Story Of The Week

‘Amma’ Subsidies- Boon or Bane??

Idli at Rs 1, pongal at Rs 5, sambhar rice at Rs 5, curd rice at Rs 3 and two chapatis with dal at Rs 3- at a time of such high inflation sounds like magic. But that is true story at Tamil Nadu’s ‘Amma Unavagam’ (Mother’s eatery). Launched by Chief Minister Jayalalitha in February 2013, the state owned food outlets aim at providing affordable and hygienic food to urban poor.

Currently there are 294 such centres across Tamil Nadu catering to a population of 250,000 daily who come there to eat. While it is a boon for the poor who find it increasingly difficult to afford food due to high inflation, the impact of this subsidy goes beyond their immediate welfare.

While subsidies do have an incremental value- reallocating resources and aiding the poor to access meals, education and health care facilities otherwise unaffordable, they sometimes end up doing more harm than good if not kept in check. Amma Unavagam might be giving hygienic food to a segment of population that doesn’t have access to even 2 proper meals a day, but they have caused a worry for the private sector. Many restaurants in Chennai have already reduced prices, but it is also affecting the small street-side and push-cart vendors.

There is no doubt that if the brand reaches the desired sections, it will help in improving the quality of living (as it provides services which are basic amenities for the poor) and thereby human capital. However, free lunches cannot remain confined to just a select few. Even people, who can afford the food at prevailing prices, now prefer to eat at these centres. This then, might make this scheme another one of the several poorly directed schemes.

In addition, the state government has also launched other products like mineral water, rice and pulses at heavily subsidised rates under the name “Amma’. Recently, it also launched 3 types of salt at almost half the rates of open market, giving corporates a run for their money. Also, since this is a heavy subsidy, in all amounting to almost 60% of the cost, the continuously increasing input costs as prices continue to rise are adding to the increasing deficits. And the cost is just going to increase as the government sets to introduce 360 more such outlets. One may ask if this is actually the correct way of dealing with inflation.

As we know from the ten principles of economics, heavy subsidies lead to loss of economic surplus known as deadweight loss, which actually increases inflation in the long run. The poor people that are meant to benefit, actually end up being more at loss, especially if the subsidies reach a huge proportion of the overall expenditure. They also limit the growth of the private sector.

This problem will get magnified, as other states, impressed by the model in Tamil Nadu, set out to imitate it. Gujrat, Andhra Pradesh, Rajasthan and even an Egyptian delegation has shown keen interest in the scheme. At a time when the Centre is thinking of reducing the subsidies to less than current 1% of GDP and setting up a budget for the same, it could be a dangerous development.

While this scheme gives affordable and hygienic food to the urban poor and provides huge employment, it is not without its ill effects. This scheme can be beneficial if it is accompanied with keeping a check on prices by taking strict action against hoarders. But the government has to ensure net subsidy amounts remain within the budget allocated. In any case, the question still remains if this scheme will benefit the poor in the long run, and should other states adopt this model.

Advertisements

Categories: Story Of The Week