Economic Survey pegs Subsidies to the Well-Off at Rs 1 Lakh Crore

The direct and indirect subsidies to the poor and disadvantaged are often debated in the
budget season. There are also demands to cut down subsidies and focus on targeting.
But there are also policies that benefit the well-off sections of society. The Economic
Survey for 2015-16 has a dedicated chapter on the policies that benefit the well-off. The
policies include tax benefits for small savings schemes and the tax/subsidy policies on
cooking gas, railways, power, aviation turbine fuel, gold and kerosene. The Economic
Survey estimates that all these policies together account for Rs 1 lakh crore in subsidies
to the well-off. The survey also finds that the tax incentives benefit those at the top of
the income distribution more than the middle class. The chapter is included in the survey
to show that the Governments generosity is not restricted to its poorest citizens, but
many cases, the beneficiaries are disproportionately the well-off sections of society.
The Not So Small Savings Schemes
The Economic Survey mentions that Public Provident Fund (PPF) and tax-free bonds
issued by designated public sector companies like IRCL, IIFCL, PFC, HUDCO, NHB, REC,
NTPC, NHPC, IREDA, NHAI and others are contributing to the subsidies extended to the
well-off. The survey argues that savings schemes ideally should follow the EET (Exempt,
Exempt, Taxation) model of taxation, which means that the contribution and the interest
on these savings should be exempt while principal should be taxed when it is withdrawn.
Contrary to this, the PPF in particular follows an EEE model where all the three
components are exempt.
Government data also indicates that the highest claim under Section 80C of the IT act is
made by those in the 30% and 20% income tax bracket. The survey also says that
raising the limit of this exemption to 1.5 lakh also disproportionately benefitted those in
the higher tax bracket. In 2013-14, the average income in the 30 percent tax bracket
was Rs 24.7 lakh and these earners were roughly 25 lakh in number (1.1 percent of all
taxpayers) and are in the top 0.5 percent of overall Indian income distribution. Similarly,
the 54 lakh income earners in the 20 percent tax bracket represented the top 1.6
percent of the Indian income distribution.
The survey estimates the implicit subsidy of PPF at Rs 11,900 crore while the subsidy
under Tax-free bonds is about Rs 111 crore.

Other Subsidies
The survey makes a mention of other subsidies such as Gold that has one of the lowest
rates of tax (an average of 1%) while most other normal commodities are taxed at 26%
(including Central & State taxes). This difference of 25% in tax mostly benefits the well-
off and 98% of this subsidy is accrued to them.
For other goods, the survey estimates that the well-off enjoy a subsidy rate of 34% in
Railways, 36% on LPG and 32% in Electricity. The difference of more than 30% in the
tax rate of Aviation Turbine Fuel (ATF) and Petrol/Diesel also significantly contributes to
the subsidy for the well-off. The survey also mentions that half of the Kerosene subsidy
goes to the well-off.
The Richs share of consumption of these commodities is also disproportionately high.
The survey categories the Poor as the bottom 30% of the population and rich as the top
70% divided based on the expenditure distribution of the National Sample Survey Data.
98% of Gold, 100% ATF, 98% Diesel, 95% Petrol, 92% of Railways, 91% of LPG, 84%
of Electricity & 49% of Kerosene is consumed by the rich.
Total Subsidy for the Well-Off
The survey goes onto say that the effective subsidy to the well-off is not just the actual
subsidy or tax on that commodity, but the difference between what the tax burden on
that commodity should be on the rich and the actual subsidy/ tax rate. Based on
normative tax rate for various commodities, the survey estimates the total subsidy to the
well-off to be more than Rs 1 lakh crore.
The survey argues that the Rs 1 lakh crore of subsidy going to the better-off merely on
account of 6 commodities plus the small savings schemes represent a substantial
leakage from the governments kitty and an opportunity foregone to help the truly
deserving.

Cautious on subsidies, lukewarm to direct benefit transfers (DBT)

The Budget has made a provision of Rs 2,43,810.98 crore for 2015-16, which is below
the revised estimates of Rs 2,66,691.84 crore for the current fiscal. But this reduction is
entirely on account of petroleum subsidy, which is projected to fall by over Rs 30,000
crore mainly courtesy lower global oil prices.
On the other hand, subsidies on food and fertilisers are set to go up. This reflects over-
caution when it comes to big-ticket subsidies. It appears the government does not want
to extend DBT beyond LPG cylinders or scholarship schemes, said Ashok Gulati, former
chairman of the Commission for Agricultural Costs and Prices.
According to him, the over-caution with regard to food and fertiliser subsidy wasnt good
for Indian agriculture. The farm sector grew by 4.1 per cent during the 11th Five-Year
Plan period (2007-08 to 2011-12).
The last three years have seen average growth of 2 per cent. At a time when crop
prices are falling, the focus should have been on reducing cultivation costs, requiring a
redirection of spending from subsidies to public investment in farm R&D, rural roads and
other infrastructure, Gulati said.
The Budget has kept the fertiliser subsidy for 2015-16 virtually unchanged from the
current fiscals levels. That by itself indicates no plans as of now to increase maximum
retail prices. This is more so in the case of urea, where there were expectations of a
phased programme of decontrol with a fixed per-tonne subsidy as in other fertilisers, an
industry analyst said.

But the fertiliser industry is not happy. We will be ending this fiscal with outstanding
subsidy dues of Rs 40,000 crore. The budgetary provision of under Rs 73,000 crore does
not take care of this. Overall, it is a disappointing budget, Satish Chander, Director
General, Fertiliser Association of India, told The Indian Express.
Similarly on food, there has been no attempt to implement any of the recommendations
of the Shanta Kumar high-level committee for restructuring of the Food Corporation of
India.
But going by the provisions in the Budget Rs 1,24,419 crore, of which Rs 64,919 crore
is towards the implementation of NFSA there is no move to implement either the
Shanta Kumar panels report or DBT. In this case, too, the subsidy provided will not be
enough to cover the estimated outstanding dues of around Rs 50,000 crore owed to the
FCI as on March 31, 2015.

Direct benefit transfer only way to cut govt's subsidy burden

Subsidy is one expenditure that the governments in India find difficult to cut. It is
understandable, considering 33 percent of the world's poor live in India.
Prime Minister Narendra Modi has time and again said that his government is for the
poor in the country. The government did not even bat an eyelid while vetoing the global
trade talks, where the rich nations insisted on capping India's food subsidy.
India's action had antagonized the rich nations, but Modi held his ground.

However, the government's stance in the subsidy issue has been against the free market
principles, which advocate drastic cuts in such expenditure. The key ingredients in
India's subsidy are fuel, fertiliser and food. While the government has already taken
steps to reduce fuel subsidy by freeing petrol and diesel prices, the other two continue to
be heavily subsidised.
"We need to bring agricultural subsidies everywhere under discipline and to object to
that for India is to believe that our agricultural sector will remain forever in need of price
support. This defeatist assumption also was responsible for our dragging our feet on
special protectionist safeguards for our agriculture earlier," renowned economist Jagdish
Bhagwati told Business Standard in an interview. He was reacting to a question on
India's stance on WTO talks.
Those who argue against subsidies say that these are wasteful spending since they never
reach the targeted group due to leakages in the system. It is the rich who are enjoying
the benefits as lower priced food, fuel and fertiliser are diverted to them. That is the
reason poverty is not getting eradicated though the subsidy spending is rising at a
scorching pace, they say.
A look at the graphics below shows their contention is true:

Over the last 10 years, subsidy pay out of the government has witnessed a steady
increase from Rs 48,000 crore in FY06 to Rs 2.61 lakh crore (budget estimate) in 2014-
15 - an annual increase of about 22 percent on an average. Subsidy as a percent of GDP
also increased almost steadily from just 1.29 percent to 2 percent.
But the figure is scarier when taken as a percent of total expenditure. In FY06, subsidies
accounted for 9.4 percent of total government spending. This rose to a high of 18.2
percent in FY13. As per the revised estimates, this has declined to 16.09 percent in
FY14. In FY15, it is likely to further fall to 14.54 percent of total expenditure, which is
still uncomfortably high.
However, the government is likely to be lucky enough see a drastic reduction in the
subsidy due to the fall in global crude oil prices. A Reuters report quoting government
sources has said that there could be a $8 billion reduction in subsidy burden. But even
this cut will not help. That is because given the elbow room created by the low global
crude oil prices, the government should reduce the burden more sharply.
The only way out for the government will be widening the coverage of direct benefit
transfer or DBT. The scheme rolled out by the erstwhile United Progressive Government
aims to directly transfer the cash benefits into the beneficiary accounts linked to
Aadhaar, thus plugging the leakages.
The government has already introduced the scheme for cooking gas or LPG. It will have
speed up the coverage of the scheme to include all cash benefit schemes.

Indias economic survey pegged growth at more than 8 percent for the next fiscal and
said inflation was now declining, while also setting the agenda for reforms needed to
further drive the expansion, prune wasteful expenditure and promote productive
investment.
Tabled in parliament Friday by Finance Minister Arun Jaitley and authored by a team led
by Chief Economic Advisor Arvind Subramanian, the annual report card on the state of
the economy said the growth should now rise further and double digit expansion was a
possibility.
On inflation, the survey said, there has been a fall of over 6 percentage points since
2013, even as the external sector, which includes exports and inflow of foreign funds,
was returning to a path of strength and resilience. Industrial growth has also picked up
now.
It also had some good news to report on the farm sector. Foodgrain production for year
2014-15 is estimated at 257.07 million tonnes and will exceed that of last years by 8.5
million tonnes.
It also made a case for rationalisation of subsidies and said such doles did not appear to
have had a transformative effect on the living standards of the poor. On the fiscal side, it
said the government was committed to consolidation with revenue generation a priority
Economic Survey 2015-16
The Economic Survey 2015-16 tabled Friday in Parliament exposes a well-kept Indian
secret: The rich benefit more from the government's subsidy and tax incentives than the
poor.
In its analysis of subsidies and tax sops, and the real beneficiaries of these benefits, the
survey explains how rich or well-off Indians benefit in many ways by shrewd tax planning
and anomalies existing in the current system.
Public Provident Fund
The Public Provident Fund (PPF) is a highly popular savings instrument among
individuals, which gives tax-payers the EEE benefit (contributions are exempt up to Rs
1.5 lakh annually, interest is exempt and amount received at the time of
withdrawal is exempt) and is used by Indians in the top two income-tax slabs of 20
percent and 30 percent. Contributions to the PPF are exempt under Section 80C of the
Income Tax Act.
"We can indirectly infer how well-off beneficiaries of the PPF scheme are. Roughly 62 per
cent of total Section 80C deductions in FY 2013-14 were accounted for by taxpayers with
gross taxable income more than Rs 4 lakh (47 percent by those earning more than Rs 5
lakh)," the survey says.
"In sum, the effective returns to PPF deposits are very high, creating a large implicit
subsidy which accrues mostly to taxpayers in the top income brackets. The magnitude of
this implicit subsidy is about 6 percentage points approximately Rs 12,000 crore in
fiscal cost terms," it adds.
Gold
The world's biggest gold consumer has a rather skewed pattern when it comes to
consumption and the benefits thereof. "The 'rich' consume most of it (the top 20 percent
of population accounts for roughly 80 percent of total consumption) and the poor spend
almost a negligible fraction of their total expenditure on it," the survey says.
It then goes on to explain how the tax treatment for the yellow metal is inexplicable.
"Yet, gold is only taxed at about 1-1.6 percent (states and Centre combined), compared
with tax of about 26 per cent for normal goods (the Central government's excise tax on
gold is zero compared with 12.5 per cent for normal commodities.) In other words, there
is a huge subsidy of about 25 percentage points (the difference between average tax on
other commodities and tax on gold). About 98 per cent of this subsidy accrues to the
better-off."

LPG
"LPG consumers receive a subsidy of Rs 238.51 per 14.2-kg cylinder (as in January
2016), which amounts to a subsidy rate of 36 percent (ratio of subsidy amount to the
market price). It turns out that 91 percent of these subsidies are accounted for by the
better-off as their share of consumption of LPG in the total consumption is about 91
percent; while the poor account for only 9 percent of LPG consumption and hence only 9
percent of subsidies go to them. So, this subsidy, aimed at benefitting the poor, is hardly
being used by them," according to the survey.
Other commodities and services from which rich Indians benefit implicity are kerosene,
electricity, railway fares and aviation turbine fuel, according to the survey.

It makes a strong case for removing such anomalies to strengthen the case for economic
reforms, an endevour often seen as politically incorrect from an electoral viewpoint in
India.
There are a fair amount of government interventions that help the relatively-better-off
in society. Addressing these interventions and rectifying some egregious anomalies may
be good not only from a fiscal and welfare perspective, but also from a political economy
welfare perspective, lending credibility to other market-oriented reforms," it says.
"The Rs 1 lakh crore of subsidy going to the better-off merely on account of six
commodities plus the small savings schemes represent a substantial leakage from the
government's kitty, and an opportunity foregone to help the truly deserving," the survey
concludes.
The Union Budget for the FY2016-17 will be presented Feb. 29 by Finance Minister Arun
Jaitley. It will be the third by the BJP-led NDA government after it was voted to power in
May 2014.