India’s subsidies: Draft Exit Strategy

Andy Mukherjee details some of the problems associated with India’s policy of subsidising various items including kerosene and diesel. I think that his suggested solution (i.e. the replacement of subsidies with closely monitored ‘inflation indexed’cash payments) would entail the problems associated with indexation and bureaucracy.

I present below my (highly idealistic) exit strategy:

Well in advance of implementing the new policy, announce very clearly to the public that the government will begin to use the proceeds from the sale of foreign exchange reserves to purchase gold bullion. At the same time announce a date for the complete cessation of governmental subsidies. (This is stating what would occur automatically but) people/businesses will be advised to accumulate gold (or not sell gold that is already held within savings) prior to ‘implementation’. The government should publicly commit to purchasing a amount of gold per month until b funds are exhausted. Thereafter, publicly commit to indefinitely spending c% of import tax revenues on the purchase of gold bullion.

The government will openly seek to convince that raising the price of gold is a far better way of increasing the purchasing power of the people of India as compared to a complex and failing system of subsidies.

Obviously, the above strategy would work better if adopted in conjunction with other pro-gold actions such as opening the national mint for gold coinage (as per Fekete’s suggestion) and, more generally, 'sponsoring gold'.