General Awareness

Subsidies in India

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Following article on”Subsidies in India ” is part of our series on general awareness:

Subsidy is a benefit given by the government to groups or individuals in the form of a cash payment, kind or tax reduction. It is the difference between the market price of a commodities and the amount paid by consumer to access that commodity which is usually borne by Government. A government subsidy is typically used to keep an industry from going out of business or to encourage economic activities that would not occur otherwise, apart from providing a safety net to the vulnerable section of society. Subsidies are converse to the indirect taxes as indirect taxes used to increase the price while subsidies tend to reduce the price. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public. Major form of subsidies in India includes food subsidy, fuel subsidy, fertilizer subsidy, education subsidy etc.

A subsidy may take the form of direct payments from the government, as is the case in a variety of agricultural crop and livestock production programs. The purpose of direct payments to wheat, cotton, wool, and other agricultural producers is to ensure adequate production to meet domestic and foreign demand and to protect or supplement the income of farmers. On the other hand, governments also frequently provide subsidies to finance wholly or partially the acquisition of fixed assets such as technology, plant, and equipment. Such subsidies may be paid only once or a limited number of times and therefore are often referred to as non-recurring subsidies.

During, 2011-12, subsidies are estimated to be 2.4 percent of the GDP however the target was supposed to be 2.0 percent for the said period. Food subsidy bill for the 2011-12 fiscal is projected to be Rs 605 billion. Fertilizer subsidy during the year 2011-12 is expected to be Rs 500 billion and the fossil fuel subsidy of Rs.1200 billion which is in the form of burden to India’s public sector oil marketing companies [OMC] who struggle to stay afloat even as global oil majors make super profits.

In 2012-13, subsidies are expected to be Rs2.16 trillion or 2.5 percent of GDP and government has set a target of bringing them to 1.75 percent of the GDP in the next three years. The fuel subsidies comprise of 3 major components. The subsidy on Kerosene for the lower income group distributed through the public distribution system (PDS), the subsidy on domestic LPG and the subsidy on diesel.

In India, subsidies are often criticized because of following issues:

(i) Budgetary subsidies are beneficial in short term but are harmful in the long run.

(ii) Many wrong goods/services being subsidized.

(iii) Over subsidization had become unsustainable and will lead to harmful effects

The increasing amount of subsidies, apart from other expenditure, is the prime cause of widening fiscal deficit which if grew unabated, may derail the balance growth of the economic system. Subsidies also distort the market structure by altering the price system, due to which, it is often seen that sectors availing the subsidies develop black market. The politicians often create their elections agenda out of the subsidies and push back the real meaning and use of subsidies. In international trade also, subsidies provide extra edge to the exporting countries by making the market price of exporting commodity artificially low which results in the destruction of domestic industry in the importing country.

It is because of this reason that World Trade Organisation provides a ceiling on the amount of subsidy that can be availed by the exporting countries. Subsidy provided by US and EU to their agriculture sector is the major bone of contention in the WTO talks.

The whole issue of subsidies is an economic as well as a political issue. The subsidy policies in India are being advocated by those same policy makers who appear in public as pro-poor, but are driven by the political implications of their actions. Subsidies in India never reach their intended target i.e. the poor. Despite of the continuously rising food subsidies, hunger and malnutrition prevails in the entire county.

The most alarming aspect of the surging subsidies is not the size, but the manner and purpose of spending on them. Subsidies provided in India suffer from both inclusion error (wrong kind of people benefiting) and exclusion error (deserving people left out of subsidies). Efficient subsidies must be transparent, targeted and-in most cases-temporary whose motive must be to remove temporary and short term mismatches.

Though subsidies may not be good from economic point of view but they are important from the welfare point of view. A developing country like India indeed needs subsidies due to various reasons. Providing minimum consumption entitlement to the poor by subsidizing the items consumed by them is extremely important for the welfare of the economy. However, the benefits can be maximized only when the subsidies are transparent, well targeted, and subsidies designed for effective implementation without any leakages.

These days, one can hardly see the benefits of the subsidies and often the government is criticized for granting subsidies which do not reach their target. The objective of subsidies is not only to reach the target population but also to bring out an effective change in the economy. For instance highly subsidized nitrogen (N) fertilizers against the potassium (K) and phosphorous (P) fertilizers resulted in skewed ratio fertilizer use.

This subsidy must be altered in order to ensure the ideal combination of fertilizers. Similarly, in Punjab, electricity is provided free of cost to the farmers which lead to the depletion of ground water apart from deteriorating the condition of ailing power sector. Gradually water is becoming a scarce commodity therefore modern irrigation techniques like drip irrigation, sprinkler irrigation can be subsidized.

Thus subsidies are in important tool in the hand of policymakers to bring about a change in the consumption, distribution and production pattern of the society. Therefore effort should be not on eliminating the subsidies but on transforming the subsidies according to needs of the economy.

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