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Rich are benefiting from subsidies

Economic Affairs Financial Inclusion
  • Published on: 01-Mar-16
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Rich are benefiting from subsidies
  • There is a need to remove subsidy anomaly in India where the well-off receive an implicit subsidy of more than ` 1 trillion.
  • Taking into account small savings schemes, tax/subsidy on cooking gas, railways, power, aviation turbine fuel, gold and kerosene, the economic 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 subsidisation, which is surprisingly substantial in magnitude.
  • Addressing these interventions and rectifying some egregious anomalies may be good not only from a fiscal welfare perspective, but also from a political economy welfare perspective, lending credibility to other market-oriented reforms.
  • It argued that the ` 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.
  • Rich are also benefit from the EEE or exempt-exempt-exempt tax treatment being enjoyed under the Public Provident Fund (PPF). Survey can indirectly infer how well-off beneficiaries of the PPF scheme are. Roughly 62% of total 80C deductions in FY 2013-14 were accounted for by taxpayers with gross taxable income more than ` 4 lakh (47% by those earning more than ` 5 lakh). These individuals are at the 97.3rd and 98.4th percentiles of the income distribution respectively—hardly ‘small’.
  • Pointing out that gold is a demerit good that is mainly consumed by the rich, so 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).
  • Also why aviation turbine fuel was taxed at only 20% by states as against petrol and diesel which are taxed in the range of 55-61% when a majority of air travellers are well off. Similar arguments can be used on the subsidy for cooking gas and kerosene.
  • Richest 1% in India earned 12.9% of all income in 2012, up from 9% in 1998.
  • The survey showed that 10% of the tax bracket starts at the top 5.8 percentile of the income distribution, 20% starts at top 1.6 percentile of the income distribution, and 30% starts at the top 0.5 percentile of the income distribution.
  • Seeking to correct the anomaly, the government has started the process of streamlining subsidies. It has sought to restrict the cooking gas subsidy to only those whose annual income is less than ` 10 lakh.
  • The government spends nearly 4.2% of gross domestic product on subsidising various commodities and services, the survey said, adding that the phasing out of corporate tax exemptions and implementation of the goods and services tax are steps toward correcting the fact that the rich are benefiting from subsidies.

By: Vishal
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