General Awareness

Business of subsidies in India

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Today, you will read general awareness topic: Business of subsidies in India

Although the term “subsidy” is widely used in economics, it is rarely defined. Often it is used as an antonym to a tax. While tax is transfer of money from a private entity to government, vice versa is subsidy. It can be defined as a sum of money granted from public funds to help an industry, business or individual keep the price of a commodity or service low.

Subsidies are often criticized for intervening into the market mechanism by altering the price and thus consumption of the object. However, many times, their necessity is felt to provide the safety net to the vulnerable and downtrodden of the society. Since in India, more than one third of the population is living below poverty line (BPL), subsidy cannot be criticized on social grounds but it is criticized on economic grounds.

According to the Budget proposals, the central government's subsidy bill on food, petroleum and fertilizers is estimated at Rs 1, 79,554 crore for the 2012-13. The oil subsidy, which is given to state-run oil marketing firms, such as Indian Oil Corp, BPCL and HPCL, for selling diesel, domestic LPG to households and kerosene through the PDS system, below cost, is estimated lower at Rs 43,580 crore in the fiscal year 2012-13.

The government's food subsidy given to run the public distribution system is estimated to be Rs 75,000 crore. Food subsidy is provided to meet the difference between the economic cost of food grains and their sales realization at the Central Issue Price fixed under the public distribution system (PDS) and other welfare schemes.

The fertilizer subsidy is also pegged lower at Rs 60,974 crore. Under the fertilizer subsidy, the government would provide Rs 13,398 crore for imported urea, Rs 19,000 crore for indigenous (urea) fertilizers, and Rs 28,576 crore for the sale of decontrolled fertilizers (DAP, MOP and complexes) at a subsidized rate to farmers.

At the start of current fiscal year, subsidy burden was estimated to be 2.5percent of GDP and the Central Government’s target is to trim the subsidies upto 2 percent this fiscal. Current economic prospects of the country are bleak marred by rising fiscal deficit, mounting inflation, reducing Foreign Direct Investment (FDI), policy paralysis, downfall in international rating, all culminating into a growth fatigue. In order to realign the country’s economy with the high growth path, major reforms are to be undertaken in all the sectors including the subsidy budget.

As already stated, ensuring employment, food, sanitation, potable water etc are tasks entrusted to the government; subsidy for such activities should not and must not be denied. However, the motive of subsidies is not just to provide food, water and sanitation etc at subsidized prices but a little more holistic.

Subsidies must be designed in such a manner that they help in the strengthening the manpower and human resources of the country. Government has been providing subsides for the last sixty years since independence but dependency on subsidies has not been reduced which meant subsidy tool is not been effectively used in India.

Need of hour is not to eliminate the subsidies but to better target the subsidies. In India, cost of an LPG cylinder which is sold at subsidized prices is same for CEO of a Fortune 500 company as well as for BPL family. Petrol prices are same for driving scooter as well as BMW etc. Moreover, the subsidies which are targeted for poor only are don’t reach the designated person and even if reaches, it is hardly 10 percent of the initial amount.

Therefore, in order to assure the effectiveness of subsidies, an effective monitoring mechanism is needed. Subsidies granted because of purely political motivations must be withdrawn.

For example, free electricity is provided to the farmers in Punjab which not only causes the wastage of electricity but also resulted in overexploitation of ground water further negatively effecting the environment. Socio-economic conditions of the country don’t call for withdrawal of subsidies but reform of subsidies.

In Public Distribution System (PDS), huge subsidies are provided to feed the poorest sections of the population but entire PDS is marred by pilferage and rampant corruption. Here, a monetary transfer in the form of coupons can reduce the corruption as with those coupons, poor can buy food grains from open market. Similarly MNREGA, the flagship programme of UPA government is also witnessing corruption and is enriching the bank accounts of few influential persons only. A compulsory social audit every quarterly of half yearly can make a dent on the corruption.

Currently, Indian economy is derailed from its track of high growth path and in order to grow at 9 percent per annum sustainably, it is important to assure that fiscal deficit doesn’t become unsustainable. Unsustainable, increasing and ill-targeted subsidies are bound to increase fiscal deficit and thereby strengthen the inflationary tendencies.

Country needs a second generation of reforms which must be holistic in nature and starting these reforms from subsidy is not a bad idea as this will benefit those who are in dire need of benefits.