Friday, May 30, 2008

Subsidies are like steroids - they may look attractive in the short run but they cripple you in the long run!

These days fuel price hike is making headlines. There are debates about how much to increase, whether to increase the price of diesel and LPG as well and how will this impact the price of consumables.

This situation was bound to happen. And, every time this issue arises, it sends political parties in a frenzy of activity that only a Bofors or a Tehelka can! The faulty economic policies have ensured that our economy depend on the crutches of subsidies and licences. Subsidies are like steroids; they can give you a sudden burst of energy in the short term but they are certain to cripple you in the long run. Politicians in India have always been more interested in the short term benefits, getting voters, wooing populations with sops and subsidies, artificially protecting the economy from competition and consequently incapacitating the people and the economy in the long run.

Let's consider farm subsidies. Farm subsidies have ensured that our farmers remain poor and unproductive always. The subsidized seeds, fertilizers, manure are so inferior in quality that the resulting farm produce is also of poor quality and quantity. These poor subsidies lead to poor yields which, in turn, lead to poverty. This leaves the farmers with no choice but to depend on subsidies for the next season as well. Thus we have ensured that our farmers are always trapped in the vicious circle of poverty with farm subsidies. Many farmers want to buy good quality seeds, fertilizers etc but the infrastructure around them prohibits that. They can get bank loans only for the poor quality government-approved subsidized products. This leaves the farmers with no choice but to borrow money at “very” high interests from moneylenders. The interest rates are so high that they are anyways bonded for life just paying back the interest! So does the subsidy favour them at all? It has instead crippled our farmers.

Similar is the case with our (public distribution system) PDS. Ask any sensible person and he will tell you that the PDS is a farce. Who reaps the benefits? Middlemen, traders, all, but those below the poverty line! So whom does the subsidy favor?

Take the case of LPG. It is highly subsidized. It enjoys a subsidy of around Rs 110 per cylinder. If there were no subsidies, the cost would be aorund Rs 415 per cylinder. So who are the LPG consumers? They are the better-off households and commercial users such as hotels, tiffin centers, laundries, abattoirs etc. The rural and semi-urban consumers still rely on kerosene, firewood, and coal for their regular fuel needs.

What has subsidy on LPG managed to do? It has made people ignore its worth and encouraged them to use LPG indiscriminately. Why else would people boil huge quantities of water both for dirinking and bathing on their gas stoves? If the price of LPG was at par with the global rates, at least the usage would be more discrete. There would be a demand for alternative fuels like bio gas, solar energy etc. Sadly, our policy makers have always had populist policies. Their over enthusiasm to protect the weak has only made the weak weaker. There has never been any foresight about how we can empower the weak to take on world competition. Also there's no foresight about how to prolong the life of our natural resources.

Now, we face the same crisis with petrol and diesel. Today, the global oil prices have forced governments to hike rates, and the repercussions are felt by all! From airlines to trucks, the hike in oil prices will spiral off a hike in the rates of all commodities and services. This situation could have been well avoided because the subsidy did not benefit the BPL, it benefited the huge car-driving middle class, who could anyways afford the “real” market rates. Nowhere in the world is there a difference in petrol and diesel prices. So what does that translate to? Diesel cars are much cheaper and they clog our roads! Do you see whom the subsidy has actually favoured? There is a brilliant article by Swaminathan S Anklesaria Aiyar in Swaminomics which will give you goose bumps when you find out that every year the country looses a staggering Rs 200,000 crore just on just oil subsidies! Can you see where your hard earned money goes?

1 comment:

ripul said...

some chunking would be easy on eyes :)