PM’s ‘revdi’ remark: We need to disentangle good subsidies from bad

Source: This post is based on the article “PM’s ‘revdi’ remark: We need to disentangle good subsidies from bad” published in the Indian Express on 22nd July 2022.

Syllabus: GS 2 – Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Relevance: India’s subsidy burden.

News: Recently, the Prime Minister has called for an end to this free “revdi” (freebies) culture. This shows curbing freebies may now be a policy priority.

What are various types of subsidies?

Technically, a subsidy is the unrecovered cost of any service (or good) provided by the government. The deficit between the receipts and expenditure of a government department in providing a service is the unrecovered cost of providing that service. This is a subsidy.

Freebies mean different things to different people. Separating this mixed bag is important for making policy. For instance,

Highly visible and discussed freebies: The most notable freebies include, free televisions distributed in Tamil Nadu, free cycles distributed in Bihar, and laptops distributed in Uttar Pradesh.

Other visible subsidies: The highly visible and discussed freebies are fiscally insignificant compared to the much larger subsidies on food, fertiliser and petroleum.  These “visible” subsidies in government budgets remain a major source of fiscal stress.

Invisible subsidies: These include especially in state government budgets, not always recognised as such, but which are also very large.

Other subsidies: These include freebies of pure cash grants for poor households.

What is the status of the subsidy in India?

Subsidy-GDP link: According to a study, the volume of subsidies as a proportion of GDP comes down with rising per capita incomes. For instance, The total volume of subsidies came down from 13% of GDP way back in 1987-88 to a little over 10% by 2015-16.

Major provider: State governments provide the bulk of these subsidies, mainly for social services like education and health. The central government accounts for less than 30% of total subsidies, provided mainly for economic services including food.

Which subsidies should India eliminate?

India should allow “merit subsidies.” These are essential for the public interest. These include subsidies on 1) food, 2) education and health services, 3) water supply and 4) sanitation have large benefits for society.

These four “merit” subsidies account for only a third of total subsidies. Thus, two-thirds of total subsidies, about 6% of GDP, are unwarranted freebies or non-merit subsidies which should be eliminated.

Why does India need to eliminate non-merit subsidies?

Phasing out these unwarranted freebies, along with much of the tax exemptions and concessions will amount to about 5% of GDP. That would free up huge fiscal space for the government.

This would enable a massive reduction in the combined fiscal deficit of the Centre and the states, while at the same time stepping up required expenditure on education, health and infrastructure.

Can India provide “Universal Basic Income”  instead of non-merit subsidies?

These demands are supported by global corporate leaders like Mark Zuckerberg as well as leading economists and think tanks.

Schemes like MGNREGA and other schemes in the states pay much less than the minimum wage, they obviously cannot raise rural wages beyond what is the legal minimum wage anyway.

A randomised control trial (RCT) by SEWA in Madhya Pradesh shows that small cash support provided in the villages will was spent primarily on seeking better education for children, repairing dwelling huts and supplementing the very meagre diets of these poor households. Hence, India should implement UBI.