The Hindu Business Line : Target subsidies

AS THE BUDGET is widely expected to focus on the farm sector, it may be reasonable to believe the Finance Minister will try to not only arrest the burgeoning food subsidy burden, but even reduce it to a manageable level. At last count (2003-04), the food subsidy had grown to an alarming Rs 25,000 crore-plus. The fiscal implications of this order of subsidy — 10 times more than in the early 1990s — are serious. Besides impacting the agricultural sector by fostering crop imbalances, it violates fiscal discipline. It is important from the point of view of fiscal consolidation too. Admittedly, public investment in agriculture has been falling. Though real private investment has shown an upward trend in recent years, the overall real capital formation has been low. The food security system is surely unsustainable in its present form given the unconscionable high associated costs. Explicit (food, fertiliser) and implicit subsidies (free power, water, low cost credit) are large and ill-targeted. Obviously, there is an urgent need to address the issues that negatively impact the food security system.

Political compulsions aside, it makes fiscal sense for the government to considerably reduce, if not eliminate, handouts. To start with power and water must be appropriately priced and user charges recovered. This would release resources for public investment in infrastructure projects and to maintain existing facilities. But the key to success in this would be how the Centre prevails upon the States to remain disciplined. The Finance Minister's next focus ought to be the food management policy and the functioning of the Food Corporation of India (FCI), the state behemoth for procurement, storage and distribution of foodgrains (mainly rice and wheat). FCI's operations have become too unwieldy with transparency and good governance taking the backseat. Streamlining its operations would lower transport and logistics costs. But, then, as FCI's functions are primarily for and on behalf of the government, if the agency is culpable of omissions and commissions, Krishi Bhavan cannot escape blame.

An uncomplicated way of reducing FCI's operational cost is to end the system of open-ended procurement of fine cereals and restrict it to the extent required for food security, market intervention and buffer-stocking. Neither the Expenditure Reforms Commission nor the High Level Committee on Long-term Grains Policy examined the case for limiting procurement. It is also perhaps the most effective way to promote crop diversification, and to fight ecological threats in the frontline States of Punjab and Haryana. Crop shifts will happen not through persuasion, but by adopting a system of incentives and disincentives. A considerable part of the food subsidy relates to the foodgrain-carrying cost, which benefits neither the producer nor the consumer. Subsidies may be unaffordable for this country; but per se are neither bad nor undesirable. Overzealous axing of the food subsidy will hurt the needy. Subsidised foodgrains supplies through the public distribution system should be expanded and the system strengthened to plug leakages. The Government must ensure that subsides are well targeted and effectively delivered.

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