It is critical to distinguish between good and bad subsidies, which necessitates an objective appraisal of the overall subsidy culture that pervades India’s political system. Many subsidies are targeted at creating political constituencies and vote banks that nurture and perpetuate a patronage system in government. Subsidies on prices, for example, have long been a key component of India’s anti-poverty policies.

In the Economic Survey 2015-16, their effectiveness in changing the lives of the poor was questioned. The federal and state governments subsidise rice, wheat, legumes, sugar, kerosene, cooking gas, water, power, and fertiliser. According to the poll, the fiscal cost of these subsidies is expected to be Rs 3.78 trillion, or 4.24 percent of GDP. 

Why Rationalise subsidies?

The most common criticism against price subsidies is that they are regressive and unintentionally favour wealthy families over poorer people. Artificially cheap pricing fosters leakage and wastage, particularly in the public distribution system. According to the survey, around 15% of rice, 54% of wheat, and 48% of sugar provided through the public distribution system are wasted. Fertiliser subsidies mostly help fertiliser makers, not poor farmers.

Government agencies and civil society organisations are advocating for social welfare policies that invest in creating productive assets and processes in the economy, and this is where the major shift is taking place.

Furthermore, price subsidies distort markets in ways that favour middlemen while harming the poor. The rising minimum support prices in India are also linked to the country’s high food inflation rate. Water-intensive agriculture depletes groundwater tables, which is bad for the environment. While the diesel subsidy has been withdrawn and prices have been linked to the worldwide market, many products in India continue to be subsidised, and populist concerns hamper the government’s efforts to rationalise pricing subsidies.

India has prioritised fiscal deficit reduction over growth support for the past three to four years. Reduced subsidy expenditures will enable the government to supplement its finances and redirect them to public infrastructure or other productive assets in the economy, resulting in increased employment and consumer demand across all sectors.

The Government on Rationalisation of subsidies:

The government will rationalise subsidies to guarantee that only those eligible benefit and the subsidy bill will be one of the primary duties before the government’s planned expenditure control commission. The primary task of this Commission will be the subsidy bill and will provide the report by the end of the year.

“With active policy measures/reforms of the government to contain the fiscal deficit and quantum of subsidy bill, the subsidy will progressively reduce.” Finance minister Arun Jaitley said in Lok Sabha.

Effect on industries due rationalisation of subsidies

According to industry stakeholders, the Centre must solve major difficulties in the agricultural, fertiliser, and plantation sectors to ensure the primary sector’s long-term viability.

Because urea is heavily subsidised and costs one-fourth of what it costs elsewhere, the price of urea must rise by at least 15%. This results in an overabundance of urea and an unbalanced fertiliser application. Prices must steadily rise over the next four years, while subsidies must be reduced. The subsidy currently channelled through fertiliser companies could be paid directly to farmers. The industry is an excellent candidate for direct subsidy transfer, which will prevent leakage and save superfluous paperwork.

Issues of subsidies in India

Subsidies disadvantage other firms and sectors by assisting specific businesses and industries. This market distortion causes economic losses that are difficult to observe and are often overlooked by policymakers. When competing against companies that do receive government support, energy companies that do not receive government support are at a disadvantage. Because they didn’t have access to government subsidies, a company or entrepreneur with a superior product or technology may never reach the market. As a result, resources are diverted from enterprises that the market prefers to those policymakers favour, resulting in overall economic losses.

Pros And Cons Of Rationalising Subsidies

Pros

• Agriculture may be revived by rationalising subsidies and improving infrastructure.

• 328 people are lifted out of poverty for every million rupees spent on agricultural research. On the other hand, the equivalent money spent on energy subsidies only lifts 23 individuals out of poverty.
• Agriculture based on subsidies is unsustainable.
• Extending consumer services to make essentials more affordable to the poor.
• To lay the groundwork for many economic areas in which the private sector can participate. When an economy is in its early stages of development, private sector participation in production is often unviable and costly.
• Better nutrition- Poor people will be able to expand their diet by including more things such as beans, eggs, and other foods if they get monetary transfers. This will help them consume more protein.
• Helps in reducing corruption.

Cons

• Rationalising subsidies would not keep industries from collapsing in the long run.

Many businesses, such as fishing and farming, should be kept alive and well since they are necessary for population support. Subsidies may be beneficial to a variety of new and rapidly growing companies.

• Rationalising subsidies would interrupt the greater supply of goods

Governments strive to improve people’s access to goods and services like water, food, and education. As a result, they provide an incentive, which could be a tax credit or even cash. Markets with positive externalities are typically the ones that profit from them.

• Dissolving subsidies would not be able to aid in price reduction and inflation control.

Subsidies are particularly useful for production cost inputs like fuel prices, especially when global crude oil prices are rising. To avoid prices from skyrocketing, many governments subsidise fuel expenditures.

Conclusion

Subsidies are supposed to help the needy and distribute resources fairly. Subsidies to the wealthy are regressive. They contribute to the perpetuation of poverty by creating inefficiencies in the economy, which result in inflation and corruption. As we have seen in the case of India, the economy suffers as a result. When India grew at an average rate of 7.5 percent in the first decade of the millennium, it was discovered that this growth was jobless and unsustainable. India’s economy was hampered by supply-side restrictions, which meant that productivity did not rise in tandem with GDP.