|Demand of the question
Introduction. Contextual Introduction.
Body. Discuss arguments in support of subsidies and against.
Conclusion. Way forward.
A subsidy is a form of financial aid or support extended generally with the aim of promoting economic and social welfare. The subsidy is given to improve the lives of the poor and is important to promote social justice in the society. But subsidies also put a great burden on fiscal purse. It is not considered as sustainable as the root problem remains unresolved.
Subsidies- not a sustainable solution:
- Fiscal burden: The economic survey, 2017 points out that despite spending as high as 3.77 lakh crore rupees annually on subsidies, there is no ‘transformational impact’ on standard of living of masses. India spends roughly 2% of the GDP in indirect subsidies, which put excessive burden on fiscal purse with lesser impact than desired.
- Optimal amount: An important problem with subsidy is calculating the optimal amount after overcoming unseen costs. An unjust price makes subsidies more burdensome than they are beneficial.
- Corruption: Providing subsidies doesn’t ensure it reaches the hands of needy. Leakages, corruption are common malaise that reduce the effectiveness of subsidies. For example, leakages in PDS do not lead to social welfare of many but put extra burden on fiscal purse. At the all-India level according to parliamentary standing committee it is observed that leakages were around 40% for food grains in India.
- False beneficiaries: A World Bank study argued that the rich stood to gain more than the poor from public provision of services such as healthcare and education due to various factors. Despite free provisioning, availing of services entails private costs which the rich found easier to pay.
- Distortion: Agricultural subsidies distort the cropping pattern which leads to environmental degradation and pollution. Overuse and inefficient use of scarce resources such as water and financial losses to the government because of power subsidies.
Need of subsidies:
- Ensuring welfare: Its state responsibility to ensure welfare of all the people. Subsidies are a way to ensure the welfare of people. This allow inclusiveness and equity in the society by welfare of marginalised.:
- Social justice: Few communities have been economically, socially and historically marginalised in society, for example Dalits. A helping hand is needed for such people. Subsidies provide social justice in a way that allows equal rights and opportunities to all.
- Farmers welfare: Around 600 million people are dependent on agriculture. With nearly 98% of Indian farmers being on low income or are resource poor with mostly engaged in subsistence farming, farm subsidies provide relief to them.
- Affordability: Subsidies make services affordable. For example, food subsidies allow everyone to afford a meal at very low prices. Similarly agricultural subsidies help in making agriculture an affordable business.
- Reduce prices: Government subsidies help industry by allowing the producers to produce more goods and services. This increases the overall supply of that good or service, increases the quantity demanded for that good or service and lowers the overall price of the good or service.
- Rationalisation: Subsidies are must for uplifting poor and helping them to get out of poverty. Thus, we can’t remove subsidies. Rationalisation according to the demand of programmes based on marketability, affordability and input cost and according to different income groups could pave the way for optimal utilisation of subsidies.
- Universal basic income: Universal basic income is an alternate to subsidies. It removes issues of corruption and leakages. Further, a universal basic income helps the government to make better budgetary provisions as many subsidised schemes fail to reflect exact ground situation. Universal basic income gives a choice to the poor to invest in education and health.
- Investment: The impact of public investment on both the agriculture and rural poverty is far greater than that of fertiliser, electricity, irrigation and interest rate subsidy. There should be fewer freebies and higher investment in agriculture research, irrigation, better infrastructure.
- Technology: Technological improvement like Aadhaar, direct benefit transfer can be used to eliminate inclusion and exclusion errors. The third party verifications of beneficiary will help in eliminating the free riders.
- Targeted subsidies: There should be better targeting of subsidies by linking them to specific crops, size of farms, area, regions etc. This is important to prevent false beneficiaries and to benefit only the needy.
Subsidies are must to ensure welfare of the poor. It can help in improving access to education and bridge socio-economic divides across communities in the country. However, these can be rationalised in order to reap optimum benefits. It is better to make subsidies more rational and targeted. Direct transfer of cash can help in plugging the leakages.