Subsidies: Beneficial or Detrimental By Shreya Sinha from CNLU, Patna
At the eve of Independence, India was left with an uphill task of socio-economic development, markets were almost non-existent, people were compelled to live in abject poverty and illiteracy, and enough food was not being produced to satiate the hunger of the people, and life expectancy was just 32 years, in short, India faced crisis at almost every stage and in almost all the spheres from agricultural to industry, health to education.[i] To some extent colonial legacy was to be blamed for the same. In such circumstances the founding fathers of the democracy of India envisaged India to be a welfare state. A welfare state is a synthesis of Police State and Laissez Faire in which the individuals are given the rights to make their own decisions but those rights are subject to certain limitations. However, even after 70 years of independence only a few problems have been solved and even certain new problems have arisen, with all these problems, poverty is still an issue which has been from the very beginning and even complicated in all these years.
In this regard, the report of a latest survey points out that, in spite of spending almost 3.77 lakh crore rupees on subsidies there is no ‘transformational impact’ as such on the standard of living of the people. One of the major allegations on the economy of subsidies is that although they have helped some poor people to tackle their problems in life but this money meant for poorest of the poor is appropriated by the richer sections due to mistargeting and leakages. It is almost impossible to imagine a welfare state without subsidies. Subsidies have to be extended by government to achieve the objectives of socio-economic policy. By this their aim is to make basic necessities affordable to poor people without extension of consumer services and to prepare a foundation of various economic sectors in which private sectors can also participate later on. The private sector cannot step in the production when the economy is at the lower or initial stage and this is because there are limited sources and there are informational externalities/uncertainties and in such cases government does handholding by supporting private sector by extending subsidies and withdrawing them when private sector becomes competitive.[ii]
Subsidies can go well in an undistorted market only if they are aimed at certain objectives and once the objectives are achieved the subsidies must be abated. However, in democracies, once a subsidy is extended it becomes a matter of politics and an extremely sensitive issue regarding politics and governments may suffer huge risk if they try to phase out older subsidies. Thus, with time, new subsidies are extended which pile up on older ones and soon they consume the scarce revenue resources of the government. This takes a heavy toll on the expenditures of the government and they are forced to cut allocation to developmental and infrastructure avenues. Further, higher subsidy expenditure pushes up fiscal and revenue deficits as government starts spending more than it earns. This fiscal deficit can be closed preferably by raising more revenue through new taxes (proactively) or by borrowing money. Most significant consequence of either of the alternatives is that money is squeezed out of economy and which results in lower consumption/demand. This in turn hits the growth of economy and lower growth leads to lower collection of taxes. On the one hand subsidy burden keeps on increasing and on the other, the taxes collected are lower and also higher borrowing results in higher amount of interest to be paid. Moreover, if a government is not able to borrow money or raise taxes it will have to print new currencies to finance deficits which will increase money supply in the economy. This will create inflationary trends in economy, and incoherent subsidy regime does more unintended harm than good for the socio economic development.[iii]
In economics one of the most debatable topics is the choice between the two alternative uses of money: consumption and investment; and subsidies are that part of government’s expenditure that is consumed by beneficiaries. In 2013, total expenditure by government was 13.8% of GDP. Out of this revenue expenditure (consumption) was 12.1% of GDP, leaving just 1.7% of GDP for Capital expenditure (investments). Out of this revenue expenditure, non-plan expenditure was 9.5% of GDP.[iv]
Subsidies extended to rich people are regressive because subsidies are meant for poor people and they shall ensure equitable redistribution of resource. Subsidies help in keeping the poverty intact and help in creating the inefficiencies in economy which culminates in inflation and corruption. Rationalization of subsidy regime will improve markets in India which will then attract more investment. This in short, can turn the wheel of a virtuous economy which creates more employment and attacks poverty at its roots.
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