Economy Survey: Why Should Rich Benefit From Subsidies?

The well-off in India receive an implicit subsidy of more than Rs.1 trillion, according to the Economic Survey 2015-16, which stresses the need to remove this anomaly. Taking into account small savings schemes, tax/subsidy on cooking gas, railways, power, aviation turbine fuel, gold and kerosene, the survey says that though subsidies are meant for the poor, they are benefiting the relatively well-off.

“There are a fair amount of government interventions that help the relatively better-off in society. In many cases, this help takes the form of explicit subsidization, which is surprisingly substantial in magnitude,” the survey says.  It argued that the Rs.1 trillion going to the “better-off merely on account of six commodities plus the small savings schemes represents a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving”. The six ‘commodities’ are cooking gas, railways, power, aviation turbine fuel, gold and kerosene.

Pointing out that gold is a demerit good that is mainly consumed by the rich, the survey questioned why it was taxed at only 1-1.6%. “Gold is a strong demerit good: the ‘rich’ consume most of it (the top 20% of population account for roughly 80% of total consumption) and the poor spend almost a negligible fraction of their total expenditure on it. Yet gold is only taxed at about 1-1.6% (states and centre combined), compared with tax of about 26% for normal goods (the central government’s excise tax on gold is zero compared with 12.5% for normal commodities),” the survey said, adding that this huge subsidy mainly accrues to the better-off.

“Kerosene makes up about 1% of the consumption basket of the poor; however about 50% of the kerosene given under PDS (Public Distribution System) is consumed by the well-off and the rest by the bottom 3 deciles, showing that half of the subsidy benefit goes to the well-off section,” it said.

N.C. Saxena, former member of the National Advisory Council said an effort has been made for the first time to quantify and classify the subsidy burden. “We talk about subsidy for the poor but do not realize that the rich also benefit from these subsidies. I hope more discussion takes place on this and the budget announces some concrete steps to take this forward,” he said.

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