Non-merit subsidies swell to 58% of total: Govt

Increase user charges, reduce LPG subsidy but go slow on kerosene

A government paper tabled in Parliament today has estimated the outgo in central subsidies at Rs 1,15,824 crore in 2003-04, or 4.18 per cent of the country's gross domestic product.

The paper, prepared in collaboration with the National Institute of Public Finance and Policy, said non-merit subsidies stood at Rs 67,250 crore, accounting for 58 per cent of the subsidy bill.

The paper has favoured a review of the food and fertiliser subsidies, increase in user charges and gradual reduction of the subsidies on cooking gas to improve the fiscal situation, but opted for a cautious approach on kerosene.

According to the report, the reforms should aim at eliminating non-merit subsidies and introducing a uniform price policy with a system of food coupons for families below the poverty line (BPL) as the present system of dual pricing under the public distribution system encourages leakages.

To contain operational costs, reimbursement of expenses to the FCI should be based on normative unit costs and actual quantities involved, it said.

The 'merit' categories have been broken into two levels. According to the report, merit I category "" elementary education, primary healthcare, water conservation and environment ""deserve more subsidy than merit II category, which includes ports, roads and flood control.

Speaking to reporters after the report was tabled, Finance Minister P Chidambaram said it would be discussed in the Budget session of Parliament.

Stressing that fertiliser subsidy in its present form be done away with, the report said urea imports should be de-canalised, flat-rate subsidy system be introduced and a mechanism to increase the farm-gate price of urea at regular intervals be considered.

Pointing out that only state-owned oil companies had been permitted to market subsidised LPG and PDS kerosene, the report said this had curtailed the entry of private retailers and stifled competition.

On user charges, it said appropriate upward adjustment of these charges would directly reduce the subsidy bill and suggested services be divided into three groups. While the user charges on some services should be increased immediately, the timeframe for the other two groups could be five years and 15 years, respectively.

The report favoured introducing a flat rate subsidy system for the fertiliser sector with different rates for domestic producers and importers.

"Both farmers and fertiliser industry have been subsidised. There is a need for policy measures to reduce subsidy to both the groups," said the report.

Stating that social service qualified for large subsidies in comparison to economic services, the report favoured variable pricing for economic services.

The increase in input costs unaccompanied by an improvement in recovery rates resulted in escalation of implicit subsidies on a variety of economic and social services, the report said, adding: "There is a wedge between subsidies that are actually received by the users of the service and subsidies that are borne by the government."

Any subsidy reform should aim at reducing volume relative to revenue receipts while eliminating non-merit subsidies. Subsidies should be administered directly to the targeted beneficiaries.

Besides, they should be made more transparent by being shown explicitly in the Budget and avoiding multiple subsidies to serve the same policy objective.

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Subsidy reforms aim at:

Reducing subsidy volume vis-a-vis revenue receipts

Eliminating input subsidies and focusing on transfers

Making the process transparent by showing them explicitly in the Budget

What's to be done

FOOD

Introduce a uniform price policy with a system of food coupons for the BPL families

Reimburse expenses to the FCI on normative unit costs; involve actual quantities

FERTILISERS

De-canalise urea imports, consider mechanism to increase the farm-gate price of urea at regular intervals

Introduce flat-rate subsidy system with two different rates for domestic producers and importers

LPG, kerosene

Reduce LPG subsidy gradually, adopt cautious approach on kerosene

Encourage fair and healthy market competition