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Subsidies Have theyDisadvantaged the Poor?

Pradeep SinghPresident & CEOIL&FS Infrastructure Development CorporationNew Delhi, India

The views expressed in this paper are the views of the authors and do not necessarilyreflect the views or policies of the Asian Development Bank (ADB), or its Board of Directorsor the governments they represent. ADB makes no representation concerning and does notguarantee the source, originality, accuracy, completeness or reliability of any statement,information, data, finding, interpretation, advice, opinion, or view presented.

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EIRR

Subsidy is not a Dirty Word

FIRR

The Case for Subsidies

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Subsidies and Cross SubsidiesSubsidies and Cross Subsidies

Government

Company

subsidyoperational

Tariff belowcost

Rich & Industrial ConsumersTariff abovecost

Cross subsidy

Poor Consumers

DirectSubsidy

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Subsidies Can Be Economically EfficientSubsidies Can Be Economically Efficient

Subsidies do not always lead to misallocation ofresourcesUnder positive externalities, subsidies can lead tobetter allocation

Differential pricing under cross subsidies can beeconomically efficient

Airlines

Toll Roads

Water Distribution

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Water Subsidy in India

St at e Subsidies : US$1.1 billion per year

Equivalent to 0.5% of the GDPBUT How well do the water subsidies perform in India ?

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Subsidies Reach Everyone but the Poor

Indiscriminate Untargeted Subsidies

Subsidy resources used for private taps: 90-95 %

Private tap owners above poverty line: 70%

Subsidy captured by the non-poor: 70%-80%

Public Taps most Effective But subsidies used to finance public taps: 5% - 10%

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Subsidy Led Vicious Cycle

Lack of BudgetaryLack of BudgetarySupportSupport

Poor QualityPoor QualityProvisioningProvisioning

Deterioration ofDeterioration ofExisting AssetsExisting Assets

Massive losses toMassive losses to

economyeconomyEffect s of non

recovery offu ll cost

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Solution Better TargetingTWO APPROACHES

1. Targeted Consumption Subsidies

2. Targeted Connection Subsidies

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Solution Targeted ConsumptionSubsidies

Three income proxies to allocate subsidies

1. Modified Increasing Block Tariffs

Reduce size of the first block

2. Geographic TargetingDesignated slums or colonies

Where at least 60% of the residents live below poverty line

3. Individual TargetingIdentify convenient variables that are good indicators ofindividual poverty

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Incremental Block TariffsIncremental Block Tariffs

I ncreasing Block

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Targeted ConsumptionSubsidies - Implications

Modifying the IBT does not Address the Issue

Difference in average water consumptionbetween poor and non-poor is only approx 20%

No one gets much subsidy

Both Geographic and Individual Targeting improveperformance

But, large percentage of the poor get excluded Individual targeting has high administrative costs

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Connection subsidies prove easier to target the poor

Much higher concentration of poor people among theunconnected population

As shown by a Bangalore study, even untargeted connectionsubsidy performs better than the existing IBTs

The percentage of the poor left out of subsidies declines

The percentage of the rich getting the subsidies declines

Solution Connection Subsidies

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Properly targeted water subsidies can be usefulHowever, typically water subsidies are very poorly targeted atthe poor. The non-poor benefit most

Huge subsidies deprive the water sector of much neededresources to expand and improve services. The poor sufferthe most as a result

Consumption subsidies are very unlikely to be effective inincluding the poor and excluding the non-poor

Connection subsidies are considerably more effective byincreasing coverage of the poor

Five Propositions

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A subsidy is like a surgeons knife

If not wielded properlyit can killthe patient

Careful with the Subsidies!!

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Thank You