Introducing a sunset clause in all central government subsidies, and holding a large-scale two-year pilot program on direct cash transfers.
In the Financial Year 2012, the total central government subsidies accounted for INR 190,015 crore of government expenditure (approximately 2 percent of GDP). This is expenditure that is used for sustaining the country, and does not contribute to the development of the country. In addition, the amount borrowed for subsidies accrues interest, which is an additional amount that is taken away from the development of the country. Subsidies are not targeted, and therefore the middle class is a large unintended beneficiary of the subsidies. India’s current fiscal deficit at 5.9 percent does not allow us the leeway to continue with the high amount of non-targeted subsidies. Food and fuel subsidies account for 49 percent of total subsidies.
Therefore, my first proposal on subsidies is to introduce a sunset clause – a ten-year progressive decrease in subsidies to zero, that is, a reduction in subsidies of ten percentage points every year for the next ten years. This proposal is bound to face opposition. To offset this opposition and have a sustainable targeted safety net program in India, my second proposal is to hold a two-year large-scale pilot of direct cash transfers to the poor in multiple states.
Conditional cash transfers have been successful in poverty alleviation in countries in Latin America and Africa. What makes it challenging in India is the high population density and difficulty in tracking conditionality. On unconditional cash transfers, the sample data points are fewer in number and the available data is less convincing. However, both programs provide a more sustainable means of social welfare than untargeted subsidies.
Abhimanyu Sanghi is a Delhi-based investor and a classical liberal.
(The above piece was written by Abhimanyu in April 2012, as a student of The Takshashila Institution.)