Finance Minister Arun Jaitley has rolled back the budget proposal that sought to tax withdrawals of provident fund accumulations exceeding 40 per cent. But in his statement, he clearly said the government would like to do a comprehensive review of this proposal.
Does that mean it has been deferred? That may be difficult to say. But as it battles with the task of tapering the most visible of subsidies, like in cooking gas and kerosene, the Modi government finds itself with a new set of hidden subsides that go as “bounties to the well-off”.
The Economic Survey 2015-16, loosely guiding the government's economic policy, described the Public Provident Fund as a “not so small” savings scheme, which results in an “implicit subsidy” of Rs 11,900 crore to the rich (see box). The survey counts it as something contributing to the Rs 1 lakh crore “bounty to the well off”, based on benefits they draw on account of small savings schemes and tax and subsidy policies on cooking gas, railways, power, aviation turbine fuel, gold and kerosene.
Committed as it is to reducing subsidies along with leakages in their delivery, the government began with the Direct Benefits Transfer (DBT) scheme, using Aadhaar as a base. “But it cannot end with the subsidy on LPG. It has to move forward,” said chief economic adviser Arvind Subramanian, as he explained the survey. While public discussion on the issue of subsidies focuses on their importance for the poor, “the Indian state's generosity [of subsidies] is not restricted to its poorest citizens. In fact, in many cases they are disproportionately well-off,” he commented.
With the “success of the DBT in LPG”, as economic affairs secretary Shaktikanta Das sees it, there was reason for the government to reduce subsidies in other areas. “Food and fertiliser subsidies are critical for the economy and have to continue. The focus of the government is to make subsidies more targeted. Diesel and petrol subsidies are gone,” explained Das.
But the “implicit subsidy” which benefits the well-off, said an economic affairs ministry source, would not go away by introducing DBT. He gave the example of the railway passenger fare that Railway Minister Suresh Prabhu left untouched in his budget. “There is a difference between the earning per kilometre and the cost per kilometre,” he said. “If the poor passenger in an unreserved coach benefits 69 per cent because of the low fare, passengers in air-conditioned coaches benefit by about 35 per cent.”
The Economic Survey's estimate of the railways subsidising the rich—passengers other than those in unreserved compartments—stands at 03,671 crore. It points out that the poor consume 9 per cent of the subsidy, and the rich the remaining. While many voices in the corporate sector favoured an increase in train fares to demonstrate commitment to reforms, the government spoke in favour of utilising its assets to raise funds. “Given that the middle class also uses the trains, it is a sensitive subject, and the decision is always political. But a cess is a way out, and an option the government always has,” said a former member of the Railway Board. The pressure brought on the finance minister to roll back the proposal to tax PF withdrawals beyond a limit clearly indicates why Prabhu did not hike the fare.
A senior economist in the government pointed out that the biggest “implicit subsidy” for the “super rich” was the tax-free bonds, where, while the amount is taxed, the returns are tax free. While that may have been true till fiscal 2015-16, Das ruled out any such bonds in the coming financial year. Das said Budget 2016 did not include any tax-free bonds, and cited “the havoc that the interest rates on the tax-free bonds play” as the reason for doing away with them. The Economic Survey estimates the benefits to the wealthy from this to be Rs 111 crore. It is well known that these bonds were mopped up by high networth individuals.
While previously, too, there were suggestions to do away with such bonds, “the idea was dropped because it provided for long-term parking of huge funds within India, directly or indirectly, in government's kitty”a source said. These bonds prevented the flow of funds to the parallel economy.
Delhi resident Mahesh Sahu, who has invested in tax-free bonds, was not even aware that he was the beneficiary of any hidden subsidy. “It was advertised as for everyone. And one did not have to invest a minimum of a crore or anything like that,” is his simple and spontaneous reply. Like Sahu, passengers of an air-conditioned coach in trains don't seem to be aware of cornering away any subsidy.
“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,” said the Economic Survey. But more important than this, for the government, it will lend credibility to market-oriented reforms.
But for now, the government is less inclined to raise fares or redraft tax policies that help the well-off benefit, and is more focused on bringing down total subsidies using DBT. “Reforms to continue,” tweeted Das, as he announced that DBT for kerosene would be rolled out from April 1. Next will be DBT for fertiliser on a pilot basis.