Published: Wednesday, 10 February, 2016 10:50 AM
Rationalization of Subsidies – Pros & Cons
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Read General Awareness Topic : Rationalization of Subsidies – Pros & Cons
At the recently held Global Business Summit in Delhi, Prime Minister Narendra Modi stressed the need to rationalize subsidies and strive for reforms that positively make a difference in transforming the lives of the people. RBI governor Rahguram Rajan has also made a strong case for streamlining subsidies during the recent monetary policy review meeting and urging the government to not miss fiscal deficit targets.
The prime minister was categorical in his assertion that rationalization of subsidies does not necessarily mean their elimination and that his government will continue to use them towards the welfare of the poor. No government can ignore that more than one-third population in the country are still living in poverty. However, what Modi meant was that wasteful expenditure must be removed without compromising the need to provide support to the purchasing power of the people.
A difference between good and bad subsidies therefore needs to be made and that requires an objective assessment of the entire subsidy culture that permeates India’s political system. A lot of subsidies are targeted towards creating political constituencies and vote banks which nurture and perpetrate a system of state patronization. A case in point is price subsidies, which have formed an important part of anti-poverty policies in India.
The Economic Survey 2015-16 questioned their impact in transforming the lives of the poor.The center and state governments offer a host of price subsidies, including on rice, wheat, pulses, sugar, kerosene, cooking gas, water, electricity, and fertilizer. The survey pegged the fiscal cost of these subsidies at Rs 3.78 trillion, which translates into 4.24% of gross domestic product.
The major criticism levelled against price subsidies is that they are regressive and benefit unintended richer households more than poorer households. Artificially low pricing encourages leakages and wastage particularly in the public distribution system. The survey calculated about 15% of rice, 54% of wheat, and 48% of sugar distributed under the public distribution system is lost. In case of fertilizer subsidies, it benefits manufacturers the most, not poor farmers.
Moreover, price subsidies also distort markets in ways benefitting the middlemen ultimately hurtingthe poor. India’s high food inflation rate is also linked to the rising minimum support prices. Environmentally, it leads to water-intensive cultivation depleting groundwater tables. While diesel subsidy has been removed and prices linked to the international market, India retains subsidy in many products and the government efforts to rationalize price subsidies remain constrained populist concerns.
A broad consensus is emerging that any rationalization of subsidies must begin with targeting the right segments of population who are in genuine need. It is here the major shift is taking place with government agencies and civil society organizations pushing for social welfare measures that invest in creating productive assets and processes in the economy.
To weed out corruption and middlemen, the use of technology and financial inclusion are being used as a key enablers. It will add thrust to economic growth and improve efficient governance which brings the greatest benefit to the poor. For instance, six million consumers reportedly surrendered their cooking gas cylinder connections on prime minister’s appeal. More importantly, the part of subsidy is deposited in the beneficiaries’ bank accounts which reduce the scope for corruption and black marketing.
For the last three to four years, India has focused on reining in fiscal deficit over propping growth. A trim subsidy outgo will help government augment its finances and divert it to public infrastructure or other productive assets in the economy, which, in turn will generate employment and spur consumer demand across all sectors in the economy.
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