• PAGE ONE
• INDEX
• HOME

VISION 2020 -- Perquisite, another name for largesse?

The Communications Minister has estimated the cost of providing free telephones to telecom staff at Rs. 68 crores -- on the basis that Rs. 200 is the minimum monthly rental charge for a telephone. With the current practice, the capital cost of provi ding telephones to all telecom staff will be Rs. 1,200-1,400 crores. Servicing that much capital investment will cost Rs. 350 crores or more per year. That gives three separate figures for the cost of Mr. Paswan's largesse -- Rs. 68 crores, Rs. 1 ,200 plus crores and Rs. 350 crores, saysP. V. Indiresan

THIS SERIES of Vision 2020 articles is not about current affairs, but about possible ideas for a better future. Nevertheless, it is worth taking a cue from the recent decision of the Minister of Communications, Mr. Ram Vilas Paswan, to hand out free tel ephones to 3.5 lakh employees of his department. What Mr. Paswan is offering is a perquisite. In a way, every perquisite is a subsidy, which is the issue that has been under discussion in the past few articles.

The controversy about Mr. Paswan's scheme has centred around its cost. In fact, cost is always the irritating central issue in all cases of perquisites or subsidies. However, that is only one side of the picture. A truly balanced view will be obtained on ly when the costs are set off against benefits. In other words, subsidies and perquisites should be treated as investments and not as largesse. Only then can we be sure if any particular perquisite or subsidy is worth providing.

How much do perquisites cost? That can be assessed in several ways. For instance, the Communications Minister has estimated the cost of providing free telephones to telecom staff at Rs. 68 crores -- on the basis that Rs. 200 is the minimum monthly r ental charge for a telephone. On the other hand, capital expenditure per telephone is around Rs. 35,000-40,000. (Dr. Jhunjhunwala claims his technology can be installed at half to a third of that cost, but there is not much enthusiasm for his technology. That is another story, the story of subsidising foreign suppliers at the cost of indigenous manufacturers.)

So, with the current practice, the capital cost of providing telephones to all telecom staff will be to the tune of Rs. 1,200-1,400 crores. Servicing that much capital investment will cost Rs. 350 crores or more per year. That gives us three separate fig ures for the cost of Mr. Paswan's largesse -- Rs. 68 crores, Rs. 1,200 plus crores and Rs. 350 crores. The truth can be presented in many colours!

A general overview of this issue can be obtained by referring to the basic supply-demand curve. As the figure shows, offering a perquisite raises the demand curve from D to D+. As for supply, let us consider two extreme cases -- the supply curve as a ho rizontal line SH and the same as a vertical line SV. The former is the ideal case where there is infinite capacity to supply at no extra cost, at any rate enough supply to meet all anticipated demands. A train with empty seats is one example . Employees can be allowed to ride free because they add next to no cost. In this case, the quantity supplied increases from Q to Q+, but cost remains the same. Under these circumstances, perquisites and subsidies pose no problem at all.

The supply line as a vertical is the other extreme case. In this case, the production capacity is totally saturated. The perquisite can then be provided only by reducing that much service to paying customers. Here, the cost goes up from P to P+ without altering the quantity Q supplied. That extra cost will have to be recovered somehow or other -- by raising charges levied on paying customers, by economising on the cost of operations, or by reducing the quality of service. In India, the u niversal practice is to go for the third option by skimping on maintenance.

The real world falls between these two extremes with a sloping supply line S. Then, the entire cost is not passed on to the customers as in the previous case. Instead, the surplus in the production capacity is used to meet part of that cost. The remainin g part will, however, have to be borne by the paying customers. That is not the end of the story.

It is possible that the perquisite (or subsidy) induces people to work better. Then, the supply line shifts downwards to `S'. In that case, the cost may be brought back to the original level `P' as shown, but with the benefit of the output increasing to Q+. The cost may even become lower than what it was without the perquisite.

A wise administrator will check that, in this manner, the benefit will indeed be more than the cost by extracting a commitment from the beneficiaries that they will, in return for the perquisite offered, raise productivity high enough to compensate for i ncreased pressure on costs. From what one hears, Mr. Paswan does not belong to that category of administrators. He is in good company. Few Indian politicians bother to do so.

Perquisites may be brought under two categories: Those that are produced in-house and those that are bought outside. Providing subsidies of goods produced in-house can arouse certain problems of conflict of interest. For instance, railway employees are e ntitled to free travel. Should that be at the expense of commercial passengers? Quite rightly, the railways have a rule that free passes are available only when seats are going empty. Unfortunately, telecommunications operate under conditions of scarcity . So, the rule that employees can have only unused lines cannot be enforced. Evidently, the perquisite of free telephones leads to a conflict of interest between the private want of the employees and the public need to provide good service.

That problem does not arise when the perquisite is produced by somebody else. For instance, there would have been no such conflict of interest if Mr. Paswan had decreed that all employees be given free subscriptions of a newspaper. That will increase the income of the newspaper. Suppose it distributes that extra income as a perquisite to its own employees, say, giving them vehicles to move around. That will increase the income of vehicle manufacturers who too can continue the chain.

Theoretically, the beginning made by the minister can lead to an infinite (at any rate substantial) growth of the economy. In fact, this is no different from the `pump priming' that Keynesian socialists used to be so fond of not long ago. In other words, what the government can do to the economy by deficit financing, private employers can do by offering perquisites to their employees. The perquisite route is better than deficit financing because any employer worth his salt will check that the benefits u ltimately will be better than the costs. It is too much to expect politicians to take such a precaution with deficit financing.

One question remains. Why offer a perquisite at all? Why not raise the wage by an amount equal to the cost of the perquisite? Suppose telephone employees are paid Rs. 120 per month extra instead of a free newspaper subscription. Then, they may not buy t he newspaper at all and spend the money instead on coffee or cigarettes. So, they will miss out on the enlightenment that they would have got by reading the newspaper. Their need is to get enlightened; their want is a packet of cigarettes. It may sound p aternal, but whenever a need is suppressed by a want, it is a wise policy to offer that need as a perquisite.

In brief, perquisites are warranted when they are a need and not a want; the supply is substantially in excess of demand, but not otherwise; and, the cost can be recovered fully from improved productivity.

(The author is former Director, IIT Madras.)