Can India live without subsidies? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can India live without subsidies? 

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In this issue:
» Has the govt cooked up food wastage numbers?
» Will rupee help OMCs this time?
» India could recover faster than China: RBI
» US leaves the world confused
» ...and more!


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00:00
 
The word 'subsidy' has been used again and again as the root cause of India's fiscal problems. The government's populist programs have been a burden on the fiscal front. In the absence of commensurate revenue streams the fiscal balance has gone awry. So would it be wrong to say that India should simply do away with the subsidies?

Like any other question, there are two views to this one too. The first one is that of the Kelkar Committee. It suggests that the subsidies should be completely removed. The committee has suggested that the various subsidies on fuel and food grains should be removed. This can be done by hiking prices of the same by one-third till 2014-15. The hikes and subsequent elimination of subsidy can be undertaken in a phased manner to minimize the pain for the country's residents. Over time, this would help the government in maintaining healthier fiscal balances and using its money to promote growth in key areas in the country. Healthier fiscal balance combined with policy reforms would give India the boost that it needs. This in turn would help promote investment interests of the private sector as well as bring in long term foreign capital. The combined effect would be long term growth for the country.

The other view is that of the Finance Minister. As per him, in a country like ours where the number of poor is significant, subsidies cannot be done away with. In his opinion, subsidies will always remain a part and parcel of India. What is missing is a proper delivery system to ensure that the subsidy reaches the beneficiaries directly. If the process is streamlined, then the subsidies would no longer be a burden. In addition policy reforms are the key to long term growth and the government has already embarked on the path to ensure the same.

It is true that subsidies are a burden currently. It is also true that a significant number of people in the country are poor and therefore need help. But what is not true is that by keeping prices artificially depressed through subsidies the government is trying to help the poor man. All it is doing through this populist measure is to ensure that it gets enough votes to remain in power for another term. What the government needs to do is to do things in tandem. This means that it needs to get on with the policy reforms and at the same time start cutting back on the subsidies. Doing just one without the other would not help achieve the desired result. And the desired result is one we all want - India to shine in the long term.

Do you think that India can live without subsidies? Share your views or you can also comment on our Facebook page / Google+ page

01:05  Chart of the day
 
The government surprised the world with its recent announcement on FDI in retail. Some cheered it. Some opposed it. Some are still confused by it. The reason for the last category is the underlying justification given by the government on its move to allow FDI. The government has stated that nearly 35-40% of the fruits and vegetables produced in the country is wasted. Therefore, FDI in retail can help infuse the much needed funds in the infrastructure and supply chain for the same which will help control the wastage. But as per the Indian Council on Agricultural Research (ICAR), the maximum loss in fruits and vegetables ranges between 12.4 to 18% (post harvest). In fact if we see the results of their study, the maximum percentage of wastage in food items is not even close to what the government had stated. This can only mean one of the two things. Either the government inflated its numbers to make FDI in retail sound good to the country. Or the ICAR has gone horribly wrong with the calculations.

Source: Business Standard, 2010 ICAR study


01:40
 
Recently, government raised diesel prices and also capped the subsidy on Liquefied petroleum gas (LPG) cylinders. This should bring down the under recoveries of oil marketing companies (OMCs). Further, strong recovery in the rupee is kind of an icing on the cake. It is known that India imports majority of its crude requirements. Thus, rupee plays a significant role in determining the end user prices. And rupee has appreciated significantly in the recent past.

In the second fortnight of September, rupee averaged at around 53.6 to the US dollar. Compare this to 55.4 levels that persisted in the first fortnight. Such a sharp appreciation is expected to bring down the losses of OMCs on sale of diesel by around 10% in the first fortnight of October. The margins on petrol are also expected to rise to Rs 1.50 per litre from Rs 1 per litre persisting currently. Thus, it is evident that rupee plays a key role in determining the under recoveries of OMCs. In fact, it is estimated that every rise in the rupee by 1 against the US dollar brings down the under recovery burden of OMCs by Rs 88.1 bn per year. As under recoveries decline, subsidy burden of the government too comes down. This helps curb the fiscal gap.

02:20
 
A series of domestic and global issues have put India's economic prospects at risk. While economic growth has slowed down, inflation is hardly showing any signs of abating. But India is not the only one facing such concerns. Our neighbouring economic giant, China, too is facing fears of an extended slowdown.

However, as per Deputy Governor of the Reserve Bank of India (RBI), Anand Sinha, India could recover much faster than China. How? There is a fundamental difference between the two economies. While China is heavily dependent on exports, India depends on domestic consumption for its economic growth. Given the turmoil in the developed economies, China's exports are likely to suffer. And it will take a while before the country can change its economic orientation towards domestic consumption. So while India has a better chance for a faster recovery, it may not come until we sort out several domestic issues. Political paralysis, slow reforms and myriads of corruption scams are some of the major issues plaguing the country. The recent reforms have been announced with much fanfare. But in our view, they are too trivial to really make any significant impact. It is a given that the government is unlikely to put the interests of the country before its petty political games. So it really remains to be seen if India can recover faster than China.

03:10
 
A leading business daily reports how the US economy seems to be flashing confusing signals right now. Its consumers seem more confident but aren't loosening their purse strings. Also job cuts aren't happening as widely but then not many are being hired either. On the prices front, while asset prices are going up, incomes are not rising as fast as inflation. And lastly, cars are flying off the shelves but manufacturing seems to be faltering.

Well, these are conflicting signals indeed. Can anyone explain these diverse phenomena? We can only hazard a guess we think. Our view is that the strength of the US economy seems to be currently resting only on stimulus measures and the flood of liquidity that the US Fed has injected into the US economy. Its fundamentals still remain weak. Hence, consumers and manufacturers aren't going all out in spending and taking more people on board. In fact, in a way, this trend is good because this is what will put the US economy on a firm footing for the long term. Its consumers have to reduce debt to account for the mad bout of leveraging that has happened all these years. And businesses too need to improve productivity from existing employees rather than take in more people. The Government's efforts to interfere in this process will only make the recovery more difficult and will continue to send out conflicting signals like it is doing now.

04:10
 
The Competition Commission of India (CCI) seems to be on a mission. First on its radar were cement companies. The latter were fined heavily for unhealthy competitive practices and cartelization. And now its focus has shifted to auto manufacturers. The CCI has charged auto companies in India. This is for using their dominant market position to charge exorbitant prices from their consumers. The major issue in this regards appears to be with respect to availability of spare parts and servicing. According to the CCI, car makers have ensured that consumers are compelled to get their vehicles serviced or repaired or even buy spare parts from dealerships only. This is for lack of an alternative in the form of retail markets from which the same can be sourced.

The anti-trust regulator has cited examples of the US and Europe. Changing practices there have allowed the formation of independent motoring businesses. This is something that has not yet evolved in India. The auto industry as it is has already been facing some macroeconomic headwinds. Thus, any fine imposed by the CCI will surely pile on more pressure on profitability. Interestingly, auto ancillary companies could benefit. This is because they could get an opportunity to expand beyond car companies into direct retail market.

04:40
 
In the meanwhile, after opening the day in the green, the Indian equity markets continued to trade above the dotted line. At the time of writing, Sensex was up by 15 points (0.1%). Among the stocks leading the gains were Infosys Ltd and Tata Motors. Other major Asian stock markets have closed the day on a mixed note with Japan and Indonesia closing in the red while markets in China and Malaysia closed in the green.

04:55  Today's Investing Mantra
"In the short run, the market is a voting machine but in the long run it is a weighing machine." - Benjamin Graham
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16 Responses to "Can India live without subsidies?"

Anti Corruption

Nov 13, 2014

Let this government be voted out for imposing the bank account/aadhar and related problems with bank accounts upon the people, just like the previous government was voted out. Let them never come to power again.

Like (4)

J.N.Yadav

Oct 28, 2012

Subsidy per se is not only not bad, it is reqired.Where distribution is the real problem subsidy is the corrective measures against the greedy for the needy. But the real problem is corruption, pilferage out on out , a sure sign of poor governance.Dont brand subsidy as bad.There are many more poor than rich- rich who have not earned but stolen

Like (5)

Parimal Shah

Oct 2, 2012

If - 1) The scams stop, 2) Looting by those in authority stops, and 3)Money goes to the rightful beneficiary -
then the prices can be decontrolled (fiscal deficit gets corrected) and subsidy can be given by cash-transfer i bank account through ADHAR card KYC norms.
Problem is the loot and the corruption. Online clearances for business proposals and projects can ensure transparency, minimize human contact (the reason for corruption & bribes) and expedite clearances - if not cleared in time-limit, it can escalate to higher level automatically - so delays can be minimized, and make people really work rather then have indefinite number of so called tea-breaks.

Like (4)

madan Morgaonkar

Oct 2, 2012

Many years ago we were talking about same issue.At a point one of my friend raise our attention towards an issue that when govt.is giving any subsidies to any commodity,one things we must consider that the maximum tax payer states are enjoying maximum consumption of subsidies lets consider petrol,LPG etc.these are consumed more by tax paying states than under developed states.which means the tax payer is giving by one hand and taking back by another hand.we know this is not 100% right but it is a noticeable fact.Hence unless govt The conclusion was it makes no difference where it should be continued or not but currently first make them short listed towards actual...............

Like (2)

hsk

Oct 2, 2012

The F,M is very correct in this matter, but will he succeed is the great question.

Like (4)

wahi subhash chandra

Oct 2, 2012

To my mind is concern SUBSUDY is not he problem.Problem is in its uses.As in many GOVT. programmes out of Rs.100/- expense only 25 to 30% reaches in the hands of elligibles.If GOVT. can check this pilphres then only 60-70% will requored SUBSIDY.In AMERICA also SUBSIDY is given in the form FREE medical and FREE education upto high school UNEMPLOYEMENT PERQUES .IS it not an ALTERNATE form of SUBSIDY.I am still of the opinion that only by financial honesty IF shown by the MODEL PERSONS with UTMOST TRANSPARENCY as in past followed by Dr.RAJENDRA PRASAD,LAL BAHADUR ASHASTRI,ATALJEE,Dr.ABDUL KALAM,etc.I hope by honest use of 'ADHAR' for all type subsidy disbursement. In this HONEST & TRANSPARENT role of revanue officers will be v.IMPORTANT. Last but not the least HONEST PUBLIC REPRESENTATIVE will have to be vigilent and they should be protected and supored by the vigilent PUBLIC so that they are not harmed by the miscreants.

Like (2)

Chandrasekaran

Oct 2, 2012

The money Grabbed from Various Sources as tax & etc., only given as subsidies. Its not the problem of finance, its the connivance of miss management for the selfish need of fellow Indian Swindling Politicians

Like (2)

Dipakkumar

Oct 1, 2012

India can live with subsidies and actually the Government must be with the 'Aam Admi'. The Aam Admi is not the Dalits and the Scheduled Castes alone, it includes the economically backward and the middle class community also.In order to live with the subsidies the Government firstly has to be honest. Secondly,the leaders leaving aside all politics must try to be committed to their responsibilities and must strive to reduce the expenses in all their assignments. It is not required to elaborate how the subsidies are to be managed. The answers to these issues are known or can be found out easily. If these things are taken care of subsidies will automatically go.

Like (2)

Vaibhav

Oct 1, 2012

India is overdeveloping country and there are lot of people who lives with less then 30 rupees in a day which are not sufficient only for food and they taking to remove subsidy.I think this will be the worst decision ever taken .

Like (3)

Radheshyam Sharma

Oct 1, 2012

Subsidies will always be necessary because of corruption existing at all levels in the state and central government.
What benefits are to go to the poor are stolen by the middlemen with the connivance of interacting government officials.
The government first raises the prices of petroleum products by imposing more than 60% in multiple taxes and duties and then the government says the oil companies are making losses and there are huge under recoveries.
Like coal, oil is an essential fuel. Why can't the government supply the petroleum products to the poor and for essential services by supplying it at Cost Plus basis, without imposing the multifarious taxes and duties.
Yes, for the rich, the government should charge whatever duties are reasonable. If the government just decides to get rid of the corruption monster and bring back the black money stashed away in tax havens, all problems would be solved. Oh, yes, these leeches who go by the names of MPs and MLAs should just give up the free gas and fuel which they get from the government, free of cost.

Like (3)
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