The Indian government has, since war, subsidised many industries and products, from fuel to gas.
Kerosene subsidy was introduced during the 2nd Five Year Plan (1956–1961) and since 2009 slowly decreased until 2022 when it was eliminated.
Introduction
A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy. Derived from the Latin word 'subsidium', a subsidy literally implies coming to assistance from behind. However, their beneficial potential is at its best when they are transparent, well targeted, and suitably designed for practical implementation. Subsidies are helpful for both economy and people as well. Subsidies have a long-term impact on the economy; the Green Revolution being one example. Farmers were given good quality grain for subsidised prices. Likewise, we can see that how the government of India is trying to reduce air pollution to subsidies lpg
Like indirect taxes, they can alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources. Subsidies in areas such as education, health and environment at times merit justification on grounds that their benefits are spread well beyond the immediate recipients, and are shared by the population at large, present and future. For many other subsidies, however the case is not so clear-cut. Arising due to extensive governmental participation in a variety of economic activities, there are many subsidies that shelter inefficiencies or are of doubtful distributional credentials. Subsidies that are ineffective or distortionary need to be weaned out, for an undiscerning, uncontrolled and opaque growth of subsidies can be deleterious for a country's public finances.
In India, as also elsewhere, subsidies now account for a significant part of government's expenditures although, like that of an iceberg, only their tip may be visible. These implicit subsidies not only cause a considerable draft on the already strained fiscal resources, but may also fail on the anvil of equity and efficiency as has already been pointed out above.
In the context of their economic effects, subsidies have been subjected to an intense debate in India in recent years. Issues like the distortionary effects of agricultural subsidies on the cropping pattern, their impact on inter-regional disparities in development, the sub-optimal use of scarce inputs like water and power induced by subsidies, and whether subsidies lead to systemic inefficiencies have been examined at length. Inadequate targeting of subsidies has especially been picked up for discussion.
This paper based on the study conducted by Srivastava, Sen et al. under the aegis of National Institute of Public Finance and Policy, and the discussion paper brought out by Department of Economic Affairs( Ministry of Finance) in 1997, aims to provide a comprehensive estimate of budget-based subsidies in India. In addition, recent trends have been included from the Economic Survey for the year 2004–05. Attention is focused on bringing out the magnitude of the implicit subsidies, in addition to the explicit ones, to form an idea as to how heavy a draft do they constitute on the fiscal resources of the economy.
Social security subsidies The following table shows financial size of the social security subsidies in India funded by the Union government of India. The table does not cover other programs operated by various State governments, see Public welfare in India. The social security benefits / subsidies offered by various state governments is estimated to be above Rs. 600 billion (US$10 billion). Thus total subsidies become Rs. 3,600 billion (US$60 billion).
+Social security budget 2013–14 RegionSocial security programBillion RupeeBillion US$ Pan IndiaTotal subsidy for FY-2013-14 (approx)3,60060.00 Pan IndiaFood Security (PDS) (subsidy)1,25020.83 Pan IndiaPetroleum (subsidy)97016.17 RuralFertilizer (subsidy)66011.00 RuralNREGA (non-subsidy)3305.50 RuralChild development (ICDS) (non-subsidy)1772.95 RuralDrinking water and sanitation (non-subsidy)1522.53 RuralIndira Awaas Yojana (IAY) (non-subsidy)1512.52 RuralMaternal and child malnutrition (non-subsidy)30.05 StatesVarious programmes of state govts (subsidy/non-subsidy)60010.00
Subsidy: Meaning and economic rationale
Objectives Subsidies, by means of creating a wedge between consumer prices and producer costs, lead to changes in demand/ supply decisions. Subsidies are often aimed at : inducing higher consumption/ production offsetting market imperfections including internalisation of externalities; achievement of social policy objectives including redistribution of income, population control, etc.
Transfers and Subsidies
Transfers which are straight income supplements need to be distinguished from subsidies. An unconditional transfer to an individual would augment his income and would be distributed over the entire range of his expenditures. A subsidy however refers to a specific good, the relative price of which has been lowered because of the subsidy with a view to changing the consumption/ allocation decisions in favour of the subsidised goods. Even when subsidy is hundred percent, i.e. the good is supplied free of cost, it should be distinguished from an income-transfer (of an equivalent amount) which need not be spent exclusively on the subsidised good.
Transfers may be preferred to subsidies on the ground that i) any given expenditure of State funds will increase welfare more if it is given as an income-transfer rather than via subsidising the price of some commodities, and ii) transfer payments can be better targeted at a specific income groups as compared to free or subsidised goods.
Mode of administering a subsidy
The various alternative modes of administering a subsidy are: Subsidy to producers Subsidy to consumers Subsidy to producers of inputs Providing Incentives Instead of Subsidising Production/sales through public enterprises Cross subsidisation
Subsidy targeting
Subsidies can be distributed among individuals according to a set of selected criteria, e.g. 1) merit, 2) income-level, 3)social group etc. two types of errors arise if proper targeting is not done, i.e. exclusion errors and inclusion errors. In the former case, some of those who deserve to receive a subsidy are excluded, and in the latter case, some of those who do not deserve to receive subsidy get included in the subsidy programme.
Effects of subsidies
Economic effects of subsidies can be broadly grouped into Allocative effects: these relate to the sectoral allocation of resources. Subsidies help draw more resources towards the subsidised sector Redistributive effects: these generally depend upon the elasticities of demands of the relevant groups for the subsidised good as well as the elasticity of supply of the same good and the mode of administering the subsidy. Fiscal effects: subsidies have obvious fiscal effects since a large part of subsidies emanate from the budget. They directly increase fiscal deficits. Subsidies may also indirectly affect the budget adversely by drawing resources away from tax-yielding sectors towards sectors that may have a low tax-revenue potential. Trade effects: a regulated price, which is substantially lower than the market clearing price, may reduce domestic supply and lead to an increase in imports. On the other hand, subsidies to domestic producers may enable them to offer internationally competitive prices, reducing imports or raising exports.
Subsidies may also lead to perverse or unintended economic effects. They would result in inefficient resource allocation if imposed on a competitive market or where market imperfections do not justify a subsidy, by diverting economic resources away from areas where their marginal productivity would be higher. Generalised subsidies waste resources; further, they may have perverse distributional effects endowing greater benefits on the better off people. For example, a price control may lead to lower production and shortages and thus generate black markets resulting in profits to operators in such markets and economic rents to privileged people who have access to the distribution of the good concerned at the controlled price.
Subsidies have a tendency to self-perpetuate. They create vested interests and acquire political hues. In addition, it is difficult to control the incidence of a subsidy since their effects are transmitted through the mechanism of the market, which often has imperfections other than those addressed by the subsidy. On 29 June 2012, C Rangarajan, Chairman of the Prime Minister's Advisory Council in view of present difficult economic position, advocated cutting down of fuel and fertiliser subsidies to keep the fiscal deficit within the budgeted level of 5.1 per cent.
Subsidy issues in India
Subsidies have increased in India for several reasons. In particular this proliferation can be traced to 1)the expanse of governmental activities 2) relatively weak determination of governments to recover costs from the respective users of the subsidies, even when this may be desirable on economic grounds, and 3) generally low efficiency levels of governmental activities.
In the context of their economic effects, subsidies have been subjected to an intense debate in India in recent years. Some of the major issues that have emerged in the literature are indicated below: Whether the magnitude and incidence of subsidies, explicit and implicit, have spun out of control; their burden on government finances being unbearable, and their cost being felt in terms of a decline of real public investment in agriculture. Whether agricultural subsidies distort the cropping pattern and lead to inter-regional disparities in development Whether general subsidies on scarce inputs like water and power have distorted their optimal allocation Whether subsidies basically cover only inefficiencies in the provision of governmental services Whether subsidies like (food subsidies) have a predominant urban bias Whether subsidies are mistargeted Whether subsidies have a deleterious effect on general economic growth of sectors not covered by the subsidies Whether agricultural subsidies are biased against small and marginal farmers How should government services be priced or recovery rates determined What is the impact of subsidies on the quality of environment and ecology
Sustainability Issues An example of potential environmental or sustainability issues arising from the current subsidy structure can be seen interrelated problems of water and energy consumption in the agricultural sector.
During the Green Revolution in the 1960s and 70s, India's agricultural productivity grew greatly, in part due to a dramatic increase in agricultural irrigation, particularly from groundwater sources.
While that increase in irrigation has helped the nation feed itself, it has also created a groundwater crisis, the dimensions of which have become increasingly clear in recent years. Groundwater tables are falling in many areas of the country, from around 20 cm per year in Punjab to 3 to 5 metres per year in parts of Gujarat. The medium to long-term risks to agriculture in such a scenario range from an eventual decline in water resources, to the intrusion of salt-water in coastal areas.
As groundwater tables drop, the pumping of groundwater from deeper and deeper wells requires an ever-increasing amount of electricity. Because electricity for agriculture is subsidised, there is little incentive for farmers to adopt water-saving techniques, creating a vicious circle of water and energy consumption.
Recently, the government of Gujarat has engaged in a pilot program to experiment with ways to shift incentives for farmers toward more water- and energy-efficient technologies and practices.