SUBSIDIES IN INDIA
" SUBSIDIES ARE LIKE STEROIDS AS THEY PROVIDE QUICK RELIEF BUT DON'T PROMISE AN ENDURING CURE"
Providing minimum consumption entitlement to the poor by subsidizing the items consumed by them is extremely important for the welfare of the economy.
However, the benefits can be maximized only when the subsidies are transparent, well targeted, and subsidies designed for effective implementation without any leakages
Subsidies into 3 categories:
1.Public goods (national defence,police,general administration)--> available to all public so it is not priced and hence not included in subidy calculations
2.merit goods( againt diseases,environment protection,primary education,roads,bridges ,flood control etc)> they are beneficial to whole society(subsidy justified)
3.non-merit goods(benefit to individual consumer)
(3.a) CASH SUBSIDY
providing food and fertilizer to consumer at price lower than those at which the govt procure the commodity
(3.b) INTEREST OR CREDIT SUBSIDIES
loan given at lower than market rate( in the form of concessional credit to small scale industries or priority sector loan)
(3.c) TAX SUBSIDIES
tax exemption on medical expenses.postponing collection of tax arrears
(3.d) IN-KIND SUBSIDIES
free medical service through govt dispensaries,equipment for physically handicapped people
(3.e) PROCUREMENT SUBSIDIES
example is purchase of food grains at an assured price which is higher than the prevailing market price(MSP)
(3.f) REGULATORY SUBSIDIES
(fixing the price of goods produced by the public sector at less than the cost of production(making steel ,coal and other mineral available to industries,providing electricity to farmers at a rate much lower than cost)
Criticism:
1.non merit goods are criticised on the ground that they benefit individual while the cost os borne by the society
2.some time the benefit dont reach the intended beneficiary and gets diverted to better -off section of society
electricity provision are appropriated by large farmers and better-off section take the advantage
Major beneficiary of the central subsidies are industries,agriculture and power in the same order
At the state level social service account for the 39% total subsidies and economic service 61%
Since education ,health and water supply and sanitation are primarily the responsibility of state ,the level of subsidy is much higher in the social sector. In economic service irrigation is the major component .
The economic cause of subsidising merit goods is the strongest.
Some of the known subsidies like food and fertilizer and education beyond elementary level are not counted in group of merit services.
Elemeny of ' externality'>> beneficial to the society as a whole( in food and fertilizer subsidy the element of externality is limited and in such cases the subsidy may have to be on ground other than strong externality viz..social and equity objectives.
Education beyond the elementary level also falls outside the ambit of merit category
The share of social service which include education ,health,family welfare ,water supply and sanitation and labour and employment is only 21.2% in totl subsidy while the share of economic services ,agriculture,rural development,energy,industry minerals,irrigation and flood control, S&T,and environment is 78.8%
There is how ever the scope of reducing subsidy in economic services. For example in agriculture and rural development activities and even in coal and lignite.In all these services the recovery rate is very low.Another big area is industries and minerals.
What needs to be done???????
Overall recovery rate needs to be increased and attetion needs to be given for reucing the subsidy in agriculture and rural development,coal,lignite,industries and minerals industry.But the farm lobbies and industrial lobbies and coal mafias woult put up resistance.So decision needs to be taken at political level.
Food ,fertilizer and petroleum subsidies are the major component account for 91 % central government subsidy. On the other hand subsidy on railways ,interest subsidy account barely 9%
FOOD SUBSIDY
3 component:
a.subsidy to farmer through support price
b.subsidy to consumer through PDS
c.subsidy to FCI in purchase of food grain and maintaining the buffer stock
Issue: since FCI keeps on purchasing foodgrain without limit so this has resulted into creation of buffer stock in FCI gowdown in excess of prescribed norms
Some time the fod stock was so huge that the stock was reduced not by increasing the PDS offtake away but by exporting it at nearly close to BPL prices.
The cost and handling and carrying cost of foodgrain by FCI over and above minimum norms is met by the subsidy to FCI
FCI operation is concerned only in 5 states:
Punjab,Western UP,Haryana,Andhra Pradesh, Chattisgarh ,so the entire subsidy to farmer is available to the farmeres of these states only.MSP is much higher in 2 crops namely Rice and wheat ,which distorts the cropping pattern in favour of these 2 crops
Some policy reform suggested:
1. Before sowing food procurement target should be fixed with an error margin of 10% and suspend the purchase of operation once target is achieved .
2. A system of price insurance,similar to Farm Income Insurance Program be developed.
3.Fci should include greater number of states in their price support operation
4. In order to increase the efficiency ,The reimbursement to FCI should be on normative(relating with norms) units and actual involved quantity.
4. To inprove PDS penetration and reduce leakages, govt can introduce the scheme of food coupons to poor.A uniform PDS price will be fixed for APL and BPL facilities,but the poor can buy food grain partly with coupon and partly with cash.Since poor can not afford the monthly procurement of food grain in one go,the PDS purchases should be allowed on only on weekly basis. Restricting montly bulk purchase t PDS will discourage the not so needy from PDS outlet. This will help self targeting .
All these measure are good intensioned but major problem is in implementing these recommendations.For all thse years state have been succumbing to farm lobby pressure ,thereby responding with increases MSP PRICES AND unlimited procurement. Since the PDS operation is limeted to only 5 state it create huge buffer stock which needs to be exported as BPL PRICE.
BUt it will not be a good option to fix the procurement amount before sowing,so what can be done is govt should resist further increase in MSP and at the same time surplus food grain should be used to guarantee employment to all unemployed by extending the provision of employment guarantee act. Wages can be partly in cash and partly in kind (-food grain)
This wil be more practical way of converting food subsidy into employment. The government will earn the good will of farmers as well as un employed- landless labour,marginal farmers and other semi-literate in rural areas.
FERTILIZER SUBSIDY
FS is the difference between the retention price of fertilizer and the price at which it is made available to to consumers.The difference is paid to industry as subsidy
The scheme intended to provide fertilisers at a cheaper rate to the farmers and provide a 'reasonable' return on investment for the fertiliser producers, which would boost investment in the industry
Average share of fertilizer subsidy to farmer is 62 % and for industry it is 38 %.
any acheme to rationalize the fertilizer industry wil depend on 2 factors:
1. efficience of domestic domestic fertilizer industry and the domestic cost of production.
2. The international price of urea
In the event of opening of fertilizer sector import,the gas based plant will survive whereas other paticularly naphtha based plant would not. This is due to the fact that naptha or fuel oil or low sulphur feedstock is more costly as a raw material than natural gas.
what the right path now?????
1.There is a need to reduce subsidy to farmer as well as industry. In the short term the subsidy can continue but in the long term the option of setting up ferrtilizer plant in such countries where natural gas is available in plenty may be considered
2.There is need o increase the farm gate price of urea at regular interval.The report is in the opinion that application of fertilizer is more dependent on technological and non-price factorsthan on price of agro-economic variables.These factors include:irrigation facility,cropping pattern,spread of HYV seeds,effective fertilizer distribution and availability of credit. It is recommended public investment as an effective instrument to promote the use of fertilizer. Moreover rationalization of urea price would have a salutary impact on balanced application of NPK.
PETROLEUM SUBSIDY
2 MAJOR COMPONENT:
a. subsidy fof kerosene for domestic use
b. LPG subsidy due to the difference between International price and the price at which it is supplied o consumer
if internationa oil price rises there is increase in the subsidy burden of govermnent. LPG subsidy mainly benefits the higher expenditure group in the urban areas and may be regressive.Urban area recieve large kerosene subsidy .The limited availability of kerosene in rural area is biases towas lighting rather than cooking.
Keroscene subsidy is prone to misutlization as half of the subsidized kerosene dosent reaches to the intended group.To improve this ,coupon must be issued to poor ration card holder with entitlement to purchase kerosene from retailer at subsidized price.
but do the coupon will work???
is administrative machinery pro-poor?
The best we can do is to provide coupon to the people whose cildren are stdying in primary school. or who avail the facility of PHCs.A system of identification of poor must be placed or else even the coupon method would lead to heavy misutilization
FUTURE POLICY ON SUBSIDY
1.Implicit subsidy are growing both at centre and state level
Eg: large number of tax exemption are given to SEZ. They imply a big loss of tax revenue.Another instance of role of state govt in acquiring land for SEZ and passing on o industrial house.
take the example of singur plan of TATA NANO ,where gove has given large tax consession to company
Critics: are we following a policy of inclusive growth by taking away the livelihood of farmers,sharecroppers,and other associated persons
dependent on land????? and at the same time we are providing various type of tax consession to industries like tax holiday,power,electricity,cheap credit,financial support,exemption and waiver.
Same time state gove provide highly subsidized electricity to farmers which mainly benefits rich farmers.
Fiscal deficit is always large due to subsidy burden.
International fertilizer prices are 4-5 times higher and even food subsidy ,due to shortage of food at home ,it needs to be imported so that it can be given to poor at subsidised rate
Even issuing bond to public sector of petroleu company is of no use the country shall only postponing burden to future
Total subsidy can go upto 4-5 % GDP.
What are the policy option????
The govt has no option but to continue with the petroleum subsidy, if domestic oil price increased it will only partially help. The option of reducing petroleum imports is not available to government in view of expanding demand of petroleum due to sharp increase in growing demand and production for automobile
Can not even increase food and fertilizer price.
Got has to take decision on large scale exemption given to industries so as to enhance its revenue
Thus some measures for effective utilization of subsidies can be:
1. The focus should be on physical achievements and not on financial disbursements.
2. The effects of subsidies should be monitorable and measurable in terms of quality or quantity.
3. Subsidies should be given as a one- time help or for a short period. Subsidies on continuing basis should be avoided.
4. The parameters fixed on subsidy should be transparent.
5. Subsidies should be cost- effective. Most of the assistance should reach the intended beneficiary and very small amount should be spent on administrative arrangements.
6. Subsidies should be properly targeted, i.e. benefit should go to the really deserving.
7. Timing of subsidies should be made proper. For example, free seed distribution should be just before sowing.
The major question in front of the policy- makers and economists these days is that that do we really need subsidies? For this, one needs to look into the negative effects of subsidies which are far more than the positive effects. Once received, people become dependent on the subsidies. Subsidies make the beneficiaries lethargic. Hence, subsidies are sometimes termed as sweet poison. Misuse of subsidies for political purpose is known worldwide. Subsidies support one industry at the expense of the other. When a person is given subsidy benefit, it imposes burden on some other person in the country. Malpractices have often been noticed in the administration of subsidies.
The whole issue of subsidies is an economic as well as a political issue(vote bank politics)
Increases in subsidies will only result in keeping the political constituents happy and lead to a bulging fiscal deficit – without benefiting the intended beneficiaries.
One who advocates subsidies should also keep in mind one thing that the subsidies in India never reach their intended target i.e. the poor
The fact is, in India, most subsidies are not for the poor but for the rich. Despite of the continuously rising food subsidies, hunger and malnutrition prevails in the entire county.
Due to faulty government practices, people who are in the real need of subsidies- even for their sheer survival are being forced out of the system.
Fertilizer subsidy places another heavy burden on the central government. It is a very well known fact that the subsidy benefits majorly goes to the fertilizer industry and not the farmers. Only 60 per cent of fertiliser subsidy goes to farmers. If we take a look at the fertilizer subsidy and its origin, then we will come to know that the original purpose of the fertilizer subsidy was to encourage spread of green revolution technology to new areas and farmers but this reason and motive has lost its credibility in the recent years.
Here regarding the fertilizer subsidy, one should also keep in mind that the availability of subsidised fertiliser should be restricted to farmers who grow staple food and cereals as they need it the most and those farmers, who produce cash crops, do extensive horticulture or produce farm goods for direct exports should be kept outside the purview of subsidy regime.
Subsidies provided in India suffer from both inclusion error (wrong kind of people benefiting) and exclusion error (deserving people left out of subsidies). Efficient subsidies must be transparent, targeted and-in many cases-temporary. These three Ts are missing from most subsidies in India.
The issue is not about removing subsidies but about how to make them effective so that they reach the target consumers and people are benefited from it. The policy- makers should try out new- mechanisms to reach the target consumers more effectively. Sometimes government subsidises some things but those things might not be affordable by the target audience, so there is need for restructuring of subsidies.
Now the time has come when the Planning Commission, the Central Government, and the National Development Council will have to work on building a political and national consensus on the subsidy issue. It is important that we restructure subsidies so that only the really needy and the poor benefit from them and all leakages are plugged. All subsidies should be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor.
" SUBSIDIES ARE LIKE STEROIDS AS THEY PROVIDE QUICK RELIEF BUT DON'T PROMISE AN ENDURING CURE"
Providing minimum consumption entitlement to the poor by subsidizing the items consumed by them is extremely important for the welfare of the economy.
However, the benefits can be maximized only when the subsidies are transparent, well targeted, and subsidies designed for effective implementation without any leakages
Subsidies into 3 categories:
1.Public goods (national defence,police,general administration)--> available to all public so it is not priced and hence not included in subidy calculations
2.merit goods( againt diseases,environment protection,primary education,roads,bridges ,flood control etc)> they are beneficial to whole society(subsidy justified)
3.non-merit goods(benefit to individual consumer)
(3.a) CASH SUBSIDY
providing food and fertilizer to consumer at price lower than those at which the govt procure the commodity
(3.b) INTEREST OR CREDIT SUBSIDIES
loan given at lower than market rate( in the form of concessional credit to small scale industries or priority sector loan)
(3.c) TAX SUBSIDIES
tax exemption on medical expenses.postponing collection of tax arrears
(3.d) IN-KIND SUBSIDIES
free medical service through govt dispensaries,equipment for physically handicapped people
(3.e) PROCUREMENT SUBSIDIES
example is purchase of food grains at an assured price which is higher than the prevailing market price(MSP)
(3.f) REGULATORY SUBSIDIES
(fixing the price of goods produced by the public sector at less than the cost of production(making steel ,coal and other mineral available to industries,providing electricity to farmers at a rate much lower than cost)
Criticism:
1.non merit goods are criticised on the ground that they benefit individual while the cost os borne by the society
2.some time the benefit dont reach the intended beneficiary and gets diverted to better -off section of society
electricity provision are appropriated by large farmers and better-off section take the advantage
Major beneficiary of the central subsidies are industries,agriculture and power in the same order
At the state level social service account for the 39% total subsidies and economic service 61%
Since education ,health and water supply and sanitation are primarily the responsibility of state ,the level of subsidy is much higher in the social sector. In economic service irrigation is the major component .
The economic cause of subsidising merit goods is the strongest.
Some of the known subsidies like food and fertilizer and education beyond elementary level are not counted in group of merit services.
Elemeny of ' externality'>> beneficial to the society as a whole( in food and fertilizer subsidy the element of externality is limited and in such cases the subsidy may have to be on ground other than strong externality viz..social and equity objectives.
Education beyond the elementary level also falls outside the ambit of merit category
The share of social service which include education ,health,family welfare ,water supply and sanitation and labour and employment is only 21.2% in totl subsidy while the share of economic services ,agriculture,rural development,energy,industry minerals,irrigation and flood control, S&T,and environment is 78.8%
There is how ever the scope of reducing subsidy in economic services. For example in agriculture and rural development activities and even in coal and lignite.In all these services the recovery rate is very low.Another big area is industries and minerals.
What needs to be done???????
Overall recovery rate needs to be increased and attetion needs to be given for reucing the subsidy in agriculture and rural development,coal,lignite,industries and minerals industry.But the farm lobbies and industrial lobbies and coal mafias woult put up resistance.So decision needs to be taken at political level.
Food ,fertilizer and petroleum subsidies are the major component account for 91 % central government subsidy. On the other hand subsidy on railways ,interest subsidy account barely 9%
FOOD SUBSIDY
3 component:
a.subsidy to farmer through support price
b.subsidy to consumer through PDS
c.subsidy to FCI in purchase of food grain and maintaining the buffer stock
Issue: since FCI keeps on purchasing foodgrain without limit so this has resulted into creation of buffer stock in FCI gowdown in excess of prescribed norms
Some time the fod stock was so huge that the stock was reduced not by increasing the PDS offtake away but by exporting it at nearly close to BPL prices.
The cost and handling and carrying cost of foodgrain by FCI over and above minimum norms is met by the subsidy to FCI
FCI operation is concerned only in 5 states:
Punjab,Western UP,Haryana,Andhra Pradesh, Chattisgarh ,so the entire subsidy to farmer is available to the farmeres of these states only.MSP is much higher in 2 crops namely Rice and wheat ,which distorts the cropping pattern in favour of these 2 crops
Some policy reform suggested:
1. Before sowing food procurement target should be fixed with an error margin of 10% and suspend the purchase of operation once target is achieved .
2. A system of price insurance,similar to Farm Income Insurance Program be developed.
3.Fci should include greater number of states in their price support operation
4. In order to increase the efficiency ,The reimbursement to FCI should be on normative(relating with norms) units and actual involved quantity.
4. To inprove PDS penetration and reduce leakages, govt can introduce the scheme of food coupons to poor.A uniform PDS price will be fixed for APL and BPL facilities,but the poor can buy food grain partly with coupon and partly with cash.Since poor can not afford the monthly procurement of food grain in one go,the PDS purchases should be allowed on only on weekly basis. Restricting montly bulk purchase t PDS will discourage the not so needy from PDS outlet. This will help self targeting .
All these measure are good intensioned but major problem is in implementing these recommendations.For all thse years state have been succumbing to farm lobby pressure ,thereby responding with increases MSP PRICES AND unlimited procurement. Since the PDS operation is limeted to only 5 state it create huge buffer stock which needs to be exported as BPL PRICE.
BUt it will not be a good option to fix the procurement amount before sowing,so what can be done is govt should resist further increase in MSP and at the same time surplus food grain should be used to guarantee employment to all unemployed by extending the provision of employment guarantee act. Wages can be partly in cash and partly in kind (-food grain)
This wil be more practical way of converting food subsidy into employment. The government will earn the good will of farmers as well as un employed- landless labour,marginal farmers and other semi-literate in rural areas.
FERTILIZER SUBSIDY
FS is the difference between the retention price of fertilizer and the price at which it is made available to to consumers.The difference is paid to industry as subsidy
The scheme intended to provide fertilisers at a cheaper rate to the farmers and provide a 'reasonable' return on investment for the fertiliser producers, which would boost investment in the industry
Average share of fertilizer subsidy to farmer is 62 % and for industry it is 38 %.
any acheme to rationalize the fertilizer industry wil depend on 2 factors:
1. efficience of domestic domestic fertilizer industry and the domestic cost of production.
2. The international price of urea
In the event of opening of fertilizer sector import,the gas based plant will survive whereas other paticularly naphtha based plant would not. This is due to the fact that naptha or fuel oil or low sulphur feedstock is more costly as a raw material than natural gas.
what the right path now?????
1.There is a need to reduce subsidy to farmer as well as industry. In the short term the subsidy can continue but in the long term the option of setting up ferrtilizer plant in such countries where natural gas is available in plenty may be considered
2.There is need o increase the farm gate price of urea at regular interval.The report is in the opinion that application of fertilizer is more dependent on technological and non-price factorsthan on price of agro-economic variables.These factors include:irrigation facility,cropping pattern,spread of HYV seeds,effective fertilizer distribution and availability of credit. It is recommended public investment as an effective instrument to promote the use of fertilizer. Moreover rationalization of urea price would have a salutary impact on balanced application of NPK.
PETROLEUM SUBSIDY
2 MAJOR COMPONENT:
a. subsidy fof kerosene for domestic use
b. LPG subsidy due to the difference between International price and the price at which it is supplied o consumer
if internationa oil price rises there is increase in the subsidy burden of govermnent. LPG subsidy mainly benefits the higher expenditure group in the urban areas and may be regressive.Urban area recieve large kerosene subsidy .The limited availability of kerosene in rural area is biases towas lighting rather than cooking.
Keroscene subsidy is prone to misutlization as half of the subsidized kerosene dosent reaches to the intended group.To improve this ,coupon must be issued to poor ration card holder with entitlement to purchase kerosene from retailer at subsidized price.
but do the coupon will work???
is administrative machinery pro-poor?
The best we can do is to provide coupon to the people whose cildren are stdying in primary school. or who avail the facility of PHCs.A system of identification of poor must be placed or else even the coupon method would lead to heavy misutilization
FUTURE POLICY ON SUBSIDY
1.Implicit subsidy are growing both at centre and state level
Eg: large number of tax exemption are given to SEZ. They imply a big loss of tax revenue.Another instance of role of state govt in acquiring land for SEZ and passing on o industrial house.
take the example of singur plan of TATA NANO ,where gove has given large tax consession to company
Critics: are we following a policy of inclusive growth by taking away the livelihood of farmers,sharecroppers,and other associated persons
dependent on land????? and at the same time we are providing various type of tax consession to industries like tax holiday,power,electricity,cheap credit,financial support,exemption and waiver.
Same time state gove provide highly subsidized electricity to farmers which mainly benefits rich farmers.
Fiscal deficit is always large due to subsidy burden.
International fertilizer prices are 4-5 times higher and even food subsidy ,due to shortage of food at home ,it needs to be imported so that it can be given to poor at subsidised rate
Even issuing bond to public sector of petroleu company is of no use the country shall only postponing burden to future
Total subsidy can go upto 4-5 % GDP.
What are the policy option????
The govt has no option but to continue with the petroleum subsidy, if domestic oil price increased it will only partially help. The option of reducing petroleum imports is not available to government in view of expanding demand of petroleum due to sharp increase in growing demand and production for automobile
Can not even increase food and fertilizer price.
Got has to take decision on large scale exemption given to industries so as to enhance its revenue
Thus some measures for effective utilization of subsidies can be:
1. The focus should be on physical achievements and not on financial disbursements.
2. The effects of subsidies should be monitorable and measurable in terms of quality or quantity.
3. Subsidies should be given as a one- time help or for a short period. Subsidies on continuing basis should be avoided.
4. The parameters fixed on subsidy should be transparent.
5. Subsidies should be cost- effective. Most of the assistance should reach the intended beneficiary and very small amount should be spent on administrative arrangements.
6. Subsidies should be properly targeted, i.e. benefit should go to the really deserving.
7. Timing of subsidies should be made proper. For example, free seed distribution should be just before sowing.
The major question in front of the policy- makers and economists these days is that that do we really need subsidies? For this, one needs to look into the negative effects of subsidies which are far more than the positive effects. Once received, people become dependent on the subsidies. Subsidies make the beneficiaries lethargic. Hence, subsidies are sometimes termed as sweet poison. Misuse of subsidies for political purpose is known worldwide. Subsidies support one industry at the expense of the other. When a person is given subsidy benefit, it imposes burden on some other person in the country. Malpractices have often been noticed in the administration of subsidies.
The whole issue of subsidies is an economic as well as a political issue(vote bank politics)
Increases in subsidies will only result in keeping the political constituents happy and lead to a bulging fiscal deficit – without benefiting the intended beneficiaries.
One who advocates subsidies should also keep in mind one thing that the subsidies in India never reach their intended target i.e. the poor
The fact is, in India, most subsidies are not for the poor but for the rich. Despite of the continuously rising food subsidies, hunger and malnutrition prevails in the entire county.
Due to faulty government practices, people who are in the real need of subsidies- even for their sheer survival are being forced out of the system.
Fertilizer subsidy places another heavy burden on the central government. It is a very well known fact that the subsidy benefits majorly goes to the fertilizer industry and not the farmers. Only 60 per cent of fertiliser subsidy goes to farmers. If we take a look at the fertilizer subsidy and its origin, then we will come to know that the original purpose of the fertilizer subsidy was to encourage spread of green revolution technology to new areas and farmers but this reason and motive has lost its credibility in the recent years.
Here regarding the fertilizer subsidy, one should also keep in mind that the availability of subsidised fertiliser should be restricted to farmers who grow staple food and cereals as they need it the most and those farmers, who produce cash crops, do extensive horticulture or produce farm goods for direct exports should be kept outside the purview of subsidy regime.
Subsidies provided in India suffer from both inclusion error (wrong kind of people benefiting) and exclusion error (deserving people left out of subsidies). Efficient subsidies must be transparent, targeted and-in many cases-temporary. These three Ts are missing from most subsidies in India.
The issue is not about removing subsidies but about how to make them effective so that they reach the target consumers and people are benefited from it. The policy- makers should try out new- mechanisms to reach the target consumers more effectively. Sometimes government subsidises some things but those things might not be affordable by the target audience, so there is need for restructuring of subsidies.
Now the time has come when the Planning Commission, the Central Government, and the National Development Council will have to work on building a political and national consensus on the subsidy issue. It is important that we restructure subsidies so that only the really needy and the poor benefit from them and all leakages are plugged. All subsidies should be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor.
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