Business of Subsidy

Subsidies, It is the word, Which is too much used in these days. Current economic condition of India has a lot to do with the subsidies, growing fiscal deficit drive a concern towards a cut in subsidies.

Political scenario and socialist continuously back the various Govt policy related subsidy, Some state introducing new subsidy policy and asking for new package to sponsor subsidies.

Kelkar panel’s recommendation on subsidy cut restarted this debate. The recent hike in petrol, diesel price and cap on LPG cylinders is one of the recommendations of Kelkar panel. Government  back subsidy policy by saying “In a developing country like ours where a significant population is poor, certain level of subsidies is necessary and unavoidable and measure must be taken to protect poor and vulnerable section of the society “

Let us first understand first what is subsidy?

A subsidy is assistance paid to a business or economic sector or producers. Most subsidies are made by the government to producers or distributed as subventions in an industry to prevent the decline of that industry (e.g. as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labour (as in the case of a wage subsidy)

Have a look towards subsidy in kerosene –The Government has provided a subsidy of Rs 24.38 per litre on PDS kerosene. Govt provide it at Rs 15.47 per litre to common man and Buys it Rs  39.85 per litre. Every single litter of kerosene is taking away Rs 24.38 per litre from Govt. This subsidy is to protect the interest of company to not turn their business in loss making and to people by ensuring its availability at affordable price. As much as 39% of subsidized kerosene is stolen.

The government, since Independence has been subsidizing many industries and products, from petrol to food. Loss-making state-owned enterprises are supported by the government. Farmers are given electricity for free. Overall, a 2005 article by International Herald Tribune stated that subsidies amounted to 14% of GDP. 

Government giving subsidies to many industries, on the other hand, India spends relatively little on education, health, or infrastructure. Urgently needed infrastructure investment has been much lower than in China. According to the UNESCO, India has the lowest public expenditure on higher education per student in the world.

India's vast subsidies have been severely criticized by the World Bank as increasing economic inefficiency.

Do we really require subsidy in India?

 India is a poor country and it is in the phase of transition our large number of population belongs to rural area or sub urban area and lives either on below poverty line or on the edge of poverty line. Subsidy is a tool to insulate the interest of these people. It means we require Subsidy.

Here is the question, is mechanism to provide subsidy is it really working?

When we talk about major subsidies then food subsidy is one of the major subsidy.

Food subsidies are implemented through Public distribution system and off course The corruption in PDS system is not hidden from anybody. This means the money invested in food subsidy is not helping people but helping the black marketer to dump the food in their stores at a subsidies price and create an artificial demand to sell it at high prices.

Subsidy is given in India in Education, Food, Health, Fertilizers agriculture. The subsidy given in education is a mechanism to teach the poor students in Govt school at a very Low fee, providing them free books- Mid day meal scheme .The quality of education in these schools is known to every one –It means there is no parameter to measure the outcome.

This precisely shows that there is a big problem in the mechanism which needy people do not get direct or visible benefit of subsidy given to them.

Fortunately Rajasthan Govt took a step to fix the tab, recent development in changing mechanism is witnessed in Rajasthan as Pilot project to direct transfer of subsidy to thae beneficiaries.

The Aadhaar-linked pilot project on direct transfer of subsidy for kerosene in Rajasthan has been quite successful in weeding out ghost customers.Initial trends of the project, being implemented since December 2011 in a block in Alwar, show a significant drop of kerosene being sold under the public distribution system (PDS). This is an indication that diversion is being checked

The official said that, the mechanism was working. PDS shop customers entitled for supplies are enrolled under the scheme, and then subsidy is directly credited to their account at least a month in advance and the kerosene is sold at market price on 44.50 litre to all. This scheme resulted in successful utilisation of subsidy to beneficiary. This also created a free market situation for kerosene and the treatment of kerosene consumer is changing from hostile to friendly.

The free market forces can enable people and stabilize market situation .Supporting free market will also give producer a chance to get fair price of their product and its effectiveness will be higher than the mechanism of artificially controlling the price of goods/Produce by subsidizing Producer or customer.

Subsidy in Agriculture also consist large pie of Government subsidy. Subsidy in agriculture is also not good practice in place of giving them subsidy Govt should be concern about providing them Market. In this summer Bundelkhand (U.P.) produced a record production of Wheat. Govt agency bought wheat at Rs 1080 per quintal while Market rate Rs 1250 per quintal. The middleman charges 50-100 Rs per quintal that means a loss of 2.5 Rs per quintal to farmers. A free market situation will create a situation where farmer can avoid this .If there will be free market situation then these 2.5 Rs will go to the Farmer and he won’t be asking for subsidy.

The Subsidy in Diesel is leading to Growth in diesel Cars market. Subsidy in diesel is designed for farmers and transporters but it is being utilized by the Luxury Car owners.

In Education Govt could stop funding the Govt School mechanism. They could start issuing Coupon to Kids that will transfer Money to Private School owners to ensure that money is reaching to beneficiary and beneficiary utilizing it for education.

The Generalize Mechanism of Subsidy has failed miserably .Govt needs to understand and accept the flaw in mechanism and bring the right mechanism in Place just like as Rajasthan Govt.