No. 49, August 2010

No. 49
(August 2010):

India’s Rulers and India’s National Interest

Behind the Attack on 'Subsidies'

Behind the Attack on ‘Subsidies’

[Note: “crore” = 10 million; “lakh” = 100,000. “Cr.” is the abbreviation for crore.]

The recent deregulation of petrol and diesel prices (accompanied by a price hike) is not an isolated decision by the Government. Rather, it is part of a broader policy, of which the petroleum deregulation is merely one instalment. The basic policy is to withdraw State intervention in the pricing of key commodities (such as fuel and fertiliser) in order to give the private sector a free hand. This policy will result in more frequent price hikes and greater profit margins, destabilise the productive activities of petty producers in agriculture and industry, and depress the consumption of the masses yet further. People need to be made aware of the fact of this policy, its grave implications, and the bogus nature of the justifications being advanced for it.

Just before the Union Budget every year, the Government presents the Economic Survey, which is its report on the state of the economy in the past year. The principal author of each year’s Survey is the Chief Economic Adviser (CEA) to the Government. This office is held at present by the well-known economist Kaushik Basu. The Economic Survey 2009-10 contains a new chapter, without precedent in its predecessors. This chapter, titled “Micro-foundations of inclusive growth”, is not about the state of any particular sector of the economy or even of the economy as a whole: Rather, it presents the economic world-view of the Chief Economic Adviser:

The need of the hour is to have an enabling Government. India is too large and complex a nation for the state to be able to deliver all that is needed. Asking the Government to produce all the essential goods, create all the necessary jobs, and keep a curb on the prices of all goods is to, at best, court failure, and, in greater likelihood, lead to a large, cumbersome bureaucracy and widespread corruption.... This is what leads to the idea of an enabling state, that is, a Government that does not try to directly deliver to the citizens everything that they need. Instead, it (1) creates an enabling ethos for the market so that individual enterprise can flourish and citizens can, for the most part, provide for the needs of one another, and (2) steps in to help those who do not manage to do well for themselves, for there will always be individuals, no matter what the system, who need support and help. Hence we need a Government that, when it comes to the market, sets effective, incentive-compatible rules and remains on the sidelines with minimal interference, and, at the same time, plays an important role in directly helping the poor by ensuring that they get basic education and health services and receive adequate nutrition and food.

This more or less reflects the reigning banality in the discipline of economics today: capitalism is a benignly self-regulating mechanism, in which the private profit drive of the individual capitalist ultimately serves the broader interest of society, and the State serves as a referee on the sidelines. True, the Survey does admit that some do not do well for themselves, and that the State must help them, but even this qualification is in line with the dominant school: for it takes care to clarify that such help is required for only a small number of people, and is restricted to making sure they get “basic” education and health services, and “adequate” nutrition and food.

Having laid bare its article of faith, the Survey proceeds to chart the course for tackling various problems. Of particular relevance in the context of the petroleum sector deregulation is the section “The Challenge of Poverty”:

The standard way to [cushion the poor] is by using some kind of subsidy. However, a common mistake is to suppose that a subsidy scheme has to be coupled with price control.  (emphasis added) This is typically a slippery slope. In a large and complex economy, it is difficult for the state to gauge what the right price of a good is. Moreover, once the Government becomes involved in setting the price of a commodity, this becomes a matter of politics and lobbying, which cumulatively adds to the distortion. Hence prices are best left to the market. If we want to ensure that poor consumers are not exposed to the vagaries of the market, the best way to intervene is to help the poor directly instead of trying to control prices, which almost invariably does more harm than good in the long run, and often even not so long a run. 

I. Implications of the food coupons proposal

Given that the UPA Government is launching a Food Security Bill, it would seem on the face of it that the Government is not planning to dismantle the Public Distribution System (PDS). Indeed, the dismantling of the PDS might face serious opposition in many states, and harm the ruling party’s electoral prospects. Nevertheless, the Survey presents the Government’s line of thinking regarding the PDS; the manner in which it is finally implemented would no doubt be contingent on the Government’s assessment of the political situation.

The Survey outlines a system whereby the PDS for foodgrains would be replaced with a coupon system. That is, instead of maintaining a network of PDS outlets throughout the country, the Government would identify the families below the poverty line (BPL), and give them coupons (the sum value of all the coupons would be the subsidy the Government wishes to provide). The recipients would be free to use these coupons as if they were money to buy food from any store, and the store owners would be free to charge the “market price” when selling grain, irrespective of who the customer was. The store owners would trade the coupons in for money at banks.

The obvious question arises: What happens when the “market price” of foodgrains goes up? At that point, as the above quotation makes clear, it is the quantum of subsidy (i.e., the value of the coupons) that remains fixed, not the price of foodgrains. In other words, as the market price rises, so does the price at which the BPL population would be forced to buy foodgrains (market price minus the value of the coupons). During a period of price rise, coupons would account for a smaller and smaller percentage of the price, i.e., in real terms the subsidy would fall. Since in such periods the prices of non-PDS commodities of mass consumption would also tend to rise, BPL consumers would already be suffering; the switch to a coupon system would further squeeze them.

In the world of the Survey, prices play a magical signalling role: they tell consumers how much to consume, and tell producers how much (and what) to produce. So it is crucial to get the prices “right”, that is, “leave them to the market”, not interfere with them. Take care of the microeconomic level of prices, says the Survey, and the macroeconomy will take care of itself. But, in the real world, supply may not respond to price signals for various by now well-known reasons; on the other hand, monopolists are able to maximise their profits by restricting supply. Here, the supply of agricultural products cannot expand quickly in response to higher prices – particularly in the case of a low-productivity, poor-infrastructure, small-peasant agriculture such as India’s. And when, for one reason or another (such as a poor monsoon), there is a supply shortfall, speculators enter the picture and drive up prices even before the crop is harvested. To check speculation in foodgrains requires not only that the Government have a substantial stock at its disposal, but that it have a distribution network of its own through which it can sell at fixed prices. In the absence of such a network, the stock the Government offloads at auctions is cornered by private traders; the best the Government can then do is to try to make sure it reaches stocks to a somewhat larger, more widely dispersed, set of traders and pray they will compete. It is obvious that the coupon system would make no dent in the profits of the private traders – they would recover one portion of the retail price in coupons (tradable for cash), and the other (and growing) portion directly in cash.

II. Fertiliser: Deregulating prices under the guise of correcting nutrient imbalances

“Similar ideas can be carried over to other products”, says the Survey, and it suggests petroleum product prices and fertilisers as two prime candidates. Let us look at the impact of this policy on the fertiliser sector, which would hence have an impact on agriculture and food.

The Government’s new Nutrient Based Subsidy (NBS) became effective in April 2010. Earlier, under the Product Based Subsidy (PBS), the maximum retail prices (MRPs) of various fertilisers were fixed below the cost of their production/import; the fertiliser firms were then given the difference by the Government as a subsidy. However, in the liberalisation era (post-1991) the PBS effectively subsidised urea (N) more than phosphate (P) or potash (K), and it was for this reason that cultivators tended to use too much urea in relation to the others. So as against the desirable NPK ratio of 4:2:1, the average use was 6:2.4:1; this imbalance damaged the soil, and affected agricultural productivity. Moreover, different soils and crops require different complex fertilisers, with various ratios of NPK and including sulphur, zinc and calcium as well as micronutrients such as iron and boron. The straightforward way to address this problem would have been to appropriately increase the subsidy on the nutrients which are under-used, expand the public sector agricultural research network in order to determine the nutrient requirements of different regions, develop specific complex fertilisers tailored to these needs, and promote these fertilisers among cultivators through agricultural extension workers. None of this required changing the earlier regime of fertiliser pricing.

However, under the guise of “balancing nutrients”, the new policy carries out a sweeping change which has largely escaped comment.  The Government has now declared the quantum of subsidy per kg of nutrient (N – Rs 23.22, P – Rs 26.27, K – Rs 24.48, sulphur – Rs 1.78) under the NBS. Each fertiliser will be subsidised to the extent of these nutrients it contains (e.g., diammonium phosphate, containing 18 per cent N and 46 per cent P, would receive a subsidy of Rs 14.69 per kg). “This policy”, says the Union Budget 2010-11, “is expected to promote balanced fertilization through new fortified products and focus on extension services by the fertiliser industry.”

But now the sum the Government will pay as subsidy is alone fixed; the retail price of fertiliser is completely deregulated, i.e., “left to the market”. The effect of this will be felt with a lag. The Budget says that “Government will ensure that nutrient based fertiliser prices for transition year 2010-11 will remain around MRPs [maximum retail prices] currently prevailing.” Indeed, press reports indicate that fertiliser firms already have imported stocks sufficient for the kharif crop, and that the Government has talked to the firms to ensure that they do not raise their prices substantially in this “transition year”. In other words, prices are set to rise in 2011-12. This is so on two counts. First, since the Government will no longer set the prices, fertiliser firms can charge whatever the market will bear. Only in the magical world of neoclassical economics textbooks does one find perfectly competitive markets which minimise profit margins. Indeed the warm welcome the fertiliser firms accorded the new policy indicate that they envision making monopoly profits after deregulation of prices.

Secondly, India depends on imports for the supply of potash and phosphate (or raw materials for phosphate). India is the world’s largest importer of potash, and accounts for a 40 per cent of world imports of diammonium phosphate (DAP), 58 per cent of phosphoric acid, and 31 per cent of rock phosphate.¹ India even imported 6 million tonnes of urea in 2009-10. Thus domestic fertiliser prices will now be substantially determined by world prices. World fertiliser prices, like all world commodity prices, are volatile, partly due to the operations of international speculators. The index of world fertiliser prices (year 2000=100) rose from 169 in 2006 to 240 in 2007 and 567 in 2008 before falling back to 293 in 2009. However, they will not fall back to earlier levels. The World Bank notes that “Fertilizer prices increased five-fold between 2002 and 2008. Though they declined considerably during 2009, their long-term real average is expected to be 80 percent higher than their early 2000s levels, raising the cost of producing most agricultural commodities.”² For example, DAP prices rose from an average of $317/tonne in October-December 2009 to $462/tonne in January-June 2010.³

Under the NBS, these price increases will be passed on to India’s peasantry. This of course makes nonsense of the claim that the NBS is in aid of balanced fertilisation; for the nutrient balance will now be determined by global price movements. If the price of DAP soars by 50 per cent in a few months, whereas domestically produced urea does not, the nutrient imbalance will worsen. In turn this will further raise agricultural costs and harm agricultural productivity, resulting in a rise in food prices. Thus the burden of higher fertiliser prices will fall on both the peasant and the consumer.

The Government has not finished with its attack on fertiliser subsidy: The Budget speech tells us that “The new system will move towards direct transfer of subsidies to the farmers.” That is again a coupon system, quite likely along the lines described above for the food subsidy. The Survey suggests that the State could use such a system to cut fertiliser subsidy by, say, Rs 20,000 crore. Of course, according to the Survey peasants would wind up getting better fertilisers, and agricultural productivity would rise. In reality, quite to the contrary, peasants would be cast to the winds of market prices, clutching a bunch of paper coupons.

III. Deregulation of petroleum prices: Gouging of the people; Promoting the private sector

The Government has laid the groundwork for this move over the years. It has been claiming – and the corporate-friendly media has been dutifully propagating – that the OMCs were making heavy ‘losses’, and that petroleum products were being heavily ‘subsidised’. They claimed that the losses of the OMCs (which the Government and international agencies also termed ‘subsidies’) were Rs 73,000 crore, which was ‘unsustainable’. In June 2009, the International Energy Agency issued a scare-mongering report (Petroleum Prices, Taxation and Subsidies in India) talking of the “huge impact of petroleum product pricing on the health of India’s national budget and on India’s macroeconomic stability as a whole”, and comparing it to the crisis of 1990. At meetings of the G-20 group of major economies, the US and other imperialist countries pressed Third World members (including India) to slash fuel subsidies. Indian officials and economic commentators too issued dire warnings that the country’s fiscal deficit would spiral out of control, threatening the country’s Growth. On his way back from the G-20 summit in Toronto a day after his government had hiked petroleum prices, Manmohan Singh vouched that “People are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making.” The speeding locomotive of India’s Growth had to be saved from the lurking saboteur of Populism.

This scare-mongering was necessary in order to divert people’s attention from the truth. The truth is very simple: There is no net subsidy on petroleum products as a whole; rather, they are, in the net, heavily taxed. Imagine a good that is imported at Rs 50, and is taxed another Rs 50. Now say the Government fixes the sale price, not at Rs 100, but at Rs 90. It then compensates the company marketing the good by giving it Rs 10 which the Government calls a ‘subsidy’. Is there any actual subsidy? Obviously not; rather, the Government has pocketed a net Rs 40 in taxes. That is the story of petroleum products in India in a nutshell.⁵

The following are the facts. First, even the public sector oil marketing companies (IOC, HPCL, and BPCL) are not loss-making, as they also derive revenues from activities other than the sale of petrol, diesel, kerosene and LPG. Secondly, the public sector oil companies as a group – including both ‘upstream’ firms such as ONGC and OIL, and ‘downstream’ firms such as IOC, HPCL, and BPCL – make substantial profits, amounting to Rs 27,127 crore in 2008-09. (The profit of ONGC alone was Rs 16,126 crore that year. The Government, which earlier sold 26 per cent of its shareholding in ONGC, is currently planning to sell some more.) Thus there is ample scope within the public sector to transfer some of the profits from the upstream companies to the downstream companies, in order to fund the latter’s expansion and modernisation plans.

Thirdly, and most glaringly, taking petroleum products as a group, they are not subsidised at all. Rather, they are heavily taxed by the Centre and the states. Central taxes on the petroleum commodities – customs, excise and other taxes – in 2009-10 were Rs 85,778 crore (excise duty on petroleum products amounted to 68 per cent of total excise revenues). Taxes by state governments on petroleum (sales tax and other taxes) amounted to another Rs 72,082 crore, bringing the total to Rs 157,860 crore – around 15-16 per cent of the combined tax revenue of the Centre and states, and 2.6 per cent of Gross Domestic Product (GDP). Two further sources of Government revenue from the oil firms were corporate tax (Rs 17,935 crore) and dividend (Rs 8,066 crore), bringing the total to Rs 183,861 crore. The crucial thing to note is that these tax and other revenues are far larger than what the international agencies, the Government and the corporate media claim to be the ‘losses’ or ‘subsidies’ on petroleum products.

In 2009-10, the Centre gave a small portion of this (less than Rs 26,000 crore) back to the OMCs as financial assistance.⁶ If the Government had simply reduced its taxes, it would not at all have to provide financial assistance to the OMCs.   We are told that the OMCs were due to incur a ‘loss’ of Rs 73,000 crore in 2010-11, and that the latest price hike will shave those ‘losses’ by about Rs 20,000 crore, leaving still a gap of Rs 53,000 crore. What exactly does this figure of ‘losses’ refer to, since the OMCs are not as a rule making actual losses? It turns out that these ‘losses’ are the ‘under-recoveries’ of the OMCs. That is, the ‘under-recoveries’ are the sum that the OMCs are losing by not pricing all their products at the import price of the same products! They are what the OMCs themselves consider their ‘profits forgone’ as a result of the State-determined price regime.⁷

However, such a calculation should not be applied in this fashion to a public sector firm, whose actions are supposedly governed by public interest. For example, the Food Corporation of India is not free to term the difference between its issue price of foodgrains and the open market price of foodgrains (or the landed cost of imported foodgrains) its ‘under-recoveries’. Rather, the food subsidy is calculated by subtracting the FCI’s actual revenues from its actual costs.⁸ The same method should be followed when calculating the subsidy to petroleum products.

Such calculation of ‘under-recoveries’ can be made only by a private sector firm, whose very reason for existence is to maximise its own profits – at whatever cost to the public – and for whom such profits forgone are a loss suffered by its shareholders. For a private firm ‘under-recoveries’ mean the under-gouging of the people, the failure to gouge as much as the market would bear.

Finally, even if the Government wished to hand over to the OMCs the sum of ‘under-recoveries’, it could have done so without increasing prices. All that it needed to do was to lower taxes to that extent; for even the figure of under-recoveries is much smaller than the figure of taxes. Indeed, the estimated revenues of this latest price hike (Rs 20,000 crore) are less than the increased taxes on crude oil and petroleum products in the latest Union Budget (Rs 26,000 crore); had the Budget not raised taxes, the under-recoveries would have been Rs 26,000 crore lower without any price hike.

Instead of lowering taxes, the Government has deregulated petrol and diesel prices in order to allow prices to rise, so that private sector firms such as Reliance, Shell, and Essar find it attractive to re-enter the domestic market and make large profits. These profits will be gouged from the vast majority of the Indian people, who are hardly in a position to lower their already low energy consumption.

Making the private sector dominant
In fact, Kaushik Basu makes clear that the new system depends on the private sector becoming dominant. Asked if private sector firms like Reliance and Essar will be free to set retail prices, he replies that today “in a sector that is so dominated by the public sector, they don’t have the room to do that because they are going to be outcompeted by the public sector.... Once there is a bigger entry of the private sector into this, that will be a true competitive situation.... A competition in which 90 per cent is State-owned, even if it is competitive, the market price is not a terribly meaningful thing.” Ideally, he says, he would like a “certain State presence” and a “much more substantial private presence” – the reverse of the current situation.⁹ At that point the Government would have a simple alibi for not controlling prices: It would say that it cannot interfere in the pricing decisions of private firms, since the latter are responsible to their shareholders, who would demand a suitable return on the firms’ investments in domestic marketing.

In a sense, Basu is correct when he criticises those who term the deregulation a price hike. Were it merely a price hike, its effect would be limited to an immediate rise in the overall price level, and a further rise with a lag as it fed into the prices of other products. However, the effects of deregulation are much greater. It is a new system: any time there is an increase in international prices, it will be extracted from the consumer, along with taxes and the profit margins of the OMCs – of which the private sector is a substantial and growing chunk.

Transmitting global price signals?
As we saw, the first argument for deregulation (“out-of-control subsidies swelling the fiscal deficit”) turns out to be merely a cover for promoting the private sector. This is indeed what the Survey means by “creating an enabling ethos for the market so that individual enterprise can flourish”. The second argument is that, in the Survey’s words, “prices are best left to the market”, so that they can send appropriate signals to both consumer and producer. Basu says: “If there is a global shortage and the international price of crude rises, this signal will be transmitted to the Indian consumer. It will rationalise the way we spend money, the kinds and amount of energy we use, and the cars we manufacture. It is an important step in making India a more efficient, global player.”¹¹

However, as is widely accepted, the demand for petroleum products is inelastic, that is, demand does not change much in response to a change in price. The reason is that petroleum is a necessary input in virtually all goods and services, and one for which there are no real substitutes at present. This is particularly so with regard to the short-term price changes that Basu is referring to. The vast masses of people have no option but to consume petroleum indirectly in all their purchases. Moreover, as income inequality widens in the particular fashion taking place in India, there is a growing section of upper-class persons to whom a rise in fuel prices makes little difference. Thus the growth of automobile demand has not been much affected by a rise in fuel prices: in 2009-10, despite a steep hike in the price of petrol and a hike in the price of diesel, consumption of the two products rose 13.9 per cent and 8.9 per cent, respectively, ¹² and the automobile industry experienced a boom, with production of passenger automobiles rising 33.4 per cent.¹³ Increases in the price of petroleum products thus merely eat into the incomes of the poor without controlling consumption by the better-off.

The reality is that the vast majority of the Indian people are poor, and India’s energy consumption is very low. India’s per capita primary energy consumption (including non-commercial energy) is one of the lowest in the world: 0.53 tonnes of oil equivalent (t.o.e.) per person in 2009, which is around 29 per cent of the world average of 1.82 t.o.e. that year. As compared to this, per capita energy consumption in two other “BRIC” countries with which India is frequently compared, China and Brazil, was 1.48 t.o.e. and 1.23 t.o.e., respectively; and in the US it was 7.75 t.o.e., or 15 times India’s figure.¹⁴ Nearly half India’s population lacks access to any form of commercial energy. Indeed, in 2007-08 77.6 per cent of rural households depended primarily on firewood and chips for cooking energy, and another 7.4 per cent on dung cake. These two sources together accounted for more than a fifth of even urban households. (The use of firewood and dung cakes as cooking fuel imposes a heavy social cost, falling most heavily on rural women: a 2005 study put the opportunity cost of time lost in gathering fuel – 30 billion hours of labour by 85 million families, plus working days lost due to eye infections and respiratory diseases on account of use of traditional fuels, and the cost of medicine for treatment of these ailments, at Rs 30,000 crore.¹⁵ This does not include the environmental cost to the forests.) Nearly 40 per cent of rural households depended on kerosene rather than electricity for lighting; ¹⁶ and for those with electricity connections, supply is of poor quality, with unscheduled outages, load shedding, fluctuating voltages and erratic frequency, adding to households’ equipment and electricity costs.¹⁷

The Government talks of transmitting international price signals to the consumer to make India a more “efficient, global player”. However, international oil prices are increasingly influenced by speculative flows of capital. A US Senate Committee found in 2006 that “The traditional forces of supply and demand cannot fully account for these increases [of crude oil prices from a range of $25-30 per barrel in 2000 to $60-75 per barrel in 2006]... there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.”¹⁸ Whereas, under the earlier Administered Price Mechanism that operated in India until 1998, and even to some extent in the ad hoc method followed by the Government thereafter, there was scope for the Government to smooth out volatility in prices, with deregulation domestic prices would reflect the swings in international prices. Private oil marketing firms would raise their retail prices and thus be protected against these swings, but domestic producers (particularly small producers in agriculture and industry) would be vulnerable and face uncertainty.

Since India now imports four-fifths of its oil, it is vulnerable to changes in international prices and disruptions of supply; and so fuel consumption in India does need to be checked, but not by the blunt and brutal instrument of a general increase in prices. Rather, physical curbs are required on elite consumption and irrational technologies, combined with State investments in socially efficient technologies. Take the transport sector, which accounts for around a third of petroleum products consumption. The explosive growth of automobiles, which is fed by mammoth State subsidies,¹⁹ needs to be suppressed; so too the growth of air traffic. In its place, a large and rationally planned expansion of urban public transport is required, which today is not possible without physical restrictions on the growth of private automobiles. (As noted by the National Urban Transport Policy, “the lower income groups have, effectively, ended up paying, in terms of higher travel time and higher travel costs, for the disproportionate space allocated to personal vehicles”.) A large and systematic scheme of investment in the Railways is required to shift freight and passenger traffic away from road transport, which is a highly energy-inefficient means of long-distance transport. (The lower surface friction and wind resistance in rail transport make it six to eight times as energy-efficient as road transport.) Systematic spatial planning of industry and agriculture is required in order to minimise the need for transport itself. Further, reliable power supply to agricultural pumpsets, and rational planning of groundwater resources in agriculture, would help to reduce diesel consumption in agriculture. Apart from these, of course, one can think of countless examples of wasteful consumption of energy in luxury expenditure, particularly in metropolitan centres. Given the nature of luxury spending, merely taxing it would not deter the bulk of it; it needs to be suppressed. Under the present social and economic order, of course, all this is out of the question. Nevertheless, it is necessary to point to what is socially rational, in order to more effectively oppose the arguments brought forward by the beneficiaries of the present warped pattern of development, who wish to thrust fresh burdens on those whose consumption is at rock-bottom. Against this background, it is ridiculous to talk, as Manmohan Singh does, of the dangers of “populism”. The fact is that the bottom two-thirds to three-fourths of the population, subsisting on a small fraction of commercial energy consumption, is desperately deprived of energy, and indeed of most of the basic requisites of a dignified existence.²⁰ The talk of ending “populism” is aimed at depriving this deprived section even further.

Affordability
While India’s petrol and diesel retail prices are lower than those in many developed countries, they are higher than US prices as of May 2010, solely on account of taxes. The ex-tax prices of petrol and diesel were, respectively, 7 cents and 11 cents lower in India than in the US; yet the retail prices of petrol and diesel in India (i.e., including tax) were, respectively, 36 cents and 6 cents higher than in the US. ²¹

More importantly, it does not make sense to compare prices in India and other countries in terms of the nominal exchange rate. By the exchange rate, a rupee is worth around 2 cents, but we know that a rupee buys more in India than 2 cents buys in the US. To capture the differences in cost of living, international agencies have devised the Purchasing Power Parity (PPP) measure, which converts a country’s currency into its purchasing power in US dollars. (In this fashion, while India’s GDP in 2009 was $1.24 trillion at the nominal exchange rate, it was $3.53 trillion in PPP terms, i.e., the goods and services India’s GDP could buy in India would have cost $3.53 trillion to buy in the US.) Comparing the price of petroleum products in PPP terms gives us a better sense of their affordability, i.e., it enables us to compare roughly how much of other goods would have to be forgone by a consumer in each country to buy a litre of petrol/diesel. According to a study of September 2009, India’s retail prices of petrol in PPP terms have been more than four times those of the US and almost double those of China, while diesel prices in PPP terms were about three times those of the US and almost double those of China in 2006. This study shows that, in PPP terms, the gap between Indian and US petrol/diesel prices has widened continuously since 1995, and in particular since the dismantling of India’s Administered Price Mechanism in 1998.²²

In measuring affordability, one may also take into account incomes in the two countries. A wealthy person can more easily sustain a hike in fuel price than a poor person; in the main, the same comparison applies to the average person in wealthy and poor countries. The US per capita GDP is $46,381, and India’s is $1,031.²³ Taking the petrol and diesel prices prevailing in May 2010 in each country,²⁴ if the entire per capita GDP were to be spent on petrol/diesel, the US per capita GDP would have bought 66 times as much petrol (gasoline) and 48 times as much diesel as the Indian per capita GDP. Evidently the burden of an identical price hike in both countries would be far greater in India. (The corresponding figures for other countries, where petroleum taxes are far heavier than in the US, are as follows: France – 27 times and 30 times for petrol and diesel, Germany – 25 and 27, U.K. – 22 and 20, and Japan – 27 and 26.)

Now let us look back at the arguments made by the Survey, namely, that (i) giving the State the job of fixing prices results in a cumbersome bureaucracy, corruption, and failure; and that (ii) not the price, but the quantum of subsidy should be fixed. Both arguments are contradicted by the same Survey, when it suits ruling class interests.

IV. Mystification of the UID

While the Survey wishes to ‘roll back’ the State from intervention in the prices of critical commodities, this does not mean it believes in the retreat of the State as such. Rather, as we will see, the State’s role is to actively intervene both in order to slash the people’s social claims and  in order to transfer surplus to the private corporate sector (domestic and foreign).

First, regarding the State’s aversion to “cumbersome bureaucracy”: the Survey accords enormous importance to the Unique Identification (UID) system. This is a system whereby all residents of India are to be issued identity cards on the basis of basic demographic details (such as date and place of birth, family members, current address) and biometric details (which may include photograph, fingerprints and iris scan). While the original (and continuing) impetus for the UID system has come from the rulers’ ‘national security’ agenda, with alarming implications for democratic rights, the Survey adds on to it a subsidy-slashing agenda as well. In discussing the earlier-mentioned coupon system for PDS grains, the Survey says:

For the full success of this “coupons system” what is needed is an effective method of identifying the poor. This is where the Unique Identification (UID) System... comes into play. Since the UID System will come into effect in 2012 and the roster of individuals registered in it will gradually move towards completion, it is possible to plan on a switch to a coupons system by 2012 and also let it achieve full maturity as the UID registration moves to completion.

What does the UID system have to do with identifying those below the poverty line, who are to be the recipients of the coupons? Precisely nothing, and as such it cannot overcome the enormous problems which have plagued all such ‘targeting’ exercises to date. The Survey admits:

Since the Unique Identification will not, in itself, have information on people’s poverty status, these kinds of tailoring of information will need to be added to the UID System. Further, since households do move in and out of BPL status there has to be provision for updating of information.

In other words, apart from the vast and sinister bureaucratic exercise of photographing, fingerprinting, and iris-scanning every resident of India and issuing them ID cards from which this information can be recovered, there will have to be a separate vast bureaucratic exercise of “identifying the poor” and periodically updating this information. This information will then be added to the UID System.

Whether on this basis or some other exercise, the UID would also be used to weed out those ‘undeserving’ of kerosene and LPG subsidy. Basu says that “once we have an UIDAI (Unique Identification Authority of India) system on board where you can locate the households which need the support, my preference would be at that stage to provide subsidised LPG and kerosene to the households whom you have located and... free it [the price].”²⁵

As for the fertiliser subsidy, another identification exercise would be required to elicit additional information, also to be fed into the UID, says the Survey:

Whatever system is adopted, we will need some form of identification of farmers and will need to have some information about their landholdings. This once again means that for the full-fledged adoption of the coupons system, there will be need to dovetail it to our UID System. If we are to move towards this, we should in fact work in tandem with the UID work so that some information that we will need alongside a person’s pure identity, such as whether or not the person belongs to a BPL household, whether her profession is agriculture and, if so, the amount of land she owns and so on can be fed into the system from the start.

Of course, as in the case of BPL status, information on occupation and extent of landholding (and presumably also whether it is irrigated or not) may also change, and there would have to be “provision for updating of information.” On the basis of this information the farmer would be issued coupons.

Thus the same State machinery which the Survey believes to be too cumbersome, bureaucratic and corrupt to price certain crucial commodities such as fuel, fertiliser and food, is to turn nimble, people-friendly and honest when assigned the task of gathering vast oceans of data on demographics, biometrics, income, profession, landholding, and so on. The reason for this absurd contradiction is quite simple: the Survey wants to find a way to slash the extent of subsidy.

By putting the well-known and media-savvy Information Technology (IT) czar Nandan Nilekani in charge of the UIDAI, the Government has succeeded in clothing it in technological mystification, conveying the sense that the information gathered will be more accurate by virtue of IT. In fact, however, the only role of IT will be to centralise and organise this information in order to make it more accessible to the State; the information itself will be gathered and tabulated by human beings, and subject to the same flaws as the earlier information. At best IT will help in eliminating multiple cards for a single person, or cards in the name of fictitious persons.

However, the information regarding, say, BPL status that is fed into the UID is only as valid as (i) the definition of poverty chosen; (ii) the methodology for identifying those who are poor by this definition; and (iii) the implementation of that methodology by the bureaucracy. The same goes for information regarding landholding, profession, and so on that the Survey wishes to build into the UID in order to ‘target’ various types of subsidy.

Massive poverty
According to what are as yet the official figures, the percentage below the poverty line in 2004-05 was 28.3 per cent in rural India and 25.7 per cent in urban India, yielding an all-India figure of 27.5 per cent. These figures have given rise to much derision. They also became the subject of controversy between the Centre and the states, since the statewise official poverty figures constituted the basis for allocations of PDS foodgrains and anti-poverty programmes to the states, whereas the state governments’ own BPL surveys (with varying methodologies) produced much higher figures.

The official definition of poverty, and the methodology for calculating the percentage below the ‘poverty line’, are worthy of Alice in Wonderland, and are matters of great controversy; we will not enter that subject here. We restrict ourselves to citing a few facts and assessments.

A large majority of the population does not attain the minimum calorie levels for rural and urban areas which form the original basis of the official Indian poverty line methodology (87 per cent of the rural population gets less than the rural cut-off of 2400 calories/day, and 64.5 per cent of the urban population gets less than the urban cut-off of 2100 calories/day); moreover, the percentage below the cut-off calorie levels is growing. The official poverty estimates nevertheless manage to obtain lower poverty figures by arbitrarily changing the basis for calculation.²⁶ Thus the official poverty figures for recent years are not comparable with those of earlier years.

Other definitions of poverty/human development, too, yield a bleak picture of India. India’s ranking in the U.N. Human Development Index, which includes life expectancy and education, is 134 out of 182 countries.²⁷ The new Multidimensional Poverty Index (MPI) developed by the United Nations and Oxford University defines the poor as those who face multiple deprivation with respect to education, health and living standard (including water, sanitation, and electricity), and measures the extent of their poverty by the range of their deprivations. It puts the number of MPI poor people in India at 645 million, or 55.4 per cent of the population. Thus there are more MPI poor people in eight Indian states alone (421 million in Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal) than in the 26 poorest African countries combined (410 million).²⁸ Another attempt to define poverty, which tries to take into account various minimum food and non-food (clothing, shelter, medical care, electricity, etc.) needs for a dignified existence, yields poverty rates of 84.6 and 42.4 per cent for rural and urban India, and a weighted average of 68.8 per cent all-India.²⁹

The Government’s own National Commission for Enterprises in the Unorganised Sector (NCEUS), using the same National Sample Survey 2004-05 data relied up on for the official poverty figures, demarcated four ‘poor and vulnerable’ sections of the population: the ‘extremely poor’, with an average daily consumption expenditure of Rs 9 (6.4 per cent of the population); the ‘poor’, with Rs 12 (15.4 per cent); the ‘marginally poor’, with Rs 15 (19 per cent); and the ‘vulnerable’, with Rs 20 (36 per cent).³⁰ The consumption of even the ‘vulnerable’ category was abysmally low. Thus 76.7 per cent of the population, or 836 million people, fell into categories which by no stretch of the imagination could be considered undeserving of subsidy. Indeed, by any rational definition of poverty, they would all qualify as poor. Moreover, the NCEUS found that while the percentage below the official poverty line had gone down over the previous decade, the percentage of ‘poor and vulnerable’ had changed very little.

Definition and methodology dictated by need to cap subsidy
The NCEUS finding that 77 per cent of the population subsisted on Rs 20 or less a day caused something of a sensation, even amid the elite euphoria regarding India’s Growth. The Planning Commission set up the Tendulkar Committee to deal with this embarrassment by producing a somewhat higher and more respectable figure for rural poverty than the official one, yet one which would not call for a major increase in anti-poverty expenditure, or question the official finding of a steady fall in poverty. The Tendulkar Committee duly came up with what it felt could be a respectable figure for rural poverty (42 per cent), and then worked out a complicated methodology to arrive at this figure.³¹

However, the Tendulkar Committee was not given the job of working out how to identify the rural poor; that job was given by the Ministry of Rural Development to another committee, known as the Saxena Committee. When the Planning Commission learned that the Saxena Committee was considering placing the percentage of BPL population in the rural areas at 50 per cent, it wrote to the latter warning that

The matter of fixing the percentage of people below poverty line is beyond the scope of the present Committee and is being handled by a separate Committee headed by Shri Tendulkar.... While the arguments given are plausible, it still remains in the domain of Tendulkar Committee which undoubtedly will consider all these issues raised. Needless to say, however desirable it may seem, fixing the percentage at 50 per cent will still be considered arbitrary. It also has tremendous financial implications and once granted cannot be reduced. As such, it was recommended that 20 per cent variation may be allowed [over the official figure] which will bring up the poverty figure to approximately 35 per cent.³²

The Saxena Committee, whose members were more sympathetic to the plight of the poor, defied this pressure and recommended that the rural BPL percentage be increased to 50 per cent. It appears from its report that the Saxena Committee more or less pulled this figure out of a hat; its only basis seems to have been what it felt was the maximum the Government might accept. So, while proposing that the rural poverty figure be revised upward to “at least 50 per cent”, the report admits that “the calorie norm of 2400 would demand this figure to be about 80 per cent.”

That is, the agenda of capping the subsidy is to be taken as the basis; the definition and methodology are to flow from that.

The Saxena Committee is well aware of the gross shortcomings of earlier BPL Census exercises, and indeed it provides a useful summary of them, culminating in the BPL Census of 2002, which was a great triumph of exclusion of the poor. The National Sample Survey 2004-05 reveals that 61 per cent of those considered poor by the official poverty estimation methodology of the Planning Commission did not have a BPL card or an Antyodaya Anna Yojana (AAY) card.³⁵ Despite this, the Saxena Committee first places an arbitrary cap on the rural poor, and then chalks out a tortuous methodology for identifying them that leaves ample scope for the same errors.³⁶

First, on the basis of the 50 per cent figure, statewise figures are worked out. Then districtwise poverty figures are to be worked out on the basis of three indicators involving the percentage of Scheduled Castes and Tribes, agricultural production, and agricultural wage rates. Then districtwise figures are to be broken up into blockwise figures on the basis of other criteria such as irrigated area, metalled roads, female literacy, and ratio of non-agricultural workers. Then this blockwise figure is to be divided into a panchayat-level figure on the basis of population. A cap is placed at each level proceeding downward. Following this, BPL households in each panchayat are to be identified first by automatically excluding certain households (using five criteria); then eight criteria are used to automatically include certain households. Finally, the remaining rural households are to be identified by allocating scores on the basis of five criteria (social group, occupation, education, disease, and households headed by those over 60). Those achieving highest marks would be included first, followed by the next highest score, and so on, till one reaches the cap of the number to be identified by the panchayat.

Of course, since conditions do not remain static, but keep changing, the information would need to be regularly updated: for example, if a member of a BPL family acquires a three-wheeler (an ‘automatic exclusion’ criterion), or if a member of an APL family contracts TB, leprosy, or AIDS (granting them one point in favour of being considered BPL),  the status of the family immediately changes. If one family moves out of the BPL category, place opens up for another to join the BPL list; a family can only be added to the BPL list if another family makes way.

It is on the basis of this rigged definition of poverty and rigged methodology that the poor are to be identified. Further, the entire process of drawing up such lists is certain to be implemented with bureaucratic callousness and corruption all the way down. Once that information is added to the UID it will acquire an even more powerful technological authority, and be used as a weapon of exclusion of hundreds of millions of people. It may be applied to deny the excluded sections subsidies in all spheres: food, petroleum products, fertiliser, education, health care, and so on.

Once the State’s overriding objective is defined as preventing any ‘leakage’ of subsidy to the ‘non-poor’, elaborate systems of targeting are necessary. Under such conditions, there is an in-built bias in favour of ‘errors of exclusion’ (i.e., excluding those who deserve subsidy) over ‘errors of inclusion’ (i.e., including those who do not ‘deserve’ subsidy). In this way the exclusion of large numbers of the poor – by whatever definition, even the official one – is inevitable. However, if the real extent of poverty and deprivation is recognised to include the large majority of the population, and the primary objective is defined instead as ensuring a dignified standard of living for all compatible with the country’s level of development and resource endowment, the only possible means in India’s conditions is a universal PDS (i.e., without any BPL/APL distinction) supplying adequate nutrition (including cereals, pulses, edible oils, and sugar).

The Survey’s technological mystification regarding the UID serves it to cloak its arbitrary suppression of the number of the poor, so as to avoid what the Planning Commission calls “tremendous financial implications” – in other words, to save the Government very large sums of money. Any non-arbitrary figure for poverty would yield a much higher figure, which, in the Planning Commission’s words, “once granted cannot be reduced.” 

V. Subsidies for the private corporate sector

To repeat, the Survey’s opposition to State intervention in the economy is selective: It opposes such State intervention as protects the people at large from the ravages of the private sector; but it envisions a vastly expanded role for the State in micro-monitoring the people, wielding bureaucratic despotism over them, and using arbitrary methods to exclude large numbers from the meagre benefits some of them hitherto enjoyed. It is an “enabling State” for certain classes, a disabling State for the vast majority.

The Receipts Budget notes: “the amount of revenue forgone contineus to increase year after year. As a percentage of aggregate tax collection, revenue forgone remains high and shows an increasing trend as far as corporate income-tax is considered for the financial year 2008-09 [assessment year 2009-10]. In case of indirect taxes the trend shows a significant increase for the financial year 2009-10 due to reduction in customs and excise duties.” (emphasis added)

These are hardly the only subsidies to the corporate sector. Various types of subsidies and give-aways to the corporate sector include free land; zero-interest loans; privatisation of public sector firms/assets and natural resources at throw-away prices; allowing firms to ‘gold-plate’ (i.e., overstate the value of) investments on which they are to earn a guaranteed rate of return (e.g. Reliance investment in its gas fields); sale of licenses/spectrum for mobile services at below-market prices; failure to collect corporate tax arrears; failure to collect bad debts from defaulting firms (some of which debts are then ‘re-structured’); failure to collect various types of dues (e.g. private airlines’ fuel dues); construction/maintenance of supportive infrastructure (such as urban roads, which benefit the auto industry); and so on.⁴⁰ For example, the Tata Nano is reported to have received a 9,750 crore loan from the Gujarat government at 0.1 per cent interest, exemption from 15 per cent value-added tax, waiver of stamp duty, and subsidised land. The subsidies come to an estimated Rs 30,000 crore over 20 years on a Rs 2,000 crore investment by the Tatas. Put another way, the Rs 1,00,000 car comes with a State subsidy of Rs 60,000, or 60 per cent.⁴¹

A recent addition to the list of subsidies to the private corporate sector is the scheme for ‘Public-Private Partnership’ (PPP).⁴² in the infrastructure sector. The Government’s claim is that the PPPs allow the Government to “leverage” public capital to attract private capital, and thus undertake a larger number of infrastructure projects. The Planning Commission wants private firms to account for 30 per cent of the $500 billion infrastructural investment under the current Plan (2007-12), and half the $1 trillion infrastructure to be set up under the 12th Five-Year Plan (2012-17).⁴³ However, the private sector will only enter the field if it receives an attractive rate of return, and as the Economic Survey 2008-09 admits,

Infrastructure projects often have high social, but an unacceptable commercial rate of return. These are generally characterized by substantial investments, long gestation periods, fixed returns, etc., which make it essential for Government to support infrastructure financing, through appropriate financial instruments and incentives. With a view to support infrastructure projects, the Scheme for Financial Support to PPPs in Infrastructure (Viability Gap Funding Scheme) was announced in 2004.... The scheme aims to ensure widespread access to infrastructure through the PPP framework by subsidizing the capital cost of their access. It provides financial support in the form of grants, one-time or deferred, to make infrastructure projects commercially viable. The scheme provides total Viability Gap Funding up to 20 per cent of the total project cost. The Government or statutory entity that owns the project may provide additional grants out of its budget up to further 20 per cent of the total project cost.

This, then, is a pure subsidy of up to 40 per cent of the project cost provided to the private investor, in order to make the project “commercially viable”! The scale of the scheme is enormous: the cost of projects completed, under implementation or in the pipeline comes to nearly Rs 7 lakh crore. (See Table below) Not all of these projects will receive ‘Viability Gap Funding’ (VGF) – or, in simpler words, subsidy – of 40 per cent; some will be compensated in other ways. (For example, the now-tainted firm Maytas, of Ramalinga Raju fame, was to be given vast real estate for commercial use as part of the Hyderabad Metro deal.) But very large VGF flows are already taking place, and commitments are being made for even larger sums.

These projects are in highways, roads, ports, airports, Railways, power, urban infrastructure, and other sectors. Source: Planning Commission, Compendium of PPP Projects in Infrastructure, March 2010.

The latest Survey, while extolling the Public-Private Partnerships and according them a critical role in building infrastructure, ignores the glaring contradiction between its lectures against those subsidies which benefit the vast majority of people, and its active promotion of subsidies to the private corporate sector.

Even under the pre-1991 economic regime in India, the ultimate beneficiaries of public sector infrastructural investment were the private corporate sector. The State took on low-return, long-gestation period, activities vital to the economy, and private corporations focussed on high-return activity, enjoying the benefits of cheap infrastructure. Such was the scheme laid down in Viceroy Wavell’s Statement of Industrial Policy (1945), on the eve of transfer of power; the same scheme is outlined in the “Bombay Plan” for India’s development chalked out by the top Indian bourgeoisie in 1944; and India’s Plans duly reflected this class logic. However, by virtue of its pretensions to popular legitimacy, the State was also unable to deny certain social claims of the people on that infrastructure, and so the people did obtain certain limited benefits from public sector investment. Now, however, the economic regime is more brazen and more rapacious: even though the infrastructure being set up continues to be primarily to serve the needs of the private corporate sector, the infrastructural sector itself becomes a channel of social surplus to the private sector.

The Haldea report, titled “Sub-prime Highways”, provoked a vituperative response from the Union Minister of Road Transport, Kamal Nath. The minister, who has announced plans of building an unprecedented 7,000 km of highways a year with a planned investment of Rs 3,70,000 crore, has termed the Planning Commission “armchair advisers.” However, a senior NHAI official admits that the NHAI might pile up Rs 85,000 crore of debt by 2012-13.⁴⁵

Of course, the NHAI’s subsidy spree is a bonanza to domestic and foreign corporations. (NHAI’s technical criteria for the larger projects in effect necessitate the participation of foreign developers/construction companies. The French bank BNP-Paribas has titled its September 2009 research report on the NHAI “India Transport Infrastructure: The World’s Largest PPP Playground”.) Note that the earlier quotation from the Economic Survey 2008-09 does not claim that infrastructure projects are necessarily loss-making. It says that though they have a high social rate of return, their commercial rate of return is “unacceptable” – that is, unacceptable to the private sector. The ‘gap’ that is being filled by various subsidies is the additional profit margin demanded by private capital – which wields control over the State. As we can see from this example, when we analyse more closely the concept of “market price”, to which the latest Survey assigns a magical role in the functioning of the economy, we find that monopoly capital and the State play a major role in constructing that price.

In the case of petroleum products and fertiliser, the corporate sector uses the banner of “market pricing” to set prices, building in a hefty profit. Whereas in the case of infrastructure, it abandons talk of market principles and draws on hefty subsidies, under the banner of “harnessing private capital in the cause of India’s Growth”. In both cases, even as ruling class intellectuals talk of the need for the withdrawal of the State from the economy, they obscure the fact that it is State intervention on behalf of the corporate sector that enables it to step up surplus-extraction.

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