What are subsidies and why are they important?

Subsidies include all grants on current account made by the government to depress the price of any good or service below its economic cost. Often, subsidies are grants made by the public authorities to government enterprises in compensation of operating losses when these losses are clearly the consequence of the policy of the government to maintain prices at a level below costs of production. The regime of subsidies is, therefore, a political economic policy framework typical of welfare states (India is one). Various subsidy regimes are meant to ensure distributive justice. Subsidies are directed at various sections of society to assist them economically. In India, the main beneficiaries have been farmers, needy people and those using various forms of public services. Proponents of subsidies argue that they are essentially negative taxes. Such negative taxes would mean that instead of being raised from the people, they are given back to certain target groups among the population of the country. To be more precise, subsidies are the converse of indirect taxes and are specific to goods and services. And, in some cases, they could reflect positive externalities. Subsidies are different from transfer payments, which are straight income supplements to the poor and the vulnerable. How are subsidy areas determined? Government expenditure, particularly in a welfare state, is classified into three categories â€” general services, social services and economic services. The first includes fiscal and administrative services like justice, jails and police, which are in the nature of pure public goods. The last two categories include a range of goods and services, which are not purely public and where the users are identifiable and user charges can be levied. For example, roads and power. Budgetary subsidies arise when the budgetary cost of providing such goods and services exceeds the recovery made from the users of the good or service. Governments make such goods and services available to users at costs lower than what was expended to produce and/or provide them because social benefits of doing so exceeds the aggregate of private benefits to individual consumers. For instance, compulsory and free elementary education, a subsidy provided by the government, aids the social development and uplift of the poor and the socially depressed classes by making such education easily accessible to them. Subsidies are financed either from tax or non-tax revenue, or result in a deficit. What is the Indian subsidy regime like? Broadly speaking and purely at the level of the central government, there are three major types of subsidies â€” food subsidies (for farmers and the poor who avail the public distribution system), fertiliser subsidies (for farmers), and petroleum subsidies (for the poor and the middle class, on kerosene and LPG, which they directly consume or diesel which fuels the transport industry that carries essential goods and thus has an impact on their prices). These are clearly visible in the government''s budget document. That apart, there are also minor subsidies such as on interest rates and subsidies â€˜hiddenâ€™ in the provision of social and economic services â€” mainly healthcare and education. In social services, the Centre''s participation is limited. Most of the social sector expenditure pertains either to the Union Territories that figure in the Union budget, or are in the nature of departmental transfers to state governments. Why has the regime of subsidies been such a contentious issue in India? The benefits from subsidies can be maximised only when they are transparent, well-targeted, and suitably designed for effective implementation without any leakages. Various studies have shown how the proliferation of subsidies in India is an outcome of undue expansion of government activities in the provision of goods and services that are not pure public goods. Subsidies result from the government''s inability to recover its costs adequately in many of these activities. Critics have blamed this on the ill-considered use of subsidies by political parties for electoral ends and have been arguing for reduction of some subsidies and the phasing out of others. Those who support the continuing of subsidies, however, argue that the focus on reducing subsidies only comes about because of the government''s failure to raise tax revenues. The report â€˜Central Government Subsidies in India: A Report, 2004â€™, brought out by the ministry of finance, has advocated reduction of MSP for farmers, the removal of the present two-tier system of prices in the public distribution system, along with a system of food coupons for below poverty line population. It has also recommended that fertiliser prices be raised and LPG and kerosene subsidies further reduced. In fact, their prices have been already raised recently since the UPA government came to power. What is subsidy bidding? It''s competitive bidding for subsidies, where companies bid against one another to serve an area at the lowest price â€” the lure is the subsidy and other benefits. This system is a way of administering subsidies without leaving any room for some competitors or technologies gaining an edge over others. But competitive bidding has anti-competitive effects, since it gives a special advantage to one company. Regulators should adopt a consumer choice system, under which any company would receive a set subsidy for each high-cost customer it served. If the customer moved to a competing carrier, the subsidy would move, too.

What are subsidies and why are they important?

Subsidies include all grants on current account made by the government to depress the price of any good or service below its economic cost.

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