Flattering to deceive

Given that the government has just cleared a massive expenditure programme on providing guaranteed employment in rural areas despite all the evidence showing that 70-80 per cent of all pro-poor benefits never reach the target groups, it’s difficult to understand why the National Institute of Public Finance & Policy (NIPFP) was ever asked to do an analysis of the rapidly increasing central government subsidies.

The fact that, unlike the last time around in 1997, when too P Chidambaram was finance minister, NIPFP has been asked to confine itself to only central subsidies, which are just a third of the total provided by the Centre and the states (based on NIPFP’s 1997 discussion paper) is also curious and strengthens the view that the government may not do too much.

After all, while NIPFP’s latest study documents how central subsidies have worsened dramatically since the mid-90s (they improved from 4.5 per cent of GDP in 1987-88 to 3.5 per cent in 1996-97) and rose to around 4.2 per cent of GDP in 2003-04, this is a lot less dramatic than the earlier NIPFP number, which showed that central and state government subsidies added up to 14.4 per cent of GDP in 1994-95.

While the rise in subsidies is alarming—between 1999-00 and 2004-05, explicit subsidies from the central government have risen by about 80 per cent—what’s more shocking is the decline in recovery rates in certain high-expenditure areas.

At a time when private citizens are willing to spend a lot more on educating their children, the government is getting a lot less from the education services it provides.

In 1994-95, the central government was able to recover 0.21 per cent of what it spent on elementary education but this has fallen to zero in 2003-04. Its recovery has fallen from 9.6 per cent on public health to 4 per cent and from over 12 per cent on water supply and sanitation to 0.1 per cent.

A comparison of NIPFP’s two reports, however, shows some positive trends as well. Though the reports are not strictly comparable since NIPFP has changed its definition of “merit” and “non-merit” subsidies—non-elementary education expenditure was considered “non-merit” in the 1997 report but is classified as “merit II” now, as is sports and family welfare, among others— there is a discernible improvement in some recovery rates.

Indeed, while the ratio of merit to non-merit subsidies (on a roughly comparable basis) was between 1:4 and 1:5 for the central government in 1994-95, it is roughly 1:2 today.

And, as compared to a “recovery rate” (the amount paid for a service by citizens as a proportion of its cost) of 12 per cent for “non-merit” sectors, recovery rates have shot up to over 45 per cent.

In the non-petroleum power sector, for instance, the recovery rate was 37 per cent in 1994-95 and this is up to over 44 per cent while for transport this has gone up from under 15 per cent to 27 per cent.

If such a change can take place without much protest, surely the scope to increase this in other areas must be quite high as well. This, of course, is where the issue of political will comes in.

The NIPFP report makes it clear that over 40 per cent of fertiliser subsidy goes to producers and not farmers, for instance, and that a correct pricing of fertilisers would lead to only a marginal decline in food production, but getting an avowedly “aam aadmi” government to move on this appears to be asking for the moon.