THE ROLE OF SUBSIDY IN ECONOMIC AND SOCIAL DEVELOPMENT OF INDIA – NEED FOR SUBSIDY REFORMS

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THIS ARTICLE WAS WRITTEN BY SANJANA BANERJEE, A STUDENT OF NUALS.

Abstract

In the present era, it cannot be denied that a human being needs a little more than food, clothes and shelter to survive. Subsidisation of certain economic goods and services is a common feature not only in welfare economies but also in market economies.[1] However, with budgetary constraints and rising public debt especially in developing countries such as India there has been a trend towards reduction of subsidies especially in public goods as well as various non-merit goods in order to deal with such financial constraints. With the rate of subsidisation in food products rising as high as 56.1% in the year 2004-2005, the rates fell to 33.7% in the year 2011-2012.[2] The year 2016 observed another cut in subsidies by 4% (a total amount of Rs. 2.31 lakh crore) not only in food but also on fertilisers and petroleum.[3]

This essay seeks to redefine India as a welfare economy and the integral role played by subsidies in core sectors such as agriculture, medical facilities and education in the social and economic development of one of the largest rising economies of Asia Pacific.

Agricultural Sector and its demands: Is mere subsidisation enough?

Starting off from the first core sector; Agriculture, the rationale behind subsidisation of the farming sector more often than not is to ensure parity with the non-farming sector.[4] Another important factor behind allowing subsidies is the risk taking aspect when it comes down to agriculture, something which is mostly seen in developing countries where agriculture depends more upon the vagaries of climate. As recently as 2015, a farmer-welfare approach was taken up in Indian agricultural sector unlike ‘the agriculture boom’ approach which was the way previously.[5]

The dilemma of climate change has further aggravated the already floundering agricultural output and probably the only manner a solution to this problem could be found is to ensure technological intervention and subsidisation.[6] Subsidisation plays a key role in capital formation, facilitating employment and expands investment. It helps in maintaining regional balance and is probably the first step towards closing the urban-rural wage gap.[7]

Irrigation Subsidy – The year 2015 saw the launch of the Rupees 50,000 crore Pradhan Mantri Krishi Sinchai Yojana project to revamp the irrigation network of the country.[8] The plan aims at long term drought mitigation by implementing extensive irrigation networks through a two – way approach: block and district with most of the work taking place at the block level.[9] This approach is based on a District Irrigation Plan (DIP) which is the cornerstone of this project.[10] An irrigation subsidy has to look into the cost of operation and the yearly yield for determination of the rate since, every scheme has an opportunity cost and moreover the depreciation cost of every major, minor and medium scheme should also be accounted for.[11] With recent instances of climate change and increase in drought the once fertile regions of Tamil Nadu and Kerala has been reduced in half, crop yields have declined and without a potential return, subsidisation of irrigation facilities seems only like a remote possibility.[12] A falling out of this is a shift from rural areas to urban areas in search of employment opportunities, high rate of school drop-outs, increase in instances of farmer suicides, inability to afford basic food products and medical facilities.[13] Capital formation is the first step towards subsidy therefore, it is extremely important to ensure effective implementation of schemes such as PMSKY as well as use of alternative measures to improve irrigation network such as use of treated waste water.

Subsidy on Seeds and Fertilisers – Fertiliser subsidy has been one of the most difficult nuts to crack for any finance minister so far. As of now out of the three major constituents of the fertiliser industry: urea, muriate of potash (MOP) and di-ammonium phosphate (DOP) only urea was subsidised under the Retention Price Scheme (RPS) till 2003.[14] Presently, under the New Price Scheme (NPS) urea is still the only fertiliser that is subsidised.[15] Major obstacle faced while implementing subsidy on fertilisers is mainly hoarding my corporates and the richer farmers; benefit accrued to smaller farmers is mostly minimal and secondly the fear that too much subsidisation of urea may disturb the Nitrogen-Phosphorous-Potassium Ratio (NPK).

On the other hand when it comes down to subsidies on seeds, the current scenario looks rather distorted where there is an inappropriate use of plant varieties, erosion of plant genetic resources and a lack of clear seed strategy.[16] In order to improve implementation of seed subsidy, the approach should be more farmer based rather than institution based. Subsidies must be aimed at such a manner which meets international trade requirements in crop yields and also any subsidy on seeds must focus on the informal system of procuring to increase approach.

Role of subsidies in the Healthcare sector

The practice of treating healthcare as a ‘commodity’ is probably one of the main reasons which has attracted the interest of various private medical institutions. As a result of this paradigm shift, the 1990s saw a spurt in the growth of private hospitals in Government allotted land.[17] A subsequent increase in private investment in India saw the dwindling role of the Government. A fallout of this was a rise in price of medical supplies since; they were not able to keep up with the demand, increased cost of procurement ultimately resulting in increased cost of medicines and treatment.[18] Over the years in 2005 and 2006 as well as in 2010, medical supplies were imported by the National Institute of Pharmaceutical Education and Research (NIPER) to provide the best possible medical care to the Indian audience.[19] The measure taken though appreciable has taken quality healthcare beyond the reach of the poor and the middle classes.[20]

One of the major reasons behind high morbidity and mortality rates is a consistent rate of low investment[21]. In another viewpoint due to the federal fiscal structure of India, most of the policies framed especially in the healthcare sector the powers of revenue mobilization vested with the states is insufficient and this kind of a vertical imbalance was created in order to enable the Central Government’s interventions.[22] An observer would say that the lack of autonomy amongst States is a major factor where subsidisation is concerned. A new subsidy model could be constituted if the states are granted a certain level of autonomy. A Report by the National Advisory Committee found that the rate of revenue distribution which showed a per capita expenditure in the health sector at Rs 251 in the year 2003-2004 and is expected to rise to Rs. 2430 by 2017 , it would be very difficult for the States to expand its investment in the medical infrastructure with the present system in place.[23]

A comprehensive State level subsidisation programme should be undertaken, where factors unique to the healthcare sector in one State should be identified and subsequently dealt with. With rising instances of deadly diseases such as cancer and AIDS, the cost of procuring chemotherapy tablets as well as tonics are way beyond the financial capability of a lower middle class Indian citizen. It would make sense to create a subsidisation programme which is disease specific.

As far as privatisation of the healthcare sector is considered, the Central Government had decided to increase the rate of public expenditure in the sector upto 2.5% of the GDP by the end of the 12^th Five Year Plan.[24] The priority behind any subsidisation policy should be three major things: affordability, reach and quality of services.[25] Now, let us take a simple statistical survey conducted in 2010 where the Reproductive and Child Health Programme revealed that 5.1% of children between the ages of 12 and 23 months did not receive immunisation and only 46.6% of child births were attended to by medical personnel in rural areas.[26] On the other hand diseases such as cancer had an estimate of 8.07 lakh in 2005 which increased to 9.99 lakhs in 2015, diabetes increased from an estimate of 310 lakhs in 2005 to 480 lakhs in 2015.[27] A National Policy of Healthcare subsidisation with greater participation from the States can be framed which will ensure affordability, quality and reach of services. Investments could be made in three stages: preliminary subsidisation of basic medicines, food served and hospital beds, the second stage would be subsidising quality medical services to the rural as well as the urban poor; this is a stage where the private sector can play a crucial role. Firstly, through subsidisation, marketing of products with a public health benefit through retail networks is possible.[28] Secondly, there is also a need to improve the healthcare infrastructure in the country. The current doctor-patient ration prevailing in the rural areas is 1:20,000 and in the urban areas around 1:2,000.[29]

The Government can institute a separate ‘Healthcare Budget’ and in its agenda it can introduce schemes and roll out an incentivisation programme encouraging the private sector to set up dispensaries, healthcare centres and clinics and minimal cost in the rural areas and for the urban slums. The private healthcare sector can cooperate with leading Non-Governmental Organisations committed to providing basic healthcare to the poor and the downtrodden. A very important part of medical subsidies is probably the pharmaceutical sector especially when it comes to treating diseases such as Cancer and AIDS. The pharmaceutical sector achieved its share of major benefits in the year 1970 when the companies were allowed to manufacture generic versions of patented medicines and secondly when fiscal incentives and state subsidies led to an unprecedented growth of medicines.[30] However, the state subsidies provided should be aimed at diseases such as cancer where the cost of treatment ranges from a minimum of 12 lakhs to more than 45 lakhs.[31] Or say diseases such as jaundice, tuberculosis, AIDS and hepatitis. More importantly in order for a scheme to be this successful, strategized marketing and conducting workshops is very important. In most cases the rural poor are more often than not ignorant about medical services available to them many of them still believing in traditional practices of sages and black magic.[32]

Subsidy in the Education Sector:

An observational study conducted in the state of Karnataka showed very clearly the close connection between education and medical subsidies. The same study concluded that the so-called ‘high education subsidies’ are not well targeted and most of the children from poorer backgrounds drop out after elementary education due to poor health.[33] Even when it comes to providing education through private entities, the richer sections of the society are the ones who reap benefits out of it, as they are able to afford better healthcare subsequent to which their children are able to complete higher education.[34]

Although the trend in the sector of education so far has been to charge very low to no fees for providing elementary education to the poor, these programmes are more often than not inefficiently implemented.[35] Another peculiarity with the education sector is a child benefitting out of subsidised educational services may drop out midway and help out his family with farming or work as a daily labourer.[36] Therefore, we can see that subsidisation by itself might probably not yield favourable results when it comes to socio-economic development of the nation, however we also cannot undermine the integral role played by education subsidies.

Education from the point view of investment can only be termed as a long term one where proportional benefits may or may not incur. With programmes like Sarva Shiksha Abhiyan and promoting education of girl children by setting up Kasturba Gandhi Balika Vidyalayas (KGBVs) elementary education for poor and underprivileged children might seem as a possible reality.[37] However, the main concern is subsidising higher education and to what extent should it be subsidised? Many claims have been raised that firstly greater access to higher education does not always necessarily mean higher income or an increase in the standard of living[38]. The major rationale behind providing education subsidy is equal opportunities for the poor however, that is hardly ever the case.[39] Higher education prices have risen far beyond the poor citizens’ reach, especially in private institutions where the cost of studying a full time engineering or medical course might cost half a crore. In most situations most of the grants received by colleges and universities are used for bettering their infrastructure rather than make college fees cheaper as stated in Bennett’s Hypothesis.[40] It is agreed to that various Government and private foundations have successfully been able to fund education of many poor students through scholarships and grants however, the University is required to play a major role when it comes to fee reductions for poor students.

A new subsidisation policy with special emphasis on the higher education for the urban poor and the economically disabled can be formulated. Higher education subsidy could be made more specific towards such sectors which have greater demand for example medicine and law rather than a general grant to universities[41]. Special incentives should be awarded to students to prevent them from dropping out especially girls. Incentives and subsidies are complimentary and with proper implementation the intended beneficiaries would reap benefits out of such a scheme.

[1] Jandhayala B. G. Tilak, Public Subsidies in Education in India, 39 Economic and Political Weekly 343 (2004).

[2] Vijay Paul Sharma, Food Subsidy in India: Trends, Causes and Policy Reform Options page no. 15 (Indian Institute of Management (Ahmedabad): Research and Publications, Working Paper no 4. , 2012).

[3] The Economic Times, ‘Budget 2016: Subsidy Bill cut over by 4% to Rs. 2.31 lakh crore for 2016-2017’ , Economic Times, Feb 26, 2016, at page no.5 , available at http://economictimes.indiatimes.com/news/economy/policy/budget-2016-subsidy-bill-cut-by-over-4-to-rs-2-31-lakh-cr-for-2016-17/articleshow/51192299.cms.

[4] Ashok Gulati and Anil Sharma, Subsidy Syndrome in Indian Agriculture, 30 Economic and Political Weekly 93, (1995).

[5] State of Indian Agriculture 2015-2016, Ministry of Agriculture and Farmer’s Welfare; Department of Agriculture, Cooperation and Farmer’s Welfare; Directorate of Economics and Statistics ,Government of India, 1 http://agricoop.nic.in/sites/default/files/State_of_Indian_Agriculture%2C2015-16.pdf    last accessed on 12^th January 2017

[6] Supra.

[7] Id. at 5.

[8] P. K Joshi and Avinash Kishore, ‘5 changes that may bring agriculture back on track in 2016’, The Financial  Express, published on 13^th January 2016    http://www.financialexpress.com/opinion/reaping-better-agri-growth-in-2016/192951/   last accessed on 12^th January 2017

[9] Manual for Drought Management December 2016, Department of Agriculture, Cooperation and Farmer’s Welfare, Ministry of Agriculture and Farmer’s Welfare, Government of India 3, 109   http://agricoop.nic.in/sites/default/files/Manual%20Drought%202016.pdf   last accessed on 17^th January 2017

[10] Ibid.

[11] Supra note 5

[12] Karthikeyan Hemalathai, Soil Fertility in Tamil Nadu reduced by half; says Government paper, The Times of India, June 17, 2015 , available at   http://timesofindia.indiatimes.com/city/chennai/Soil-fertility-in-Tamil-Nadu-reduced-by-half-in-30-yrs-says-govt-paper/articleshow/47697599.cms.

[13] Supra

[14] Ashok Gulati and Sudha Narayanan, Demystifying Fertiliser and Power Subsidies in India,  35 Economic And Political Weekly 784 (2013)

[15] Key Facts about Subsidy Policy in India Today, General Knowledge Today  http://www.gktoday.in/blog/key-facts-about-fertilizer-subsidy-policy-in-india/   last accessed on 17^th January 2017

[16] Supra

[17] Dr. Hiral Sheth, Changing Trends in the Healthcare Sector in India, 3 Abhinav International Monthly Referred Journal of Research in Management and Technology 42, 43 (2014).

[18] Id.

[19] Id.

[20] Id.

[21] The National Health Policy Report (NHP) in its report in 1999 stated that the rate of public expenditure in medical facilities declined 1.3% in 1990 to 0.9% in 1999. Health expenditure has declined from 3.3% in the First Plan to 2.09% in the Tenth Plan.

Oommen C. Kurian, Financing Healthcare for All in India: Towards a Common Goal, Oxfam India 5, 11   https://www.oxfamindia.org/sites/default/files/WP-Financing-Healthcare-for-All-In-India-29-05-2015-EN_0.pdf   last accessed on 18^th January 2017

[22] Praveen Jha and Subrat Das, India’s Fiscal Policy Space for investing in Children  page no. 18 (UNICEF Working Paper Studies, 2010).

[23] Supra 

[24] Indian Chamber of Commerce and Pricewater House Coopers Publications September 2012, Healthcare Infrastructure and Services in India: Operation and Challenges 1, 3   https://www.pwc.in/assets/pdfs/publications-2012/healthcare_financing_report_print.pdf    last accessed on 18^th January 2017

[25] Supra

[26] Report of the National Commission of Macroeconomics and Health, National Health Profile (2016) – Central Bureau of Health Intelligence

[27] Id.

[28] Elizabeth Smith, Ruairi Brugha and Anthony Zwi, Working with Private Sector Providers for Better Health Care: An Introductory Guide, London School of Hygiene and Tropical Medicine publications  1, 37   http://www.who.int/management/partnerships/private/privatesectorguide.pdf   last accessed on 18^th January 2017

[29] Supra note 25

[30] Chandra M. Gulhati, Marketing of medicines in India: Informing, influencing or inducing?, 328 British Medical Journal 778, 779 (2004).

[31] Supra note 29

[32] Supra note 31

[33] Ajay Mahal, Policy Implementation of the Distribution of Public Subsidies on Health and Education: The case of Karnataka, India, 49 Comparative Education Review.

[34] Supra

[35] Emmanuel Jimenez, The Public Subsidization of Education and Health in Developing Countries: A Review of Equity and Efficiency 1 The World Bank researcher Observer , 35 (1986).

[36] Supra

[37] M. Govinda Rao, Subsidies in Higher Education, 28 Economic and Political Weekly 891, 892 (1993).

[38] Lant Pritchett, Research on Improving Education Systems Working Paper 15/005 – Creating Education Systems Coherent for Learning Outcomes (December 2015)  http://www.riseprogramme.org/content/rise-working-paper-15005-creating-education-systems-coherent-learning-outcomes     last accessed on 24^th January 2017

[39] Jandhayala B G Tilak, Public Subsidies in Education in India, 24  Economic and Political Weekly 343, 344 (2004).

[40] Josh Freedman, ‘Why we need the Government to play an active role in Higher Education Finance?’ Forbes Magazine, Sept. 4, 2013, at 43

[41] Supra