Free Metro Rides and Other Freebies – Do They Help Those in Need?

The Economic Survey 2014-15 found that “a rich household benefits more from the subsidy than a poor household.”

Most elected governments – at the Centre and in states – have resorted to populist measures to woo people.

(Photo: Kamran Akhter/The Quint)

Supporters have hailed the move as liberating for women. It will help women feel comfortable using public transport frequently, they argue. Critics, on the other hand, have termed it yet another political stunt from a leader known to have done many more in the past, intended to retrieve the lost ground before the upcoming Assembly elections.

To be fair to Delhi Chief Minister Arvind Kejriwal, he is not the only leader to have succumbed to populism, if the move is seen as just that, in promising free Metro rides to women. Most other elected governments – at the Centre and in states – have resorted to populist measures to woo people.

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In fact, the very first cabinet meeting of the recently re-elected Narendra Modi government decided to extend the benefits of PM Kisan scheme to all farmer households, which was earlier exclusive to small and marginal farmers, entailing an additional cost of Rs 12,000 crore.

Now the total cost of the PM Kisan scheme, that promises to give Rs 6,000 per annum in three equal instalments to an estimated 14.5 crore farmer households, stands at a whopping Rs 87,000 crore.

‘Rich Households Benefit More Than Poor Ones’

Do the benefits of such general freebies, as opposed to targeted subsidies, reach those in need? The answer is clearly ‘No’ if you go through chapter three of the 2015 Economic Survey.

It observes: “Prima facie, price subsidies do not appear to have had a transformative effect on the living standards of the poor, though they have helped poor households weather inflation and price volatility. A closer look at the price subsidy landscape reveals why they may not be the government’s best weapon of choice in the fight against poverty.”

The survey adds that “A rich household benefits more from the subsidy than a poor household.”

The survey offers the following data sets to support its stance:

1. Very rich households corner a large share of the 27 percent of the entire power subsidy amount as they consume more electricity than poor households. Most poor households do not have access to electricity at all.

(Photo: Kamran Akhter/The Quint)

2. The situation is not very different with regard to kerosene subsidy.

(Photo: Kamran Akhter/The Quint)

3. We spend nearly 0.5 percent of the GDP in subsidising train passenger fare.

(Photo: Kamran Akhter/The Quint)

4. It’s the same story when it comes to fertiliser subsidy.

(Photo: Kamran Akhter/The Quint)

5. Food subsidy is one of the major components of our subsidy basket, but...

(Photo: Kamran Akhter/The Quint)

6. On price subsidies allocated to water utilities, the survey highlights:

(Photo: Kamran Akhter/The Quint)

How Subsidies Harm Interests of the Poor

Other than instances of benefits not reaching the sections they are meant for, the survey lists out reasons for how the misdirected subsidies end up harming the interests of the poor:

1. The Centre offers minimum support price (MSP) to farmers for selected items procured by government agencies.

The scheme is meant to ensure that prices of certain food items don’t fall below a certain level, saving farmers from sudden price shocks. There are studies that show that this encourages “under-cultivation of non-MSP supported crops”.

As a result, there is a demand-supply mismatch, pushing prices of non-MSP supported crops (mostly daily items like fruits and vegetables) higher. We all know that this results in higher food inflation which hurts poor households the most.

2. Higher MSPs for selected items and subsidies for water together “lead to water-intensive cultivation that causes water tables to drop, which hurts farmers, especially those without irrigation.” Is that the reason why the water table has been dropping across the country?

3. We have been charging more for rail freight traffic to subsidise passenger fare. As a result, our “freight tariffs are among the highest in the world”. Is that the reason why our manufacturing sector has failed to take off despite several failed attempts, as higher freight traffic pushes the cost of manufacturing, making the sector uncompetitive?

A weak manufacturing sector means tepid employment generation and faltering exports. Can we afford that? Needless to say, it hurts us all – the rich and the poor.

4. The survey also says that “loss-making passenger transit services mean that the railways cannot generate sufficient internal resources to finance capacity expansion investments.” This is the reason why the railway network’s growth has failed to keep pace with the rapidly rising demand.

In view of growing evidence against the general subsidy regime, can we really go on this way? Now that the Union Budget is about to be unveiled in less than three weeks, let us have consensus on moving towards a targeted welfare scheme regime.

Making a case for a new subsidy regime, the 2015 survey observes that “The regressive nature of many price subsidies reduce their effectiveness as anti-poverty strategies; second, reducing subsidy leakages gives the government the fiscal space required for higher-return social transfer programs without causing welfare losses; and, third, the same amount of benefit that households gain through subsidies can be directly transferred to the poor through lump-sum income transfers, avoiding the distortions that subsidies induce.”