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Is Subsidizing Basic Amenities a good Long Term Policy?

This article is the analysis of the results of the Saturday Poll posted on India Institute’s Facebook page on 4 January, 2013 which asked the above question.India Institute

The AAP government in Delhi has already made good their promise of 700 litres of free water per day per household and halving the electricity tariffs. This policy choice has come for appreciation as well as criticism. The supporters of the policy argue that the provision of these services now allows several citizens to finally get their fair share of basic amenities and frees them from the clutches of the water mafia and corruption. At the same time, several experts believe that this could have detrimental effects in the long run. Not only would cases of meter tampering increase but such subsidies cannot be sustained without increasing the tax burden, which in turn will encourage tax evasion.

36% of you had said yes, while the remaining 64% said no, it was not a good long term policy. No doubt some people who cannot afford water and electricity bills will benefit from these measures but only for a short while. Fulfilling the promise of 700 litres of water and subsidizing electricity has so far proven to be a good political move, but economically it is tough to argue as sensible. Because nothing really comes free of cost. Someone has to bear the cost of the subsidies provided by the government. The AAP came to power saying all problems would be solved by eradicating corruption. Can the government produce electricity and potable water at zero cost by eradicating corruption? If yes, fantastic. If not, it will have to find ways to cover the expenses. And there are primarily only two ways of doing that. One, by increasing taxes on goods and commodities, and two, by reducing expenditure on development projects. In essence, the price for the free water and subsidized electricity will either be increased taxes or foregoing some development. Most commonly the government undertakes the first option of increasing taxes to bear the cost of its subsidies. The tax payers suffer loss more than gain.

Moreover, it is not only the rich but also the poor who would end up paying for the subsidies through indirect taxes in the form of increased value added taxes and service taxes. It can also lead to other serious problems like tax evasion, more corruption and black money. Taking the second option into consideration, the government may not burden the tax payers but then it will have to compromise on public expenditure that would have been incurred on other development projects. This route will result in a loss of employment opportunities and social development in the long run. It is the duty of every government to take into account the interests of the public and their welfare, but it should never lose sight of the fact that only a policy with a long term vision solves a problem. Other measures just postpone tough decisions until continuing those measures become completely unviable. Sadly, losses would have accrued so much by then that just getting back to the original status involves painful reforms. Therefore, as in health, it is better not to go for short term solutions which come with serious side effects that become bigger problems than illness.