because of the existence of these scams? That is the wrong question. The issue, correctly framed, is whether there is a better way to benefit the poor without giving criminal elements the opportunity to exploit price arbitrage opportunities. Increasingly, it would seem that direct financial pay-outs to the poor are probably the better policy option, and should be tested as an idea. If successful, cross-subsidies can be scrapped in all fields, market distortions ended, and the scams made a thing of the past. Any takers?