Subsidies aren't best weapon to tackle poverty: Economic Survey

Price subsidies did not have a transformative effect on the living standards of the poor, though they helped poor households to weather inflation and price volatility, the Economic Survey for 2014-15 revealed Friday, adding the rich often get benefits from it.

"A close look at price subsidies, which are estimated to be about Rs.378,000 crore, about 4.24 percent of GDP (gross domestic product), reveal that they may not be the government's best weapon for fighting the poverty," said the Economic Survey for 2014-15.

Dwelling upon various subsidies to the poor, the survey, which was tabled by Finance Minister Arun Jaitley in parliament here Friday, even stated that these are often regressive.

"An analysis of the current subsidy scheme indicates that rich households benefit more from the subsidy than a poor household," it said.

Among various examples that it had dwelt upon, the survey said subsidy on electricity can only benefit the relatively rich.

It said recent academic research on Public Distribution System (PDS) leakages (kerosene, rice, wheat) has found that these are falling but are still unacceptably high. Kerosene leakage was to the tune of Rs.10,000 crore, for rice Rs.5,800 crore and for wheat Rs.12,600 crore.

"Converting all subsidies into direct benefit transfers is a laudable goal of the government policy," it added.

"Recent experimental evidence documents that unconditional cash transfers - if targeted well - can boost household consumption and asset ownership, reduce food security problems for the ultra-poor and opportunities for leakage," the survey said.

The survey, however, concluded that eliminating or phasing down subsidies is neither feasible nor desirable. 

"By adopting what it called the JAM Number Trinity - Jan Dhan Yojana, Aadhaar and mobile numbers - would allow the state to deliver the subsidies to poor in a targeted and less distorted manner," it added.

The survey provided some statistics that show price subsidies are not helpful for transformation of living standards.

** Price subsidies are often regressive said the survey: It means that a rich household benefits more from the subsidy than a poor household.

. Price subsidies in electricity can only benefit the (relatively wealthy) 67.2 percent of household that are electrified.

. The poorest 50 percent of household consume only 25 percent of lPG.

. Majority (51 percent) of subsidized kerosene is consumed by the non-poor and almost 15 percent of subsidized kerosene is actually consumed by relatively well-off (the richest 40 percent).

. A large fraction of price subsidies allocated to water utilities - upto 85 percent - are spent on subsidizing private taps when 60 percent of poor household get their water from public taps.

. Controlled rail prices actually provide more benefits for wealthy household than poor households.

** The survey said price subsidies can also distort markets:

. This contributes to food price inflation that disproportionately hurts poor household who tend to have uncertain income streams and lack the assets to weather economic shocks.

. High MSPs and price subsidies for water together lead to water-intensive cultivation that causes water tables to drop, which hurts farmers, especially those without irrigation.

. In order to cross subsidise low passenger fares, fright tariffs in railways are among the highest in the world. This reduces the competitiveness of Indian manufacturing and raises the cost of manufactured goods that all households, including the poor, consume.

. Benefits from fertilizer price subsidies probably accrue to the fertilizer manufacturer and richer farmer, not the intended beneficiary, the farmer.