SUBSIDIES

MADE BY:
NITESH GUPTA
SWATI KHANNA
SECTION--B
 INTRODUCTION
 A subsidy, often viewed as the converse of a tax, is a
potent welfare-augmenting 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.
 Definition

The Oxford English Dictionary defines subsidy as

“money granted by State, public body etc to
keep down the prices of commodities etc”
 CONTINUED….
 Subsidies bring out desired changes by
effecting optimal allocation of
resources, stabilizing the price of
essential good & services,
redistributing income in favor of poor
people thus achieving the twin objective
of growth & equity of nation.
 Subsidies will be targeted sharply at the poor
and the truly needy like small and marginal
farmers, farm labour and urban poor.
CONTINUED…..
 Subsidies in areas such as education,
health and environment 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,
 Subsidies, as converse of an indirect tax, constitute
an important fiscal instrument for modifying market-
determined outcomes. While taxes reduce
disposable income, subsidies inject money into
circulation. Subsidies affect the economy through
the commodity market by lowering the relative price
of the subsidised commodity, thereby generating an
increase in its demand. With an indirect tax, the
price of the taxed commodity increases, and the
quantity at which the market for that commodity is
cleared, falls, other things remaining the same.
Taxes appear on the revenue side of government
budgets, and subsidies, on the expenditure
side.
 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 :
1. Inducing higher consumption/ production
2. Offsetting market imperfections including
internalisation of externalities;
3. Achievement of social policy objectives
including redistribution of income
 FORMS OF SUBSIDIES
 A cash payment to producers/ consumers is an
easily recognizable form of a subsidy.
 It also has many invisible forms:

(It may be hidden in reduced tax-liability, low

interest government loans or government equity
participation. If the government procures goods,
such as food grains, at higher than market prices
or if it sells as lower than market prices,
subsidies are implied).
 DIFFERENT TYPES OF SUBSIDY
1. Cash Subsidy: Providing food or fertilizer to
consumer at lower price.
2. Interest or credit subsidies
3. Tax subsidies
4. In kind subsidies
5. Procurement subsidies
6. Regulatory subsidy
 CAUSE OF SUBSIDIES ‘S
PROLIFERATING IN INDIA
1. The expansion 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.
4. Increase in explicit budgetary subsidies on food and fertilizer
 There is a wedge between subsidies that are actually received
by the users of the service and subsidies that are borne by the
Government. Several types of inefficiencies
 CONTINUED…
 Several types of inefficiencies may accompany the public provision of
services. Apart from direct costs like overstaffing, poor maintenance of
assets, procedural delays, and delays in taking critical decisions, there
are systemic inefficiencies.
 High costs of service provision and low or negligible recoveries through
user charges are the two critical factors leading to high subsidies. Costs
need to be reduced, by eliminating producer inefficiencies.
 The unprecedented and steep rise in the international prices of crude and
petroleum products has led to an increase in the explicit subsidy bill in
the Central Government’s budget from Rs.5,225 crore in 2002-03 to Rs.
6,573 crore in 2003-04. Moreover, there were reports of underrecoveries
by public sector oil marketing companies leading to demand for greater
subsidies.
 CONTINUED…..
 Thus, Subsidy reforms need to follow a
scheme of priorities by focusing on selected
sectors, which yield maximum results. A
scheme focusing on services in which there is
considerable scope for higher recovery in
the non-Merit category may constitute the
first step.
 SUBSIDIES AS AN INTENSE TOPIC
OF DEBATE
 In the context of their economic effects,
subsidies have been subjected to an intense
debate in India in recent years due to the
following reasons:
1. Whether the magnitude and incidence of subsidies,
explicit and implicit, have spun out of control; their
burden on government finances being unbearable.
2. Whether agricultural subsidies lead to inter-regional
disparities in development
3. Whether general subsidies on scarce inputs like water
and power have distorted their optimal allocation
4. Whether subsidies like (food subsidies) have a
predominant urban bias
 CONTINUED…..

 Whether subsidies are mistargeted

 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.
GROWTH OF AGRICULTURAL
EXPORTS IN
POST-WTO PERIOD

Value of Agri1994-1995 2000-2001 Percentage

Exports Change

In Rs. Crores 13712.00 28909.50 110.83

In Million 4227.30 6012.56 42.23

Dollars
 TRENDS IN AGRICULTURAL TRADE
OVER THE LAST TWO DECADES
Sl.No. Item 1980-81 1990-91 2000-01
1. Total exports 8486 18143 44400
(113.80) (144.72)

2. Total Agricultural 2601 3521 6013

Exports (35.37) (70.77)

3. %share of Agri 30.65 19.40 13.54

Exports to Total (-36.70) (-30.20)
Exports

4. Total imports 15869 24075 49720

(51.7) (106.52

5. Total Agricultural 2030 1354 1676

Imports (-33.26) (23.78)

6. %share of Agri 12.80 5.62 3.37

Imports to Total (-56.1) (-40.03)
Imports

7. Value of Agri 78.04 38.45 27.88

Imports as (-50.73) (-27.50)
In India subsidies can be classified in
two categories
Economic Subsidies

Power
Agriculture & Irrigation Communication
& & Industry Transport & others
Cooperation Flood Control (2.4)
(16.4) Energy (11.5) (7.3)
(10.8)
(7.6)

Social Subsidies

Water Supply
Education Health &
Sanitation
Rural
(22%) Housing and others
(9%) (5%)
Central budgetary subsidies 1998-
1999
Comparison of budgetary subsidies
Subsidy estimates 1998-99 and 1996-
97, comparison
Classification of subsidies, merit
and non merit categories
Explicit Subsidies of the Centre:
Period-Wise Trend Growth Rates
Food and Fertiliser Subsidies in
the Nineties
Sectoral shares, all state
subsidies
Subsidy Estimates: Groups A, B and
C
Subsidy Estimates: Groups D and
E
State-Wise Per Capita Education
Subsidies
State-Wise Per Capita Medical
and Public Health Subsidies
Subsidies of Petroleum Products
Relative Share of Major Sectors in All
India Subsidies
(in Descending Order)
THE FOLLOWING STEPS SHOULD
BE TAKEN TO REFORM THE
SUBSIDY REGIME
 Reducing the overall scale of subsidies
 Making subsidies as transparent as possible

 Using subsidies for well defined economic

objectives.
 Focussing subsidies to final goods and services
with a view to maximising their impact on the
target population at minimum cost
 Instituting systems for periodic review of
subsidies
 Setting clear limits on duration of any new
subsidy schemes.
 CONTINUED…
 Limiting these to only Merit I and Merit II categories while eliminating
the non-Merit subsidies.
 Avoiding multiple subsidies to serve the same policy objective.
 In the case of fertilizer, both farmers and fertilizer industry have
been subsidized. There is a need for policy measures to reduce
subsidy to both the groups.
 The domestic LPG and PDS kerosene subsidies seem to be
ineffective in serving the desired objectives. Therefore, the domestic
LPG subsidy may be gradually reduced or at least substantially
restricted, while a more cautious approach should be pursued in the
reduction of kerosene subsidies. A market environment encouraging
fair and healthy competition is the most effective way to expand the
supply and availability of competitively priced kerosene and LPG.
 CONTINUED……
New public enterprises should not normally be
set up any more; and
 There should be a periodic review as to the
utility of continuing a subsidy and a decision
should be taken even at the initial stage of its
introduction as to the life of the subsidy.
 Each unit should prepare a plan for reducing
staff strength, by putting limit on fresh
recruitment and developing a scheme for
redeployment of staff, and introduction of
voluntary and sometimes compulsory,
retirement schemes
FUTURE STRATEGY FOR DEVELOPING
COUNTRIES LIKE INDIA WITH REGARD
TO AGRICULTURE
Ensure reduction of AMS and duties in letter and spirit ………. The
implementation issues
Forge a common platform to change the rules of the game: special
and differential treatment, AMS, reduction of duties.

Proactive preparations for penetrating the markets when

the duties and the subsidies come down.
Active participation in Codex meetings.
Forging common platform for SPS related barriers.
Emphasis on quality within the country………
the “Quality” culture has to be developed

Identify subsidies which are WTO

compatible…………………

Agri Export Zones are a move

in this direction.
Take a fresh look at agricultural commodities
which are being supported and move
towards such commodities which are market
driven rather than State driven
Wheat Durum Wheat
Rice Basmati Rice
Sugar Potatoes
Onion
Eggs
THANK YOU