Subsidies are a double-edged sword which every country professes to promote in the domestic economy but not without negative implications. Basically, subsidies are a form of financial assistance granted by the Government to a business or an economic sector (Source:Wikipedia). The most important effect of subsidies on the economy is the income redistributive effect. Subsidies are expected to provide some kind of monetary benefit to the underprivileged section of the society, thereby increasing their welfare. However, there could be other types of subsidies, which need not necessarily result in income redistribution: for example, export subsidies. These are typically given to encourage export oriented units, who would otherwise (i.e., without the benefit of subsidy) have to charge much higher prices because cost of production may be high due to smaller scale of production etc. If they charge higher prices, they will lose market and hence will die. So sometimes subsidies are provided to help some specific types of industries, because, they are supposed to lead to larger economic gains like increased foreign exchange earnings etc. Further, there could also be hidden subsidies like tax holidays for export oriented units or emerging sectors in the economy.
Notwithstanding whichever type of subsidy, they will all ultimately lead to resource redistribution in some or the other form. To illustrate it with an example, lets assume that an investor has 2 crore, which she intends to invest in some industry. Now, there are two options available to her : one, in an industry which doesnt receive any subsidy (eg: opening a motor car dealership) and two: an industry which involves some kind of subsidy ( eg. cold storage unit). It is most likely that the investor will choose to invest in the industry which enjoys a subsidy because her income will be more from the subsidized industry. Therefore, investments generally tend to flow to those areas, which have some kind of subsidy. But, considering the situation when the economy needs more motor car garages than cold storage, even though subsidies are available for cold storage, then investment is likely to flow to cold storage than motor car garages, though the other way would have been more desirable. So at times, the subsidies tend to alter the flow of resources to certain sectors from their competing sectors.
Usually, therefore, subsidies are given to those sectors, which the policymakers think need to have greater resource flow.
Since subsidies usually have income redistributing effects, they are widely favoured as a policy choice. If properly designed and implemented, subsidies can give a big boost to an industry or a sector (for instance, tax holiday to software exports led to the software boom in India).
However, subsidies are harmful, if they are poorly targeted or do not reach the intended beneficiaries. Two examples of this are the food subsidy and the fertilizer subsidy granted by the Government of India.
In case of food subsidy, the Government buys food grains at higher prices (called Minimum Support Prices). It enables the farmers to receive higher income, and then sell the same grains at lower prices (called Common Issue Prices) to poor people. Since it buys at higher price and sells at lower price, the difference will have to be borne by the Government as subsidy. This subsidy is called food subsidy. The annual food subsidy bill amounted to Rs 43627 crore in 2008-09 (Source:Public information bureau release). However, just 42% of the deserving people are benefited by it, according to a Planning Commission study released in 2008. A major portion of the allotted money is consumed in the system itself for example, the carrying costs of the Food Corporation of India.
Like-wise, in case of fertilizer subsidy also, it goes to support inefficient fertilizer companies (mostly public sector units). So, the two most important subsidies in India accounting for 4% and 3.5% of the GDP respectively are actually wastage of public money.
Moreover, if subsidies are financed by debt, the Government's debt liability increases. When the debt liability of the government increases, after a certain point, the Government's major part of revenues will go for interest payments, thereby leaving very little scope for developmental work. So subsidies have many drawbacks, if they are not implemented properly. This has led to lot of criticism against the subsidies in India and also across the world.
Submitted By:
Seeona Pani
No comments:
Post a Comment