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Stop subsidies and save the economy

I have always suspected that post-Independence India has metamorphosed into a nation of freeloaders. Particularly its effete educated middle class which never knuckled down to the task of firmly formulating and governing the national economic development effort. Instead of honestly and forthrightly discharging its duty to foster economic and social development within a cruelly short-changed but deserving general population as mandated by the social contract, this class has been surreptitiously accumulating unwarranted privileges and subsidies at the expense of the poor and the under-privileged.

Now this vague suspicion has been confirmed by a study of the National Institute of Finance and Public Policy which was tabled as a discussion (white) paper in Parliament by Union Finance Minister P Chidambaram on May 6. The white paper makes for shocking reading even within a nation desensitised to chronic social injustice and mass poverty.

The white paper indicates that the aggregate monetary value of the myriad subsidiaries doled out to various interest groups within the economy was a massive Rs 1373.38 billion in fiscal 1994-95 equivalent to 14.4 per cent of the gross domestic product in that year. Worse, of this massive amount the Union and state governments spent a net amount of Rs 1021.45 billion on subsidising what the white paper describes as non-merit goods and services. These are goods and services which accrue only to the beneficiaries per se and have a marginal impact on society as a whole. Examples of non-merit goods and services subsidised are power supply, irrigation, transport, higher education, agriculture and industry.

On the other hand merit goods whose social benefits far exceed the sum of private benefits (primary education, flood control, roads and bridge construction, sewerage and sanitation services) attracted a relatively modest net subsidy of Rs 351.93 billion from the central and state governments.

Quite appropriately the white paper says that ''it may not be unreasonable to set a target'' to cut non-merit subsidies by 50 per cent during the next three years. If this target is attained through the gradual increase of user charges, the impact upon the nation's finances will be momentous. The Union and state governments's combined fiscal deficit which is currently a frighteningly high 6.5 per cent of GDP would fall to 2 per cent. Thereafter the reduction of the subsidy on non-merit goods and services by another 25 per cent within the next two years would result in a fiscal surplus by the turn of the century. Given the beneficial impact that a reduction in the fiscal deficit would have in taming inflation, it's a consummation devoutly to be wished.

Yet despite the moral imperative of the propositionthat one should pay the full price of the goods and services one consumes, you can bet your boots that the proposal to even gradually reduce the subsidies on non-merit goods will be condemned with full-throated ease by our comrades of the left and their fellow-travellers who dominate academia, the media and public discourse. That's because freeloading comes naturally to the comrades of the left. Indeed the most notorious freeloaders in contemporary history were the much revered leaders of the communist Soviet Union and China.

The daily food and drink orgies of Stalin during the period of forced collectivisation of Soviet agriculture when millions of peasants died of starvation are well-documented. Likewise chairman Mao Zedong according to his personal physician Zhisui Li may well have been the greatest freeloader of all time. 'Mao spent much of his time in bed, or lounging by the side of a private pool, not dressing for days at a time. He ate oily food, rinsed his mouth with tea, and slept with country girls. During a 1958 tour of Henan, Mao's party was followed everywhere by a truckload of watermelons.... He slept on a specially made huge wooden bed that was carried on his private train, set up in his villas, airlifted to Moscow,' writes Andrew J Nathan in the foreword to Li's biography of the great helmsman (The Private Life of Chairman Mao, Arrow Books, 1996).

Nor should one believe that such sybaritic luxury was the privilege of only the apex-level leadership of the communist regimes. Party members enjoyed similar if more scaled-down versions of these privileges subsidised by the cruelly deprived mass of the population at the base of their social pyramids. And it is from these regimes and via dishonest intellectuals spouting Marxist ideology that socialist India imported the subsidy culture which as the white paper highlights, has distorted and sabotaged post-Independence India's national development effort.

I have often argued in these columns that no price is too great to pay to swell the flow of national savings into merit goods and services, particularly primary education. It will undoubtedly be difficult for India's 150-million-strong middle class to sacrifice the subsidies on power, water, petroleum products, food and higher education it has enjoyed for a long time.

But with personal tax rates having been drastically reduced in the recent Union Budget and the annual rate of economic growth having doubled during the past decade, this is the best time for this class to bite the bullet and cooperate with the finance minister as he attempts to gradually reduce the unethical subsidies on non-merit goods and services and canalise the savings realised into the provision of merit goods such as primary education and preventive health care.