The rising spending on subsidies by the government of Punjab in times requiring fiscal stringency is an intriguing phenomenon.
Budgetary allocations for subsidies have risen exponentially since 2005-06. In 2005-06, the entire allocation under the head was a paltry Rs0.75 billion. This amount was meant for keeping wheat prices at a ‘reasonable’ level and had hence been branded as ‘wheat subsidy’.
By the current financial year, the subsidy allocation has ballooned to Rs34 billion over a period of just seven years. Break up of the subsidy figure is as follows: Wheat subsidy (Rs27.5 billion), public transport (Rs1 billion), Ramazan package (Rs4 billion) and yellow cab scheme (Rs1.5 billion).
Generally speaking, subsidies have three objectives; to keep down prices, maintain incomes of producers and sustain a service/employment.
Subsidies can, however, be justified in special circumstances only. The justification may, for instance, comprise the need to ‘correct’ externalities and the need to protect budding infant industries. However, subsidies cause the misallocation of resources by distorting market prices and opportunity costs. A sensible option is to pursue the objectives intended to be achieved through subsidies by alternative means. For instance, as often as not, more or less the same objectives may be achieved by direct income support. Recourse to such support is likely to cause much less distortions than direct subsidy. The subsidy regime in Punjab, therefore, demands a serious reappraisal. Where do the subsidies in Punjab stand in economic and social terms?
First, the subsidy on wheat (eating up the largest chunk of expenditure) remains untargeted. It does not stabilises wheat prices. Why can’t the high expenditure be redirected towards provision of direct assistance to the needy? For example, direct cash transfers to households headed by widows and disabled could ensure availability of the staple where most needed.
Second, the heavy subsidy under ‘Ramzan package’ simply means ensuring availability of basic food items (sugar, wheat, dates, etc.) needed during the fasting month at prices below the market rates. Indeed there is a significant assumption implicit in allocating resources for poorly targeted subsidies of a general nature. The assumption pertains to the weak governance mechanisms. The authorities are unable to ensure subsidy to those needing it most.
Third, the subsidy on public transport does seem well thought out. Inducting CNG/diesel buses for public transport benefits the less affluent sections of urban population. It is a reasonable assumption that the less well-off will, if anything, enhance their usage of public transport. Despite the clear benefit, the subsidy on public transport has received the lowest allocation of a paltry sum of Rs1 billion.
While subsidy bill has surged, tax revenue is grossly inadequate for the provincial government’s growing needs of expenditure. It appears that a serious attempt was made for larger revenue collection in 2010-11 when the target was raised from previous year’s Rs49.6 billion to Rs90.1 billion. However, the government ended up collecting less than Rs67 billion which was below three-fourths of the target. Evidently, the failure of tax machinery to deliver on ground has been a discouraging factor and the government has failed to revise the revenue target significantly upwards ever since.
Punjab is just not collecting enough taxes today. This reflects poorly on the quality of governance as well as the much-trumpeted zero political tolerance for corrupt administrative practices.
Being soft on tax collection and keen on tangible subsidies constitutes ‘good’ populist politics. However, such populist political measures in turn reinforce mediocre governance.