Post on 04-Apr-2018
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7/31/2019 Subsidies Have they Disadvantaged the Poor?
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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