When everybody agrees on some economic policy, one should suspect some serious catch somewhere: more often than not deeper issues relating to the problem at hand are then lost sight of and the suggested measures inappropriate, if not counter-productive.

So it seems to be the case with views of fiscal experts and government on the need for elimination of subsidies as a key to budgetary viability. This conventional wisdom is, to be sure, not without some merit.

But it is not backed by quantitative significance of the subsidies; reflects poor perception of their pitfalls; and shows little awareness of major policy omissions and commissions, which constitute by far the largest source of subsidisation, income inequality and distortions in resource use.

Out of the total subsidy payments listed in the Union Budget, around 56 per cent is due to food subsidy. However, throughout the 90's the food subsidy bill remained mostly below 0.5 per cent of GDP and only from the late 90's did it register a sharp rise, jumping from 0.49 per cent in 1997-98 to 0.77 per cent in 2001-02.

Such a trend is no doubt alarming; but it is due primarily to the switchover from universal to targeted public distribution system with little appreciation of its economic and social consequences.

As the High Level Committee on Long Term Grain Policy and a number of independent studies underline, TPDS has eroded viability of fair price shops; opened the floodgates of corruption and political interference in identification of BPL and Antyodaya families; and led to huge accumulation of food stocks on the one hand and diversion of grains released for TPDS on the other.

The food subsidy bill, even the official data suggest, has been swelled mostly by buffer stock costs and highly subsidised exports, not by gains accruing to consumers.

Indeed, given the reduced per capita availability of foodgrains and rise in their open market prices over what would have prevailed without public intervention, consumer subsidies have in all probability been negative in recent years!

Behind the food policy muddle and many a government measure one detects distorted views regarding the objectives of subsidisation and not-so-hidden hands of a whole host of special interest groups.

PDS, initially adopted to reduce the incidence of hunger, is no more than a second or third best solution to the problem.

Were it possible to identify the indigent without any insuperable difficulty, provision of income earning opportunities or direct financial support rather than subsidised food, would have been more cost effective and less distortionary. Given the history of loan melas and similar experiments it was not very difficult to see how TPDS could be easily manipulated for private gains.

Thus the most plausible explanation, a la the guiding principle in detective stories, of switch to TPDS and its continuation (contrary to HLC recommendation) seems to lie in the influence of the two strongest interest groups in the Indian economy, viz., bureaucrats and politicians, steadfastly united in their opposition to transparency and curbs on opportunities for aggrandisement.

No less deleterious is the way minimum support prices are fixed. While the government has persistently set MSPs way above those recommended by the Commission for Agricultural Costs and Prices, the CACP exercise behind the recommendations itself betrays poor understanding regarding the role these prices, apart from providing some insurance, are to play.

There is, we must remember, no case in general for subsidising any group of producers, not even small and marginal farmers. They require support as consumers, not producers, remembering that their lot may not be worse than that of many a street vendor, wayside cobbler, or rickshaw puller.

Output subsidy is justified only when (a) production of the good creates positive externalities; or (b) the subsidy is a purely temporary means of putting the industry on its own feet and making it competitive.

Except as insurance against risk, budgetary support to foodgrains producers should thus be regarded as a necessary evil, which the society has to endure for feeding the hungry.

This perspective suggests some elementary but important policy results.

First, MSPs should be related to targeted level of domestic production and hence to farmers' marginal costs. Second, allocative efficiency requires MSPs to be higher in deficit than in surplus states.

Third, for minimising net resource cost of some targeted food requirement, it is necessary to consider both domestic supply response and import/export possibilities of foodgrains. Quite clearly, CACP needs to have a radically different focus and methodology if its recommendations are to make economic sense.

Our reasoning also underlines the need for some form of land revenue for correcting the rich-farmer bias of food subsidies.

There has been much greater awareness of inefficiency and budgetary drain caused by subsidies on or underpricing of fertiliser, electricity, water and other inputs; but political pressure has prevented any worthwhile measure toward elimination of these subsidies.

However, even while the government tries to reduce these subsidies, it feels little qualms in extending huge financial benefits to groups no more deserving than farmers.

Tax laws and Exim Policy measures are replete with instances of special concessions and fiscal sops. Year after year industries like IT, textiles, gems and jewellery, sugar and tourism, have been enjoying income tax or other duty reliefs.

Except for telecommunications none of the favoured industries generate positive externalities; nor do they seem able (or willing) to become adults or competitive.

One may well wonder, why all economic activities are not given 'special support'! Much more scandalous is the bonanza being showered on the affluent through abolition of taxes on dividends and capital gains on equity.

Arguably the lion's share of subsidies goes to politicians and bureaucrats. It is a moot point whether the main beneficiaries of publicly provided inputs are their users or the high cost personnel entrusted with supply of such inputs.

Add to that the widespread perception of how an unholy alliance between bureaucrats and politicians has led to a yawning gap between the benefits enjoyed and value of (dis) services rendered by the large majority of them, and it is not very difficult to see why any mention of need for belt tightening or for reducing input subsidies draws derisive comments from their current beneficiaries.

Even an impartial observer cannot but wonder how the economy gains through abolition of input subsidies along with a whopping increase in public personnels' financial benefits on the premise that such increases raise more than proportionately productivity in provision of public goods and services.

The subsidy syndrome in India is more widespread than is generally acknowledged by analysts or the government. There is not much realisation of the fact that burgeoning of the food subsidy bill that has been hogging the limelight is due mostly to faulty policy design.

Nor does discussion on subsidies focus on the largest and most distortionary sources of budgetary drain.

No wonder then that government attempts at reducing food subsidy has proved ineffective; or that there is so little popular sympathy for a programme where some subsidies are reduced, but the ones provided to the most undeserving are left untouched or raised.

(The writer is ex-professor, Presidency College and Indian Statistical Institute, Kolkata, and currently Director, Monetary Research Project at ICRA)