Wednesday, January 1, 2014

Anna, AAP and subsidy

In cyclone everything gets destroyed, well this is not the case with what happened in April 2011 in India. India won the ICC world cup that month nevertheless it was the month that triggered the cyclone in India to challenge the mundane and ‘’chalta hai’’ culture of India. Yes it was Anna Hazare’s movement. It resulted in lokpal which became an act today (01/01/2014) with Presidential consent. Well the debate on quality may lead to politicization of my article which I would avoid. Coming back to moment, some parted ways with Anna Hazare due to differences in the way the goal should be pursuit. The result was AAP! A young  (by political standard) dynamic person who earlier resigned from prestigious Indian Revenue Services to join 
Anna was now the founder of AAP.

People may differ from the ideology of congress BJP or AAP but no one can deny that AAP has indeed made a very good approach in changing the attitude of politicians. Normally we have seen big guns of big parties used to tacitly approve the misdeeds of local leaders as these people assured the parties a big vote bank. But with AAP coming into picture all of them were forced to rethink their strategies. BJP changed from Vijay Goel to Dr Harshwardhan! Again I would not like to go in detail even on this as this would raise moles from all parties including AAP.

The purpose of writing this piece is to know about subsidies. So why does the word ‘’subsidy’’ raises so much furore? Is it good or bad?

Well remember nothing is absolute good or bad it depends only on the motive. The great Albert Einstein gave you theory on relativity, it is applicable in every field of life! Don’t forget the frame of reference while saying good or bad!  Subsidy raises eyebrows because one has to pay for others. Subsidy is necessary evil just like the friction! It is like extending your hand to help others. WTO has raised subsidy issue in different way. In certain goods it wants the government to abandon input subsidy and go for output subsidy eg: let the farmers buy fertilizer at market price and provide subsidy on the output instead of subsidizing fertilizer. Now you may think why do this? Well if we reduce the price of fertilizer then with reduction in price the demand of fertilizer goes up and hence farmers use more fertilizer resulting in (long run) decrease in productivity of land. India too is facing the same issue.

India provides the other kind of subsidy also like in the case of petroleum products. The government doesn’t pay from its pocket when you buy petrol diesel or LPG. What government does is that it reduces it taxes, say for car tax is 15% then for petroleum product it will charge 10% and say it is providing the subsidy of 5%. Remember the government is not providing the product below the Cost Price + Profit of companies, it just reducing its share of tax! The other subsidy is say government buying food grains at Rs 20 per KG and providing it to poor at say Rs 2. The second subsidy can be justified for food grains, lifesaving medicine and other extremely necessary items. Even public goods (economic term) like road bridges etc are designed in such a way that it recovers its cost!

AAP is headed by an extremely abled person we all aspire to be like him at least academically one may differ from his politics. Recently they have announced water subsidy and electricity subsidy. I hope it is not populism and based on sound economic base. Like in Amravati people are getting water supply 24 X 7 and they are paying it willingly (I am attaching the news article link below, article is written in 2012 till then 20% got this facility and rest work was in progress). So if they can pay why cant Delhi? Even forget about that if one is using above 20KL then one has to pay for it. It means one has to bear the cost of subsidy for those who are using 20KL. But why would one bear it since it is above the bare min limit? Moreover I believe that min cost should be applied and make Delhi Jal Board (DJB) economically viable. The DJB is headed by an IAS, I think it should be headed by management person (say MBA) than an administrative person. It is all together a different issue who should head it I will write another blog on it.
Coming back to electricity, I think if the cost of electricity production is say Rs 3 per unit then it should never be sold below Rs 3. Why would anyone pay for subsidy on electricity that is higher than bare minimum consumption?

Maximum a government should do is that it can reduce its service tax and provide subsidy like the central government provides in petroleum. Only in this way I believe the electricity board can be sustainable. Unnecessary subsidy below the cost of production is not good. In Ahemdabad a unique smart grid pilot project is going on that can also be studied.
Above all Delhi CM is much learned and apt hope he might have come across the points that I have raised but I failed to see such points raised by leading media and hence made me confused on the issue!