No. 62, January 2016

No. 62 (January 2016):

Railways on Track for Privatization

Part Two

Part Three

 

Constructing Theoretical Justifications to Suppress People’s Social Claims

Part One

Part Two

Part Three

 

 

 

Constructing Theoretical Justifications to Suppress People’s Social Claims

Part III. Failure as an alibi

Strangely, as part of his argument Subramanian points to certain deprivations suffered by large sections of the masses. Such deprivations are in fact evidence of the failure of the Government to extend the most basic services to the people; properly, that fact should spur the more rapid extension of these services to the deprived sections. Instead, Subramanian uses these deprivations as evidence that price subsidies on essential services are regressive, since rich, electrified households benefit more than poor, unelectrified households.

For example, he says that price subsidies in electricity “can only benefit the (relatively wealthy) 67.2 per cent of households that are electrified.” Miraculously, everyone who uses electricity is now considered “relatively wealthy”.[1]

In fact, the percentage of households who use electricity is the same as the percentage of households which are electrified; no electrified household prefers to use kerosene or candles for lighting. From the National Sample Survey of 2011-12, we can see that in states such as Andhra Pradesh, Haryana, Himachal Pradesh, Jammu & Kashmir, Kerala, Punjab, Tamil Nadu, and Uttarakhand, where rural electrification has advanced further, the poor too use electricity for lighting; but in states such as Bihar, U.P., Jharkhand and Odisha, where electrification lags behind, the poor have to make do with kerosene lamps. Moreover, throughout the rural areas, there are long interruptions in power supply – they may actually receive supply only for a couple of hours. The moral should be: extend electrification to the poor and to underdeveloped regions, and provide uninterrupted supply. It is simply perverse to call for raising electricity tariffs in the name of those who lack electricity.

In a similar vein, Subramanian says that “The bottom 50 per cent of the households consume only 25 per cent of the LPG (liquefied petroleum gas)”, implying that it is a rich man’s fuel, which does not deserve to be subsidised. In urban areas, 68 per cent of households use LPG as their primary cooking fuel, and this figure is rising continuously. It is true that, in rural areas, 77 per cent of households use firewood, chips or dung cakes as their primary cooking fuel, and only 15 percentage use LPG.[2] But the use of biomass as fuel in rural areas has a heavy price: women must labour billions of hours gathering firewood, and suffer damage to their health due to the smoke of firewood/dung cake fires. Moreover, forest cover gets eroded. It is necessary that cooking gas reaches rural households.

At any rate, as we have pointed out several times before in Aspects, fuel in India,taken as a whole, are not subsidised. Rather, in the net, they are heavily taxed. There is, no doubt, cross-subsidisation of certain fuels, but this is more than made up for by the heavy taxation on petrol and diesel. Indeed, the petroleum sector is a huge source of revenue for the Government. What the anti-subsidy brigade want to do is to remove the cross-subsidisation on LPG and kerosene while maintaining, and even increasing, the taxes (i.e., the negative subsidy) on petrol and diesel. In other words, they want to squeeze the people even more.

Electricity: subsidy, or overcharging?
Subramanian’s next argument is that the bulk of the subsidy goes to those who use more power: the bottom 20 per cent of households consume on average 10 per cent of the subsidy amount, while the top 20 per cent of households consume 37 per cent of the subsidy amount. If there is indeed a subsidy enjoyed by the top 20 per cent, a simple remedy to this is already in place in Indian cities: namely, the block pricing structure, whereby those consuming higher quantities (say, over 300 kWh, or 500 kWh) are charged higher rates.

But are electricity consumers indeed subsidised? The mere fact that distribution companies are running losses does not automatically mean that consumers are being subsidised. We would still need to ascertain whether they indeed are receiving power at below the properly assessed cost of production, or the distribution firms’ losses are instead the result of inefficiencies and exorbitant profit-extraction along the entire supply chain. In the latter case, one can hardly claim that consumers are being subsidised.

Surya Sethi, the Government’s former Principal Advisor on Power and Energy, points out that the Indian power sector, taken as a whole, does not make losses. All energy sector enterprises except the state distribution companies are profitable. The central public sector units active in this financially stressed sector jointly extracted over Rs 50,000 crore of post-tax profits in 2013-14 despite their own inefficiencies compared to global standards. The private sector companies active in this otherwise bankrupt sector, whether in generation or distribution, are also profitable.

Profitability is not necessarily a measure of efficiency or integrity: Sethi also points out that the approved capital costs of India’s coal-based power plants are among the highest in the world on a like to like basis. As a result of such mismanagement or corruption, the average price of bulk power in India is among the highest in the world, and India’s average consumer tariff is easily the highest worldwide when corrected for capacity to pay. Meanwhile, per capita electricity consumption of electricity is at sub-Saharan levels.

While everyone in the electricity value chain except for the state distribution utilities extracts unjustified profits, it is the state distribution utilities that generate the bulk of the cash flow that deliver the returns to the others. (With the Centre’s latest revival scheme, the losses of the distribution companies have wound up as debt of the state governments, to be serviced by the taxpayers.) “A fair reallocation of risks and rewards in the sector”, Sethi claims, “would actually see tariffs going down rather than up.” He makes the remarkable assertion that bulk power in India should be 30 per cent cheaper, a correction which would in itself wipe out all current distribution losses.[3]

Sethi’s claims regarding excess profit-extraction appear to be borne out by the CAG draft audit of August 2015: this audit found that three private distribution firms, owned by the Anil Ambani group and the Tatas, had overcharged Delhi consumers by Rs 8,000 crore.[4] Moreover, Sethi’s statement that Indian power tariffs are very high by international standards, in terms of capacity to pay, is objectively verifiable. Therefore, without examining these credible claims, one cannot assume that electricity consumers are indeed being subsidised at all.

Fertiliser subsidy: the rationale
Subramanian points out that the response to price changes (‘elasticity’) differs between fertiliser manufacturers and farmers. A fall in fertiliser price would not cause fertiliser manufacturers to reduce production much; but a rise in prices would cause farmers to reduce purchases of fertiliser relatively more. Hence, he says, manufacturers gain more from the fertiliser subsidy. However, this misses the point. In order to assess the usefulness of the fertiliser subsidy, we need to see whether overall national economic interests are furthered by it, and whether there is a better alternative.

We need to keep in mind that the fertiliser subsidy is not merely a channel to put a few rupees in the hands of the farmer. It is required (i) to ensure adequate use of fertiliser by cash-constrained peasants, thereby stabilising both peasant livelihoods and national food security; (ii) to ensure the viability of domestic production of fertiliser, thereby insulating food production and the balance of payments from volatile international fertiliser prices. In the absence of a fertiliser subsidy, food production could fall, and food prices could rise steeply. In that case, the food subsidy would need to rise precipitously to neutralise this open market price rise. Moreover, the country would once again become dependent on imports of food.

A 2012 study by V.P. Sharma[5] demonstrates the following:

(i) It is a myth that the fertiliser subsidy is cornered by large farmers. Small and marginal farmers use more fertiliser per hectare (twice as much as large farmers). Their use of fertiliser is increasing faster than that of large farmers, and their share in total fertiliser consumption is more than their share in gross cropped area. So small and marginal farmers receive higher subsidy per hectare and a larger proportion of the total subsidy. Moreover, fertiliser consumption rising faster in unirrigated areas, which tend to be lower-income. It should be remembered that subsistence farmers do not benefit much from higher output prices, but they do benefit from lower input prices.

(ii) We can get an idea of the effect of free market fertiliser prices by looking at the partial decontrol of phosphatic and potassium fertilisers. After decontrol, their prices soared, leading to a sharp fall in P and K, resulting in deterioration in the desired ratio of nutrients (NPK), which may affect productivity. (Subramanian, in the Economic Survey, cites a study which shows that farmers’ demand for fertiliser falls 6.4 per cent for a 10 per cent increase in prices.)

(iii) The existing system operates by paying domestic manufacturers their cost of production plus a fixed rate of return (12 per cent), and providing it to farmers at a fixed price. Some scholars claim that the subsidy protects inefficient domestic fertiliser manufacturers, and these manufacturers should be exposed to international competition. Sharma shows that these claims are based on the prices prevailing in a period when international fertiliser prices were low. At that time domestic producers’ prices were higher than international prices.

Thereafter, however, India’s imports rose (because of the failure of the Government to invest in increasing fertiliser production capacity). The world fertiliser market is cartelised, dominated by a few firms; so when India imports, international prices rise. In fact, as India’s imports rose, international prices of urea tripled in dollar terms (from $150 per tonne in 2003-04 to $470 in 2008-09). As a result, average subsidies on imported urea became higher than those on domestic fertiliser. This shows that the Government must encourage domestic production, and insulate Indian farmers from unpredictable, cartelised and volatile world fertiliser market.

(iv) The current proposal to substitute subsidised fertilisers with direct transfer of cash subsidies fails to take into account certain realities of Indian agriculture:

First, if subsidies are released only after the farmer purchases fertiliser at full cost, the farmer would have a problem in arranging money to make the purchase. The vast majority of farmers are cash-constrained and lack access to formal credit. This might cause a reduction in fertiliser use. Delays in reimbursement would cause further hardship. (One might add that such delays are standard in Government payments – for example, 70 per cent of NREGS wage payments, owed to the poorest of the poor, are delayed beyond the stipulated period.)

Second, the area under informal/oral tenancy has been estimated at 15-35 per cent of the cultivated area, and a larger percentage of cultivators. More than 85 per cent of tenants are landless labourers and small and marginal farmers. It is not clear how direct transfer would take care of informal tenants, who have no legal right to cultivation and therefore poor access to inputs and services.

(v) As we know, the margins in farming are low and uncertain; hence an increase in the price of even one input can tip the balance into losses. Sharma calculates the effects of total withdrawal of fertiliser, and actual market prices (retail price + subsidy) during April-June 2012. The results show that wheat cultivation becomes unprofitable in some states and in other states net income plunges steeply.[6] For rice, the situation is even more disturbing: rice farmers in 7 out of 10 major rice producing states realise negative net income.

This shows that if fertiliser subsidies are withdrawn at one go, it would have a very severe adverse effect on net income of rice and wheat farmers in many states, leading to a serious agrarian crisis. It could be added that this would also mean a serious food crisis.

In passing, one needs to note the valid objection that the exclusive reliance on chemical fertilisers, and the imbalanced use of these fertilisers, are harmful. A related point is that the current pattern of water use in agriculture is wasteful and environmentally damaging. Some persons attribute all these problems to subsidies on fertiliser, water, and electricity.

It is true that the use of organic fertilisers, and soil-specific tuning of the fertiliser mix, are of great importance. Similarly, the pattern of water use in agriculture requires radical changes. But these changes call for a long process, one which involves the revival and expansion of a public sector agricultural extension system, with capacity to study diverse soils and conditions of farming, and assist cultivators in shifting to different farming patterns. This needs to be integrated with many other changes, some involving State assistance, and some others of a basic nature, which we cannot enter into here.

The relevant point here is that ‘free’ market pricing of chemical fertiliser, or, for that matter, free market pricing of electricity, diesel, or water, does not bring about any of these needed changes in agriculture. All it does is push the small and marginal peasantry, who are already in a precarious situation, over the edge. It also imperils existing production levels of food.

Railways: distorted presentation
A subsidy on railways has been an established practice in many countries, including several developed countries. The positive net externalities of the railways (i.e., benefits to parties other than the railways and its passengers) are enormous, and a subsidy is thoroughly justified, even more so in the present context of global warming.[7] There is also no need to tie investment in railways to increasing the profits of the railways; railway investment can generate ample net revenues for the Government, by boosting the entire economy. This is borne out through Subramanian’s own data, as we have shown elsewhere.[8]

Subramanian asserts that the bottom 80 per cent of households account for only 28.1 per cent of non-suburban passengers, the implication being that the wealthiest 20 per cent are cornering the subsidy on railway passenger fares. This figure is arrived at by matching the findings of a small NCAER study on railway passengers[9] with the National Sample Survey data on consumption expenditure of households. However, Subramanian ignores certain other data in the NCAER study which do not match his picture of prosperous rail users.

1. More than 60 per cent of the passengers belong to the expenditure class of below Rs 5,000 per month per capita. Another 25.5 per cent were in the Rs 5,000-10,000 class; and only 14.1 per cent were in the Rs 10,000+ class.

2. The reason given by the majority (63.6 per cent) of interviewees for travelling by train is its economy compared with other modes of travel. When train services are affected, 25 per cent of non-suburban passengers interviewed by NCAER would not make the trip at all. The majority (67.6 per cent) would use bus services. Around 3 per cent would travel by their own vehicles, and a little over 2 per cent by reserved vehicles. Only 0.3 per cent of the passengers would travel by air when train services are affected.

3. A little over 79 per cent of the non-suburban passengers in the NCAER sample travel by general class, 18 per cent by sleeper class, 1.1 per cent by AC II tier, 1.4 per cent by AC III tier and only 0.2 per cent by AC Chair Car. The social category with the highest proportion traveling by general class was casual labour.

4. The NCAER report claims passengers are willing to pay higher fares. However, this is a distorted presentation of its own data. In fact opinion was more or less evenly divided: 48 per cent were unwilling to pay more for faster train services; 50 per cent were unwilling to pay more for greater frequency of services; and 48 per cent were unwilling to pay more for better quality of service on board.

More revealingly, they were not willing to pay substantially more. Those who agreed to a fare hike of 10 per cent or more for any of these heads (speed, frequency, service quality) ranged betwen 1.4 per cent and 3.4 per cent of the sample. Overwhelming majorities (around three-fourth) would agree only to a hike of 1-5 per cent in the fare. At any rate, increasing speed, frequency, or service quality would cost money, so it is not obvious that the railways’ profits would rise as a result.

Most strikingly, Subramanian does not note the significance of his own observation. If indeed 80 per cent of households account for only 28 per cent of non-suburban rail users, it does not mean that they have opted for some other mode of travel, since rail is the cheapest wherever it is available. It means that for the vast majority even the existing rail fares are expensive. This fact restricts their travel to the bare minimum. Any sizeable increase in rail fares will simply force them to restrict their mobility even further.

In conclusion
The entire discussion about ‘subsidies’ has a mystery at its core. Why are subsidies needed at all? Why is it that large numbers of people need to be provided food at below the cost of production? Why is it that, if peasants do not receive subsidised fertiliser, they are in danger of using less fertiliser? Why is it that large sections avoid travel even by train, which is the cheapest mode of travel? Why are billions of rural women-hours spent every day hunting for firewood to cook a meal?

The answer is that the political economy of this country grinds the incomes of the vast majority to so low a level that they are unable to afford the minimum requirements of a dignified existence. To this, establishment economics answers: their productivity is low – i.e., they add less value – and therefore their incomes are low. Indeed, the data show that the productivity of an employee in the finance, insurance and real estate (FIRE) sector is 9 times that of a worker in the construction industry; more than 12 times that of a worker in unregistered manufacturing; and nearly 25 times that of a worker in agriculture.[10] The latter are the sections who produce the bulk of the material necessities of existence of the people of this country. Without their labour, the FIRE sector could not exist at all; but the peasants and workers could exist perfectly well in a society which did away with the FIRE sector, at least in its present parasitic form. This is, then, a political economy of parasitism.

If we look at even the registered factory sector, workers’ wages as a proportion of net value added fell from 25.6 per cent in 1990-91 to 11.9 per cent in 2011-12. Indeed, real wages (i.e., after discounting for inflation) in the registered factory sector have fallen over the period of rapid growth, so that they are today much below the level of the 1990s. That has helped profits, as a proportion of net value added in registered manufacturing, to rise from 22.1 per cent to 54 per cent over the same period. These are giant shifts. In that sense, it could be said that the cheap labour power of peasants and workers is an enormous subsidy to the ruling class.

Viewed in this light, what are officially referred to as subsidies are not subsidies at all. They arise because the rulers from time to time feel it politically prudent to concede a bit of the social product to the ruled. For example, it was the popular unrest and mass struggles during World War II and the immediate post-war years, and then again from the mid-1960s to the early 1970s, that forced first the British rulers and then their Indian successors to set up and expand the public distribution system in India. What is going on now is an attempt by the present ruling classes, whether out of increased rapacity, heightened desperation, or both, to snatch away even these historically established meagre social claims of the people. They can only be stopped if those stormy struggles of the organized masses are revived.

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