Do we want the government to reduce tax rates? Yes, sure. Do we also want the government to pay higher taxes to us? Well, what is that? Yes that is a subsidy. Subsidies are inverse of taxes. Just as a tax increases the price of the product taxed, subsidies reduce the price of the product subsidised. And just as taxes increase a government’s income, subsidies reduce it. Hence, subsidies are sometimes called negative taxation.
Subsidies play a vital role in the economy of a country. A country has various resources which are to be gainfully deployed for the benefit of the population of the whole country. Subsidies are provided to ensure equitable utilization of the resources for the people. The developed, developing and underdeveloped countries have different kinds of subsidies. Developed countries like India provide subsidies to their population for improving standard of living; the underdeveloped countries provide subsidies for meeting bare minimum needs of the vast majority of population.
Subsidies represent a sizeable item of the center’s non- plan revenue expenditure. In India, Food and fertilizers are the two main items subsidized by the government through budgetary support.
Having said that what is a subsidy, studying their role and importance, one needs to understand that why India needs subsidies or why it does not. No doubt a developing country like India 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 or are manipulated by the rich. The whole issue of granting subsidies or not has given rise to many questions which needs to be answered by our government, economists and politicians as well. The few questions that frequently come up and needs as answer are-
* Do we really need subsidies and if yes then how can they be effectively used for the welfare of the people?
* Are many wrong goods/services being subsidised?
* Does over subsidisation lead to harmful effects?
* Is it that that only the rich enjoy subsidies?
* Are subsidies a burden on the Indian economy?
* Do we need to re- target the subsidies?
* Is a pure economic issue of subsidies directly linked up with the political gamble?
* If subsidies are a burden on the economy, then how India can reduce its burden?
The major question in front of the policy- makers and economists these days is that that do we really need subsidies? For this, one needs to look into the negative effects of subsidies which are far more than the positive effects. Once received, people become dependent on the subsidies. Subsidies make the beneficiaries lethargic. Hence, subsidies are sometimes termed as sweet poison. Misuse of subsidies for political purpose is known worldwide. Subsidies support one industry at the expense of the other. When a person is given subsidy benefit, it imposes burden on some other person in the country. Malpractices have often been noticed in the administration of subsidies.
The whole issue of subsidies cannot be seen in isolation of today’s politics. 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. In India, the politicians lack the courage to privatize the huge, loss-making public sector because they are afraid to lose the organized labour vote. They resist dismantling subsidies for power, fertilizers and water because they fear the crucial farm vote. They don’t even think of touching food subsidies because of the massive poor vote. The politicians create their elections agenda out of the subsidies and corner the real meaning and use of subsidies. Increases in subsidies will only result in keeping the political constituents happy and lead to a bulging fiscal deficit – without benefiting the intended beneficiaries.
One who advocates subsidies should also keep in mind one thing that the subsidies in India never reach their intended target i.e. the poor. The fact is, in India, most subsidies are not for the poor but for the rich. Despite of the continuously rising food subsidies, hunger and malnutrition prevails in the entire county.
Due to faulty government practices, people who are in the real need of subsidies- even for their sheer survival are being forced out of the system.
Even the fertilizer subsidy in India reveals the same dismal picture. Fertilizer subsidy places another heavy burden on the central government. It is a very well known fact that the subsidy benefits majorly goes to the fertilizer industry and not the farmers. Only 60 per cent of fertiliser subsidy goes to farmers. If we take a look at the fertilizer subsidy and its origin, then we will come to know that the original purpose of the fertilizer subsidy was to encourage spread of green revolution technology to new areas and farmers but this reason and motive has lost its credibility in the recent years.
Here regarding the fertilizer subsidy, one should also keep in mind that the availability of subsidised fertiliser should be restricted to farmers who grow staple food and cereals as they need it the most and those farmers, who produce cash crops, do extensive horticulture or produce farm goods for direct exports should be kept outside the purview of subsidy regime.
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 many cases-temporary. These three Ts are missing from most subsidies in India.
The issue is not about removing subsidies but about how to make them effective so that they reach the target consumers and people are benefited from it. The policy- makers should try out new- mechanisms to reach the target consumers more effectively. Sometimes government subsidises some things but those things might not be affordable by the target audience, so there is need for restructuring of subsidies.
It is not the first time problems besetting subsidies have been talked of. It is also not the first time solutions have been offered. In 1997 too Chidambaram had brought out a paper on subsidies, hoping to make the system leaner and cleaner. Nothing happened.
Now the time has come when the Planning Commission, the Central Government, and the National Development Council will have to work on building a political and national consensus on the subsidy issue. It is important that we restructure subsidies so that only the really needy and the poor benefit from them and all leakages are plugged. All subsidies should be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor.
Reforms can only be made in the subsidy system when the policy- makers, politicians and economists will understand that the question is not whether to subsidise or not, but who to subsidise and how.
Thus some measures for effective utilization of subsidies can be:
1. The focus should be on physical achievements and not on financial disbursements.
2. The effects of subsidies should be monitorable and measurable in terms of quality or quantity.
3. Subsidies should be given as a one- time help or for a short period. Subsidies on continuing basis should be avoided.
4. The parameters fixed on subsidy should be transparent.
5. Subsidies should be cost- effective. Most of the assistance should reach the intended beneficiary and very small amount should be spent on administrative arrangements.
6. Subsidies should be properly targeted, i.e. benefit should go to the really deserving.
7. Timing of subsidies should be made proper. For example, free seed distribution should be just before sowing.
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