Electric Power:Subsidies for power have been a hardy perennial. Despite all kinds of executive and legislative efforts to minimise them, gross subsidies on electricity sales by state electricity boards rose to over Rs. 43,000 crore in 2007/8 or nearly one percent of GDP. Over two-thirds is accounted for by sales to agriculture and the rest is for domestic use. And what has the long history of power subsidies got us other than financially parlous power utilities, weak state finances and over-priced supply to industry and commerce? Well, the other unfortunate results include: the tortuous history of guarantees and counter-guarantees (remember Enron-Dabhol?); perennial power deficits, including a record peak power deficit of 15 percent in 2007/8; massive disruption to medium and small scale industry and commerce; over-use of groundwater and sinking water tables; and routine "load shedding" all over the country, including in the capital city of this "emerging economic super-power".
Irrigation: The second largest subsidy item in most state budgets is for irrigation water. Except for Gujarat and Maharashtra, water charges in irrigation schemes cover only a fraction of O&M costs, let alone the massive investments undertaken over decades in dams and canals. As a result, maintenance is poor and the irrigation potential of existing schemes is seriously under-utilised. Combined with sinking water tables, much of Indian agriculture is subject to water stress, leading to low productivity and weak growth. And, as we all know, these problems are hitting home this year through higher inflation.
Urban Water Supply: Under-pricing and subsidies are rampant here as well. Unlike in most of the world, Indian cities and towns are unable to supply water from the mains 24x7. Water and sanitation utilities are chronically under-financed, under-repaired and under-invested. The well-to-do invest in tanks and pumps to solve the supply problems and filter/boil to improve quality. Slum-dwellers are lucky if they can access piped sources and still suffer the health hazards of contamination. Many buy water from "informal" water-sellers at high prices. So, most of the subsidy goes to the rich and middle classes.
Fertilizers:Another hardy perennial in India's subsidy jungle, this one is borne by the central budget and is mostly focused on urea. Despite the recommendations of a long and distinguished lineage of "High-Powered Committees", the price-control-cum-subsidy regime has persisted. So has the severe damage to soil quality from over-use of nitrates relative to potassium and phosphates. It has also discouraged new investment, with hardly any new capacity being created in the last 20 years. This leads to serious problems in periods of global scarcity, as at present.
Higher Education:Public universities and related institutions subsist on government subsidies, since absurdly low fees have not been revised in several decades. The predictable results have been inexorable decline in physical infrastructure and the quality of faculty. The problems are compounded by caste-based reservations. The rich have opted out of the system and send their youngsters to foreign universities (charging fees many multiples higher) or a small number of private, "non-profit" institutions. The less well-off have no option. Reform has been blocked by vested interests and misguided political leadership. Overall, the system is in crisis and bodes ill for India in this knowledge-based century.
Petroleum Products: The story of the huge oil subsidies needs no retelling. Aside from the massive damage to public sector oil companies and ballooning fiscal deficits, the price-subsidy structure is encouraging excessive "dieselization" of the economy, rampant adulteration of diesel with even cheaper kerosene (with resultant damage to the environment) and delayed adjustment to the inevitable.
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Foodgrains:Arguably, the PDS-related food subsidy has had some successes, especially in its early years, in enhancing consumption and welfare of the urban poor. But, as the PDS administration has worsened over time (in step with the general administration), diversion, pilferage, mis-targeting and other forms of leakage have mounted. In any case, the distribution system only works moderately effectively in perhaps five states, which exclude the poorest and most populous, such as UP and Bihar.
There are many other examples. But the general point is clear enough. Some of India's worst performing sectors are those marked by the witches' brew of public supply, price controls and subsidies. It's impossible to think of a major sector with high subsidies which is performing well. In sharp contrast, just consider some of India's best performing sectors such as IT, telecom, pharmaceuticals, auto components, two-wheelers and entertainment (TV, films, etc.). None of these rely on subsidies. Most of the Indian manufacturing sector depended on "subsidies" of a different kind for several decades up to the early 1990s. High tariffs and import controls protected manufacturing units from cheaper imports and the Indian consumer paid the "subsidy" through inflated prices for domestic manufactures. As trade protection was gradually and systematically reduced throughout the next 15 years, these "subsidies" disappeared. Indian industry didn't collapse. On the contrary, it became much more efficient, resilient and dynamic. Again the lesson is clear: wean sectors off their subsidy crutches and they perform much better.
The different histories of two infrastructure sectors, power and telecom, is also instructive. The prolonged history of a subsidy culture (and virtual state monopoly over distribution) ensured the permanent semi-crisis in India's electric power sector. In contrast, the equally long-standing telecom public monopoly was not associated with a subsidy culture (except for a limited number of netas and babus). So, when the sector was opened up in the mid-1990s to private players and new mobile technologies, there was no burden of a subsidy culture blocking its progress. And we have all benefited from the astonishing growth and technical change ushered in by Indian entrepreneurs and companies in this key infrastructure sector.
The lesson is clear: subsidies (usually linked to public provision) pave the road to perdition. If we want to rescue India's poorly-performing sectors, we have to free up prices, phase out subsidies and allow free entry. It has worked before. It will work again.
The author is Honorary Professor at ICRIER and former Chief Economic Adviser to Government of India. The views expressed are personal