Subsidies in India
How do subsidies function?
- It is the difference in price between the market price for a commodity and the price at which it is sold to the beneficiary as subsidised food grain, such as the market price of the wheat and rice that the government purchases.
Cost of Expenditure incurred in providing subsidies:
- India is a developing country, hence it lacks the budgetary resources to provide subsidies to a bigger population.
- The government budgeted amount for food subsidies is Rs. 2.06 lakh crore, which translates to roughly 1.9 percent of GDP in 2018–19 and 2.5 percent in 2019–2020.
- The revenue to GDP ratio has been constant over the lengthy period from 2010–11 to 2019–20, or about the narrow range of 18.4 percent to 20.3 percent.
- Typically, many developed and emerging market economies have a much higher ratio. In 2019, these ratios were 36 percent and 30.1 percent for the UK and the USA, 48.6 percent and 43.6 percent for Sweden and the Netherlands, and 31.5 percent for Brazil.
What does the mechanism for subsidy distribution mean?
- Distribution of food grains at no cost or at a significant discount, as well as the provision of services like health and education, are all examples of targeted aid for low-income households (Public Distribution System).
- For instance, PDS enables beneficiaries to receive subsidised food goods, whereas Direct Benefit Transfer (DBT) delivers money to the beneficiary’s bank account, allowing them to choose any food item they choose from the open market (Public Distribution System).
- Incentives have been given to increase particular categories of manufacturers and investors, such as a reduction in corporation taxes, in order to attract investment generally or in particular places, such as underdeveloped ones (production linked incentives).
- Direct budgetary support and indirect support through tax breaks are two alternatives to PLI (Production Linked Incentives). Plans must also be carefully developed to avoid misuse and save costs.
What may the rationale be for selecting a subsidy?
- We must focus on “essential” and “merit” items due to a limited budget, poor targeting, and leakage.
- Target populations are largely provided with food grains, particularly wheat and rice, at a steeply subsidised price through the public distribution system.
- Additionally, there is evidence to back up the assertion that such a distribution has decreased poverty.
- A further category of goods, referred to as “merit” goods, are those that have a significant positive externality associated with their consumption. Examples of these goods include breakfast and lunch options related to health and education. In these circumstances, the consumption of such commodities benefits both the local consumer and the greater community.
- Subsidies or the free distribution of worthwhile goods may be acceptable to fulfil social goals, however there are many instances of wasted or populist subsidies. Energy waste has increased unjustifiably because the Punjab government recently announced 300 free electricity units.
How to Proceed:
- Use technology to accurately target recipients as one of the innovative solutions.
- The governing authority states that it is essential to set up a strong mechanism to control public distribution and procurement. Therefore, the objective is to cut down on wasteful administrative costs and leakage.
- Choice of Goods and Services:It is crucial to limit subsidies to only deserving and essential products.
- Less Fiscal Space:Because total financial support is constrained, it is important to be exceedingly efficient and picky when it comes to providing subsidies for goods and services.
- Increasing Revenue:Both state and federal governments need to pay careful attention to their budgetary revenues.
- Social Impacts:Despite the fact that the PDS system has flaws, it is obvious that individuals are the primary beneficiaries, and the benefits also apply at the social and communal levels. Direct income support and PLI effects can’t yet be measured, though.
- Therefore, stopping leaks wherever they occur and continuing to experiment with direct income support are the best ways to maintain the PDS system.
