Subsidies in India - Methodology For Estimation of Subsidies in India

Methodology For Estimation of Subsidies in India

Alternative approaches and conventions have evolved regarding measurement of the magnitude of subsidies. Two major conventions relate to measurement through (i) budgets, and (ii) National Accounts. The latter estimates comprise explicit subsidies, and certain direct payments to producers in the private or public sectors (including compensation for operating losses for public undertakings) that are treated as subsidies. This, however, does not encompass all the implicit subsidies.

The estimates of budgetary subsidies are computed as the excess of the costs of providing a service over the recoveries from that service. The costs have been taken as the sum of:

1. revenue expenditure on the concerned service
2. annual depreciation on cumulative capital expenditure for the creation of physical assets in the service;
3. Interest-cost (computed at the average rate of interest actually paid by the respective governments) of cumulative capital expenditure, equity investments in public enterprises, and loans given for the service concerned including those to the public enterprises. The recoveries are the current receipts from a service, which are usually in the form of user charges, fees, interest receipts and dividends.

Mathematically, the subsidy (S) in a service is obtained by:

S = RX + (d + i) K + i ( Z + L ) - ( RR + I + D )

Where:
RX = revenue expenditure on the service
L = sum of loans advanced for the service at the beginning of the period
K = sum of capital expenditure on the service excluding equity investment at the beginning of the period.
Z = sum of equity and loans advanced to public enterprises classified within the service category at the beginning of the period.
RR = revenue receipts from the service
I + D = interest, dividend and other revenue receipts from public enterprises falling within the service category.
d = depreciation rate
i = interest rate

Services provided by the govt are grouped under the broad categories of general, social and economic services.

General services consist of i) organs of state ii) fiscal services iii) administrative services iv) defence services, and v) miscellaneous services. These services can be taken as public goods because they satisfy, in general, the criteria of non-rival consumption and non-excludability. The entitlement to these services is common to all citizens. Since they are to be treated as public goods, they are assumed to be financed through taxes.

Important service categories in social services are i) education consisting of general education, technical education, sports and youth services, and art and culture, ii) health and family welfare, iii) water supply, sanitation, housing and urban development, iv)information and broadcasting, v) labour and employment and vi) social welfare and nutrition.

Under the heading of economics services, the following are included i) agriculture and allied activities, ii) rural development, iii) special area programmes, iv)irrigation and flood control, v)energy, vi)industry and minerals, vii) transport, viii) communications, ix) science technology and environment and x)general economic services.

In the estimation of subsidies these governmental services are divided into three groups:

Group1: all general services, secretariat expenses in social and economics services, and expenditure on natural calamities are included in this subgroup. Being public goods, these are financed out of taxation and are therefore not included in the estimation of subsidies.

Group 2: it consists of services with strong externalities associated with them. In the case of these services, it is arguable that even though the exclusion may be possible, these ought to be treated as merit goods or near-public goods. The provision of subsidies is most justified in this case. Near zero recovery rates in these cases only indicate the societal judgement that these may be financed out of tax-revenues.

Merit social services: elementary education, public health, sewerage and sanitation, information and publicity, welfare of SC, ST's and OBC's, labour, social welfare and nutrition etc.

Merit economic services: soil and water conservation, environmental forestry and wildlife, agricultural research and education, flood control and drainage, roads and bridges, space research, oceanographic research, other scientific research, ecology and environment and meteorology.

Group 3: all the remaining services are clubbed under this head. In these cases consumption is rival and exclusion is possible, therefore cost-recovery is possible through user charges. These services are regarded as non-merit services in the estimation of subsidies.

The distinction between merit and non merit services is based on the perceived strong externalities associated with the merit services. However, it does not imply that the subsidisation in their case needs to be hundred percent. In addition, even if small recoveries are advocated for merit services, the issues relating to the costs of their provision, leakages to non-target beneficiaries, and their effectiveness in attaining the objectives for which they are provided, need to be examined. It also does not mean that there are no externalities associated with non-merit services, or that the subsidies associated with them should be completely eliminated.