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Need to review subsidies, says govt economic advisor

A majority of non-merit subsidies need to be urgently reviewed by the government and reduced by at least 50 per cent by raising the rate of recovery. But it is wrong to assert that all non-merit goods don't need subsidies any more, according to Dr Shankar N Acharya, chief economic advisor to the Union ministry of finance.

Addressing Indian Merchants Chamber members on Monday, Acharya said that subsidies, to be useful, should fulfill the following several criteria including transparency, a well-targetted consumer, and be a well-chosen commodity. Moreover, the programme of delivering subsidies should be well administered and the quantum of subsidies should be compatible to the maintenance of efficiency of the national economy.

In this respect, he regretted that the government budgets did not fulfill the criterion of transparency, nor did tit target the beneficiaries properly in respect to delivery of food subsidies.

Too many of our government subsidies are channelled through inputs such as fertilisers and power which in most cases did not reach the desired target groups. Instead of spending on subsidies to fertilisers, it is better to increase public investments on irrigation dams and tanks, he said.

Also, low pricing of power owing to subsidisation was driving away private investors from entering the area of power generation and distribution. The urgent need is to raise the ''recovery rate'' to 50 per cent from the present level of 10 per cent in the ''non-merit'' goods sector.

Acharya admitted that massive underpricing of commodities on the hope that it would benefit the poorer sections is counter productive, and will distort the economy. In view of this, it is desirable to periodically review all our subsidies.

"We can even consider imposing a ceiling on the total quantum of disbursal of subsidies," he said, agreeing with a suggestion made earlier by Reserve Bank of India former deputy governor S S Tarapore.

Tarapore had said that there was an urgent need to take a second look at the commodities chosen for the grant of subsidies. He recommended that the government subsidise the prices of pulses, even if that means diverting funds from subsidy of foodgrains.

Earlier, IMC President Ram Gandhi said that bulk of subsidies disbursed by the government were cornered by the middle and higher income group sections. About half the fertiliser subsidy accrues to the producers of fertilisers, rather than reaching the poor farmers. More than half the subsidy on education is for higher and technical education, most of which go to the non-poor, he pointed out.