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THE CURIOUS CASE OF SUBSIDIES

Subsidies are the most important tool of development in any welfare state. At the time of independence, India was tasked with the socio-economic development of its people. At that time, India was plagued with multiple issues, markets were absent, the people lived in sheer poverty and were mostly illiterate. India was not even producing enough food to satiate the hunger of masses. The average life expectancy was only 32 years. In simpler terms there was a crisis in every sphere; Agriculture, industry, education, health every sector was suffering. Amidst such circumstances, the framers of Indian constitution aptly envisaged Indian state to be a democratic welfare state. However, 70 years since Indian independence only a few problems have been solved, while new issues have come up and the cruelty of poverty still stubbornly remains a major problem. In this context, an economic survey of 2017-18 aptly points out that even after the expenditure of  3.77 lakh crore rupees on a yearly basis on subsidies there is no ‘transformational impact’ on the standard of living of masses, which is worrisome. Subsidies have helped the poorer sections to put up with various issues of life, but there are serious cases of misappropriation of money and resources by the richer people. A question of major concern is whether subsidies are really the cure. As already mentioned, a welfare state must provide subsidies to its people so as to bridge the differences.  Hence, Governments have to extend subsidies to achieve objectives of socio-economic policy and measures. They use subsidies as a medium to provide basic amenities to the people who cant afford the same. They also aim at laying down the foundation of a structure where private firms can participate effectively in coming times. The private sector cant plunge in it as of now, as the ground is not yet set for them. As of now, its not feasible in any case. The reason behind this is the availability of limited resources, which should be utilized in best possible way and shouldnt be spilled. The special thing about subsidies is that they work best in undistorted markets only, hence once the aim at which subsidies are targeted is achieved, it should be phased out. The issue with any democratic nation is that once a subsidy is extended or made a part of public policy, it takes the colour of politics and political party. In such circumstances, it poses a huge political risk to phase it out. With the advent of time, new subsidies are extended which are added on to the previous ones and they soon consume the already scarce revenue resources which are there for the people. This takes a heavy toll on the other expenditures attributed to the government. The government is inevitably forced to cut allocation to developmental and infrastructure matters. This pressurizes the government to spend more than what it actually earns which in turn creates a burden on the government  This fiscal deficit can be closed only by raising more revenue through new taxes or by borrowing money through various ways.   In order to resist the disruption of the market, squeezing out the money from the economy is suggested, but its again inviable. It leads to low demand and growth. This, in turn, hits the development of the economy. Less growth consequently results in a lower collection of taxes. While the evil that is the subsidy burden remains the same or even increases. Along with this, it must be kept in mind that higher borrowing actually creates a debt on the generations to come or even an unfeasible condition economically. Also, imagine a situation where a  government marred by such issues is left with no option than to print new currency. This is seriously the most unviable situation. In the wake of these facts, it wont be incorrect to say that Incoherent subsidy regime unintendedly does more harm than good for the cause it stands for the socio-economic development. The opportunity costs of the subsidy must also be analyzed. Subsidies are very much the part of government expenditure that is ‘consumed’ by beneficiaries. In the economics sector, debate and argument between two alternative use of money: Consumption and Investment is quite old. It goes without saying that it is always in the interest of the nation to minimize its consumption part of expenditure and increase allocation to capital expenditure. Interest payments in a country cannot be reduced unless there is higher growth in the economy. Pensions are also consuming major part of state funds as there is a consistent increase in life expectancy across demographic spectrum of India. Grants to states are also expected to go up given government’s steps towards cooperative federalism. In such circumstances, it might be difficult to aptly target the corruption points and leakages. The change can be easily understood by the intervention of direct benefit transfer in LPG Subsidy and the savings thereof. Lets discuss the subsidies which led to a market distortion in India: Firstly, lets talk about the Energy-water nexus – Any sector which has the maximum number of subsidies which goes undebatable is the Agricultural sector. It isnt questioned ever and is always justified. On these lines, water and electricity for agricultural use only are heavily subsidized by respective state governments. The extent of politicization of subsidies could be seen from the wastage of Subsidy in water and electricity which is diverted to various other uses. The free of cost water pumps have to lead to indiscriminate use of water and electricity, where no one is unaccountable. This has led to falling in groundwater levels. The situation is very alarming as wells have gone dry at many places. The indiscriminate usage and exploitation of groundwater have also lead to arsenic contamination at several sites.  This, combined with the erratic monsoonal weather in India due to climate change and pollution, has driven rural India in deep distress. To solve this problem, the government launched, Deen Dayal Upadhyaya Gram Jyoti Yojna in which it plans to separate agriculture feeder network from other requirements.  This separate agriculture feeder will supply electricity only for a few hours a day. The best practice started in Gujrat, might be followed by other states too. Another example of distorted subsidy is the Subsidized fertilizers. Nutrient Based Subsidy or NBS was introduced in the year 2010 with the objective of promoting the balanced and rational use of fertilizers. It also aimed at limiting the unwarranted subsidies. The concept in this regard was to fix subsidy as per nutrients (in per Kg ) in the fertilizer in which the determination of price was left to the suppliers of the same. Presently, Urea is not covered under the scheme due to several political reasons. Thus, by the analysis of various aspects, its very important to revisit the idea behind subsidies. Rationalization of subsidies in various sections will improve markets of India which will then attract more investment. This in short, can turn the wheel of a virtuous economy which will create more employment and jobs and attack poverty at its very roots.


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