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BW Businessworld

Robbing Peter To Pay Paul

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Religion, Karl Marx famously wrote, is the opiate of the masses. He would be surprised how the quest for fairness has now turned subsidies — intended as a tool for equity — into a similarly powerful opiate of the people and an instrument of political power. But power gained through lavishing subsidies on the electorate comes at a stiff price, as Thailand’s populist government is finding out. Parties in power from India to Indonesia, facing elections, too will learn as the bill becomes due and their citizens wise up.

History is replete with examples of subsidies helping parties to win elections, fuelling corruption, and creating great economic distortions. Whether delivered in the form of price supports to rice farmers in Thailand, cheap gasoline to Indonesian consumers or cheap electricity to Delhi residents, subsidies are always offered in the name of a lofty moral and social goal. Who could oppose shielding poor farmers from market volatility by offering them a minimum price — as the Thai and Indian governments have done? Can one begrudge ordinary Indonesians, whose country was once an oil exporter, filling their cars with petrol at below market prices? (But subsidy continued long after the country became a net importer of oil, pushing budget deficit to unsustainable levels.)

Price incentives to Thai and Indian farmers have distorted the grain market. By purchasing the Thai rice at a higher rate than the world price, the government has not only incurred massive losses but also been forced to sit on a large stockpile.  The World Bank estimates the cost of the Thai price support programme at $12.2 billion and all the stimulus packages could bring debt to 2.4 per cent of GDP in 2013. Earlier this month, thousands of protesters in Bangkok disrupted elections to oppose a government which relied on subsidies to win rural votes. Meanwhile, a battered Thailand’s debt ratings have come under threat.

In Indonesia, the heavy cost of fuel subsidies led the country’s current account deficit to rise to 3.7 per cent of GDP. Under pressure from IMF, both Indonesia and Malaysia (which too offered generous fuel subsidy) have been forced to cut back subsidies, pushing up the price of gas at the pump. As elections approach, Indonesia’s President faces the unenviable choice of angering consumers with high prices or producing a huge budgetary hole that will require other painful sacrifices to plug.

India’s Congress-led United Progressive Alliance came to rely on subsidies as the main tool to promote ‘inclusive growth’. The slew of transfer programmes — from right to work and right to food and education to subsidised grain, fuel, fertiliser and gas — has increased the fiscal deficit to over 6 per cent of GDP. Not to be outdone, the anti-corruption Aam Admi Party offered to halve water and electricity tariffs for Delhi residents on the assumption that suppliers overcharged consumers to that extent. It is a new Robin Hood-like subsidy: taking money from companies allegedly overcharging consumers and giving it back in the form of lower tariffs. The problem is that it might take some time for auditors to prove such overcharging actually happened. Meanwhile, the AAP — under pressure to deliver on its electoral promise — may have to resort to robbing Peter to pay Paul, that is taking cash from other programmes to cover the shortfall due to energy suppliers.

The experience of Thailand, Indonesia and India are only the latest examples of subsidy politics gone haywire. This is not to deny that at a given stage of economic development consumer subsidies could help bridge gaps and maintain social stability. But countless studies have shown how subsidies help the rich more than the intended beneficiaries and how politicians turn the handouts as the new opiate. As subsidies rarely come with a sell-by date they are often ended when economic disaster looms or wisened electorate refuse to play the politician’s games and vote for responsible leaders.  

(This story was published in BW | Businessworld Issue Dated 10-03-2014)