SUBS

Subsidies

  • Introduction
  • Subsidies are costs incurred by the government for the provision of goods that are not classified as public goods.
  • Public goods have the characteristics of being non-rival and non-excludable.
  • Examples of public goods include police services and border security services.
  • Classification of Subsidies
  1. Consumer subsidies
  • Benefits provided to consumers (e.g., LPG subsidy)
  1. Producer subsidies
  • Benefits provided to producers (e.g., MSP to farmers)
  1. Direct subsidies
  • Direct cash payments (e.g., LPG subsidy)
  1. Indirect subsidies
  • Providing goods and services below market price or government procurement in excess of market price (e.g., fertilizer subsidy)
  1. Explicit subsidies
  • Specified in the budget document or through budgetary resources (e.g., PDS)
  1. Implicit subsidies
  • Subsidies provided through subsidized public services and not included in the budget (e.g., railway subsidies)
  1. Social subsidies
  • Subsidies given for social services (e.g., health)
  1. Economic subsidies
  • Subsidies given for economic services (e.g., power)
  • Different ways of disbursing/implementing subsidies
  • Subsidies can be given through price subsidies, Direct Benefit Transfer (DBT), and income support.
  1. Price subsidies
  • Price subsidies have helped fight inflation and price volatility but have not transformed the living standards of the poor.
  • Issues associated with price subsidies include regressiveness, market distortion, and leakages.
  1. Direct Benefit Transfer (DBT)
  • Cash transfers increase the effectiveness of anti-poverty programs and reduce distribution costs.
  • DBT removes possibilities of leakages and diversions.
  • Cash transfers free up prices and promote efficient resource allocation.
  1. Income Support
  • Income support provides cash transfers without requiring specific purchases.
  • Income support does not distort the market.
  • Universal Basic Income (UBI) is a form of income support that guarantees a minimum income for all individuals.
  • UBI has periodic cash payments, is unconditional, and paid on an individual basis.
  • Misconceptions and arguments against UBI include reduced work incentives, moral hazard, and promotion of vice.
  • Fuel Subsidies
  1. Petrol and Diesel
  • Petrol and diesel prices are deregulated, and there is no subsidy on them.
  1. LPG
  • LPG subsidies are provided through DBT up to a certain number of cylinders.
  1. Kerosene
  • Kerosene subsidies have been eliminated due to the increased coverage of electricity and LPG.
  • Kerosene is distributed through PDS at market prices with zero central subsidy.
  • Fertilizer Subsidies
  1. Urea Subsidy
  • Urea subsidies are provided through pooling of gas and categorized energy norms.
  • Benefits include increased indigenous urea production and energy efficiency.
  • Challenges include lack of new capacity and inefficiencies in procurement and distribution.
  • Introduction of neem-coated urea has multiple benefits.
  1. DAP and MOP Subsidy (Nutrient Based Subsidy)
  • DAP and MOP subsidies are fixed based on nutrient content and do not vary with market prices.
  • DAP and MOP market prices are deregulated.
  • DBT in fertilizers involves retailers and biometric authentication.
  • Food Subsidy
  1. Food Corporation of India (FCI)
  • FCI procures, stores, transports, and maintains buffer stocks of food grains.
  • FCI has played a significant role in India's food security and price stabilization.
  • Issues include surplus stock, storage costs, and inefficiencies in procurement and distribution.
  • MSP is the rate at which purchases are made from farmers, and FCI is involved in open market sales and exports.
  • Evolution and Purpose of Public Distribution System (PDS)
  • Origin during World War II due to food shortage
  • Focus on urban areas in the 1960s
  • Extension to tribal blocks and high poverty areas in the 1970s-1980s
  • Management of scarcity and affordable distribution of food grains
  • Incremental nature, not intended to fulfill entire household requirements
  • Distribution of commodities: wheat, rice, sugar, kerosene, and other items in some states
  • Revamped PDS and Targeted Public Distribution System (TPDS)