Subsidies vs welfare

The ground Reality of price controls and Subsidies in India

• Urea has been sold to farmers at Rs 5,628 per tonne since November 2012.
• Fertiliser companies haven’t also been allowed to charge more than Rs 27,000/tonne for di-ammonium phosphate since April 2022.
• Wheat and rice were being issued to public distribution system beneficiaries at Rs 2 and Rs 3 per kg respectively since July 2013 under the National Food Security Act
• The total subsidy spending on the three Fs – food, fertiliser and fuel – has gone up from Rs 228,341 crore to Rs 530,959 crore between 2019-20 and 2022-23.
• The real spike has, thus, happened post the pandemic.

State governments subsidies

• It isn’t only the Centre. States, too, have substantially stepped-up transfer payments through schemes rolled out in the last 2-3 years or less.
• Madhya Pradesh has budgeted Rs 8,000 crore in 2023-24 for the Mukhyamantri Ladli Behna Yojana and Rs 3,230 crore for the Kisan Kalyan Yojana

Significance of Subsidies in India

• Subsidies play a significant role in the Indian economy, serving various purposes:

Social Welfare

• Subsidies on food, fuel, fertilizers, and public transportation keep prices low, enabling access for low-income households and ensuring their basic needs are met.
• Subsidies support education, healthcare, and rural development programs, improving access and quality of life for vulnerable groups.
• Agricultural subsidies provide income support to farmers, mitigating risk and ensuring food security.

Economic Growth

• Subsidies can incentivize the growth of strategic sectors like agriculture, renewable energy, and infrastructure, driving economic development.
• Subsidies can encourage investment and create jobs in targeted sectors, contributing to economic growth.
• Subsidies can address market inefficiencies, such as negative externalities, and promote efficient resource allocation.

Drawbacks of Subsidies in India:

Fiscal Burden:

• Subsidies can strain public finances, leading to higher fiscal deficits and reduced spending on other essential areas like healthcare and education.
• Subsidies can distort market prices, leading to inefficient resource allocation and potentially promoting unsustainable production or consumption patterns.
• Many subsidies may not reach the intended beneficiaries, leading to waste and misallocation of resources.

Market Distortions:

• Subsidies can create unfair advantages for certain industries, hindering competition and innovation.
• Subsidized goods and services may be consumed beyond optimal levels, leading to waste and environmental damage.
• Dependence on subsidies can create disincentives for efficiency and innovation in subsidized sectors.
• Subsidies can be vulnerable to political manipulation, often benefiting powerful lobbies and special interests rather than the intended beneficiaries.
• Subsidy programs can be difficult to reform or remove due to vested interests and political resistance.

Environmental Impact:

• Unsustainable subsidies, like those on fossil fuels, can incentivize environmentally damaging activities and hinder the transition to clean energy.
• Subsidies can encourage the overuse of resources, leading to environmental degradation and depletion.

Conclusion:

• Centre states can’t ignore the fiscal costs of transfer payments.
• They come at the expense of spending on public services which yield results over the medium and long term.