Overview Subhash Mathur
Understanding Subsidies in India Unacademy
Target Audience UPSC CSE aspirant RBI Grade 'B' State Service aspirants
About Me.. B.A. in Economics from DU M.A.in Economics Blogger | Traveller Dog Lover o Passionate For Teaching . Follow my profile for more Indian Economy courses.
Table of contents 1. Introduction 2. Subsidies: are they solution to a problem or are they themselves a problem? 3. Subsidies and its opportunity costs 4. Some subsidies led distortion in India 5. Direct Benefit Transfers as solution 6. JAM Trinity - Jan Dhan Yojna, Aadhaar and Mobile base 7. Conclusion
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Subsidies are one of the quintessential attributes of any welfare state. India, on the eve of independence, was left with the uphill task of socio-economic development. Markets were almost nonexistence, masses lived in abject poverty and illiteracy, we were not producing enough food to satiate the hunger of masses, life expectancy was just 32 years; in short, there was a crisis in every sphere; be it agriculture, industry, health or education; partly due to colonial legacy. Given such circumstances, founding fathers of democratic India rightly envisaged Indian state to be a welfare state. However, 70 years down the line only a few problems have abated, while new ones cropped up and poverty still stubbornly remains a pressing problem.
Subsidies: are they solution to a problem or are they themselves a problem? As already said, a welfare state without subsidies cannot be imagined. Governments have to extend subsidies to achieve objectives of socio-economic policy. By this, they aim at- Making basic necessities affordable to poor people through the extension of consumer services To prepare a foundation of various economic sectors in which private sector can participate later. When the economy is at lower stages of development, it is often unviable and unaffordable for the private sector to step in production. This is mainly because there are limited resources with private investors and there are informational externalities/uncertainties. In such case, government do handholding by supporting private sector by extending subsidies and withdrawing them when private sector becomes competitive. 1. 2.
The most significant consequence of either of this altermative is that money is squeezed out of the economy and which results in lower consumption/demand. This, in turn, affects the growth in the economy. Fewer growth results in a lower collection of taxes. On other hand subsidy burden remains same or even increases. Further, higher borrowing results irn higher amount of interest to be paid. So in short, careless or politically motivated subsidy results in lower revenues for government and higher unproductive expenditure.
Some subsidies led distortion in India: Energy- Groundwater nexus - Agriculture sector is perhaps having most justifiable claim on subsidized inputs given the dismal situation of the farmers in the country. On these lines, water and electricity for agricultural use are heavily subsidized by state governments. Again, politics seeped into this economic cause and most governments have failed to ensure rational and sustainable use of subsidized water and electricity. Owing to this, in large parts of India, groundwater is being extracted indiscriminately as electric pump consume electricity that is almost free of cost. This has led to dramatic fall in groundwater levels. Wells have gone dry at numerous places. Water extracted from deep earth often gets contaminated by arsenic mineral. This, together with erratic monsoon due to climate change, has pushed rural India in deep distress 1. To remedy this problem, government has plans to separate agriculture feeder network from rest, under Deen Dayal Upadhayay Gram Jyoti Yojna. This separate agriculture feeder will supply electricity only for a few hours a day. This was first tried by Gujrat and results were encouraging as it had role in making Gujrat a power surplus state, along with arresting continuous decline in groundwater levels
3. Railways: Subsidization and Cross- subsidization - Between 1993 and 2011, the wholesale price index rose by 295% and the fares of sleeper class and second class travel rose just by 144% and 106% respectively. Consequently, railway runs at heavy loss, which can be construed as subsidy to passengers of the railways. It's only natural that railway has failed to expand capacity and improve quality to serve needs of booming Indian economy. When British left India had network of 52000 Kms, which now increased to measly 64000 Km. Apart from this, freight carriers of railways are even more uncompetitive, because railway subsidizes passenger fare further by charging higher freight charges. Accordingly, in 1970's freight used to contribute 65% of railway revenues and now it does only 33%. This is due to shifting of freight carriage from rail to road transport, which much costlier, more polluting and more time consuming. This has made our economy a lot more uncompetitive
B.A. in Economics from DU. M.A.in Economics Blogger | Traveller | Dog Lover Passionate For Teaching Follow my profile for more Indian Econo