By Sanuj Shah
“Subsidies are good for politics but disastrous for economics.”
After the wave of protest against corruption at the Ramlila Maidan, it was time for the tortoise to beat the rabbits(s) of Indian Politics. The experts had put their money on the veteran only to realize that their conjectures had gone horribly wrong. The Aam Aadmi Party had done everything right till they sat on the hot seat. A series of economic reforms introduced by them, within hours of taking charge, might have grabbed the limelight but it could soon turn into a nightmare for their very own “aam aadmi.” To quote George Bernard Shaw, “pluck and impetuosity are good servants in war, but bad masters.” AAP’s reforms like removing the VIP culture in the national capital, establishing an anti-corruption helpline number and bringing back Gandhinian politics by holding ‘dharna’ against the Delhi police might have received a mixed response but their economic reforms have definitely caught the eye of the common man. Slashing the electricity rates by half, a promise to provide free water to all the households in the national capital and the removal of FDI in retail in Delhi have been their present approach or rather a lack of approach to economic policy.
First things first, giving cheap electricity to consumers has certain tinkered with the price mechanism. To throw light on the power sector in Delhi, the production companies are currently running on losses worth Rs.11000 crore. It is no rocket science to understand that the effects reduced the prices while the costs remain unchanged. To make things simpler, let us look at the cost structure and cost allocation in each electricity bill of an average household in Delhi. A look at the electricity bill shows numerous constituents like Energy Charges, Fixed Charges, Fuel Adjustment Charges, tax on sale of electricity, electricity duty, Wheeling charges and delayed payment charges. Though these constituents are almost the same across the country, statistics show that the energy charges (which are the number of units multiplied by the cost per unit) not only constitute the major part of the bill but are also one of the highest in the country. AAP believes that electricity is severely over-priced and therefore there is room for a price cut. However the party fails to understand simple problems of suppliers in Delhi which have to buy electricity from production companies and also have to incur wheeling costs. Going by the law of demand, a fall in prices is likely to increase the demand in the market. Moreover the higher middle income and high income people will have the incentive to use more electricity. Thereby adding to the wastage and leakage of electricity.
The subsidy program will distort the production mechanism and the cost-price matrix. Giving subsidies to farms for futile jobs like digging just for the sake of giving a wage doesn’t affect the price mechanism. Agreed that the minimum support price does distort the market price of cereals but given the differences to deal with, it is not as serious as the power sector which is a commercial venture. Therefore this policy of APP will be a regressive policy as the restructuring of the power sector will have a setback. With lower revenues for the already loss- making companies, it will be nonviable for them to carry on business in the future.
AAP has also promised the supply of free water to every Delhi household. Their twin policy aims at supplying 700 liters of free water coupled with an increase in the price of water. This means that a household using water beyond the stated limit will have to pay for the entire 700 liters plus the additional usage. This cross subsidy policy by the new government aims to cover up the subsidy expenditures through increased usage by extravagant consumers. However, there is a multiplicity of administrative and economic flaws in the same. To begin with the administrative difficulties, the Aam Aadmi Party first needs to ensure that the water supply is sufficient to meet the specifications of their promise. It also means that they need to ensure that every household becomes a part of the water grid. Furthermore, the clause which states that the consumers will have to pay for the entire 670 liters if they consume even a liter more is sure to lead to faulty and tampered water meters.
Economics says that at the end of the day nothing comes free of cost. Someone has to pay for all the free water that is being supplied. After all, supplying water costs money – the physical infrastructure and the human resources to say the least. If not the consumers, then the tax-payers should feed the government treasury. It’s a myth that only the rich suffer because of the country’s tax system. Even the poor do. Every commodity they purchase comes at a price which includes indirect taxes like Value Added Tax and Service Tax. These indirect taxes that form a substantial part of the Delhi government’s revenue are not progressive at all. This means that the poor who are without piped connections will end up paying a subsidy for the rich. Did someone say that these policies are directed for the benefit of the “aam aadmi”?
Coming down to their last major decision to roll back the FDI in retail. This step has jeopardized India’s reputation in the world community. The last government had given a go ahead regarding FDI in retail only to see the over enthusiastic AAP overturn Congress’ policy. All that is shown to the world is that India cannot be trusted and any legislation made is susceptible to change with the change in the government. The self-proclaimed bastion of ethical politics, AAP should carefully analyse the feasibility of promises they make. It is one thing good to bring about change and think about the common man but it is another thing to be foolish. Careless populism has graver consequences. The short lived pro-people politics will definitely come back to haunt the common man. It is time to reconsider the economic feasibility of all the promises made. AAP has surely created a political stir. They are blowing the bubble of popular politics. It is not long before this bubble will burst and again it will be the “aam aadmi” who will be on the receiving end.