The long and short of Modi’s welfarism

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The long and short of Modi’s welfarism

Tuesday, 11 June 2024 | Uttam Gupta

The long and short of Modi’s welfarism

The Govt is doing a good job of supplying food, fuel and fertiliser at subsidised cost but the largesse recipients are unlikely to make space for other deserving people

An overarching policy instrument Prime Minister Narendra Modi uses in relentless pursuit of a welfare State is his unflinching commitment to ensuring adequate supply of three essential items, namely fertilisers, food and fuel, to the target beneficiaries/consumers at ‘throwaway’ price or even for free.

In fact, he tells them about his intentions in this regard well in advance. Look at these facts: Urea is a widely used fertiliser that supplies primary nutrient nitrogen or ‘N’ and constitutes nearly half of India’s total fertiliser consumption. To make it affordable to farmers, the Union Government controls its maximum retail price (MRP) at a low level unrelated to the cost of production/import and distribution, which is much higher. The excess cost over MRP is reimbursed to the manufacturer/importer as subsidy which varies from unit to unit, depending on its cost.

During its first term, under a comprehensive New Urea Policy 2015 announced on May 13, 2015, the Modi Government had frozen the urea MRP of `268 per 50 kg bag for a period four years till 2019-20. Even thereafter, the price remained unchanged at `242 per 45 kg bag (currently, urea is sold in 45 kg bag; so on pro rata basis, the price is the same as earlier). This price is nearly one-tenth of the cost of making it available leading to huge subsidy payout. On June 28, 2023, Modi announced its continued availability to the farmers at this price for three years, up to FY 2025-26.

As for food, the National Food Security Act (NFSA) enacted by the erstwhile UPA Government in 2013 had provided for giving wheat, rice and coarse cereals to eligible beneficiaries at a throwaway price of `3/2/1 per kg respectively. The excess of minimum support price (MSP) paid to farmers plus handling and distribution costs over this price (read `3/2/1 per kg) was reimbursed to the State handling agencies such as the Food Corporation of India (FCI) as subsidy.

Even as the NFSA had frozen the price to be paid by beneficiaries for three years, ie till 2016, the then Minister for Food and Civil Supplies, Ram Vilas Paswan, announced that the price won’t be increased for three years. In 2020, due to the Corona pandemic, under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), the Government also started giving 5 kg of rice or wheat per person per month for ‘free’ to all the 820 million beneficiaries under the NFSA.

Meanwhile, the pandemic-induced PMGKAY was withdrawn from January 1, 2023. However, from the same date, the Government started giving regular supplies under the NFSA for ‘free’ (instead of `3/2/1 per kg charged earlier). This modified scheme was renamed as PMGKAY. Later in the year, in November 2023, addressing a poll rally in Chhattisgarh, Modi announced extension of the PMGKAY for another five years, ie till 2028.

In case of liquefied petroleum gas (LPG), ever since 2015, the Government remains committed to making it available for household consumption at a low price although unlike in fertilisers and food, Modi hasn’t announced as to ‘for how long’. At present, over 100 million poor households who have been provided free gas connection under the Pradhan Mantri Ujjwala Yojana (PMUY) are eligible to receive subsidy at the rate of `300 per cylinder (14.2 kg) for 12 fills per annum.

If the welfare scheme beneficiaries are assured that they will continue to receive the benefits perpetually, all the more when these concern essential items such as fertilisers, food, fuel and that too with zero or near-zero price tag, they couldn’t have asked for more. They can use the money thus saved for spending on other things, say education, health etc that can help them enhance their productive capacity and improve the quality of living. But, this may not happen in all cases. What if they fritter away the savings on unproductive stuff?

A bigger risk has to do with complacency that this could give rise to amongst the recipients of the benefits. When the Government arranges their basic needs for free (in Delhi, the State Government gives electricity and water free), it could trigger a feeling as to ‘why should they work at all?’ We could end up with a scenario where crores of people don’t need to earn their living and simply wait for the State freebies to take care of all their needs.

Such an approach also comes in the way of extending the benefit of welfare schemes to other deserving persons who are currently not included in beneficiaries list. For instance, the current list of PMGKAY beneficiaries being based on the Census of 2011, over 100 million persons who became eligible post-2011 don’t have access to free food.

Giving them access without deleting equivalent number from existing list will require more allocation for food subsidy. If fund constraints don’t permit hike in the budget, those 100 million will continued to be denied access.

Under the current system of giving fertiliser subsidy, farmers are prone to excessive use of urea leading to imbalance in fertiliser use, drop in crop yield, deterioration of soil health and adverse impact on the environment. Even as there is a dire need to reduce imbalance by curbing excess use of urea, its availability at throwaway price won’t let that happen.

For this very reason, there is rampant leakage/diversion of urea for industrial uses. Further, because manufacturers and importers get full reimbursement of the excess of cost over the MRP as subsidy on ‘actual’ basis, there is no incentive to reduce cost and improve efficiency in operations. The existing system of giving food subsidy also suffers from leakages, misuse and inefficiency in operations.

When Modi says the supply of fertilisers and food for free or at throwaway prices will continue perpetually, dubious operators too get to continue with their illicit gains. To address these anomalies, the Government needs to drastically restructure its welfare schemes. First, there should be an exit clause for a beneficiary under the scheme. The clause can be triggered when she crosses the poverty threshold. For instance, 250 million persons who have come out of poverty shouldn’t be eligible for free food under PMGKAY.

Two, our political brass should do away with the ‘free’ tag to any item even if it is food. While no one can deny the need for some subsidy to make it ‘affordable’ to the poor, insisting that the commodity be given for free or at small fraction of the cost (as in case of urea) is a risky idea. It is an invitation to all kinds of wrongs such as fictitious claims, diversions, inflated cost and so on.

Three, instead of delivering a commodity at a low price, the Government should deposit the subsidy in the account of the beneficiary. The latter can buy her needs from the market where prices are determined in a competitive manner, thereby ensuring that the gains of efficiency improvements and cost reduction accrue to all consumers. In this scenario, there won’t be any scope for misuse or diversion.

Four, a plethora of subsidies under different heads can be merged and given as a single lump sum amount as income support. This can save a lot of administrative work and associated costs involved in running multiple schemes.

(The writer is a policy analyst, views are personal)

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