A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy. It 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.

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A welfare state without subsidies cannot be imagined. Governments have to extend subsidies to achieve objectives of socio- economic policy. By this, they aim at

• Making basic necessities affordable to poor people through extension of consumer services.
• To prepare a foundation of various economic sectors in which private sector can participate later. When economy is at lower stages of development, it is often unviable and unaffordable for private sector to step in production. This is mainly because there are limited resources with private investors and there are informational externalities/uncertainties.
• In such case government do handholding by supporting private sector by extending subsidies and withdrawing them when private sector becomes competitive.

Subsidies should be aimed at specific development objectives. On achievement of these objectives subsidies should be phased out. It is only then that subsidies can go well with an undistorted market economy.

Issues surrounding the subsidy system in India:

• Misuse of subsidies: The subsidies that are provided by the government seldom reach the small farmers. They are mostly snatched by the large farmers or the manufacturers.
• Distortion of trade: Input subsidies distort trade by increasing net exports of input intensive commodities while decreasing net exports of commodities which require relatively few inputs. Many countries like Australia, US and UK have challenged the subsidies on wheat, sugarcane etc. which they claim are distorting trade.
• Increased financial burden: The expenditure on subsidies has doubled in the last decade leading to widening fiscal deficit of the country. It is driven primarily by subsidies in fertilizer and electricity. Most of the expenditure made on subsidies goes into the wrong hands and thus perpetuates their requirement as the position of farmers does not improve.
• Uneven distribution: Unevenness is rife across regions, crops and differing farm sizes. For example-it is alleged that subsidies have benefitted more to the north Indian states as compared to south and north eastern states.
• Flawed policies: Hostile policies have compounded the problems as no major fertilizer plants have come up in the last many years. A huge fraction of urea requirements is still met with imports.

Instances of misuse of subsidies:

• In case of food subsidy, PDS suffers from considerable leakage and apart from a low coverage of poor; the magnitude of benefit derived by the poor is very small.
• In case of electricity, the subsidy rates have been rising for both agriculture and domestic sectors because the unit cost has been rising faster than the relevant tariff-rate. Also, there is considerable variation in the level of per capita electricity subsidy indicates that, in the richer States, the per capita subsidy is substantially higher as compared to that in the poorer States.
• In case of public irrigation, water has a very high marginal productivity when used in conjunction with HYV of seeds, chemical fertilisers, power and other related inputs. It is the richer farmers who may derive relatively larger benefits because of their capacity to use these allied inputs.
• Subsidies to elementary education form about half of the total subsidies on general education. However, this is not true for all individual States: the share of elementary education is lowest in the high income States and the highest in the low income States (Goa, Punjab and West Bengal actually give higher subsidies to secondary education than primary education).A negative correlation between the level of per capita income and the share of subsidies to elementary education is thus discernible. Most subsidies to higher education accrue predominantly to the better-off sections of society as they have an overwhelming advantage in competing out prospective candidates from the poorer sections in getting admission to courses that are characterised by scarcity of seats.
• For subsidies of health, the greater emphasis on curative health care expenditure often reflects a bias towards the better-off people whereas preventive health care expenditure with much larger externalities would clearly be of greater help to the economically weaker sections of the society.

Way forward:

• Reducing the overall scale of subsidies
• Making subsidies as transparent as possible using JAM trinity
• Using subsidies for well defined economic objectives
• Focusing 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
• Use of technology like Direct Benefit Transfer to the beneficiaries’ bank account, Aadhar Enable Payment System etc.

Conclusion:

Subsidies are meant for poor people and they shall ensure equitable redistribution of resource. Subsidies extended to rich are regressive. They help in keeping poverty intact and create inefficiencies in economy which culminates in inflation and corruption. Rationalization of subsidy regime will improve markets in India which will then attract more investment. This in short, can turn the wheel of a virtuous economy which creates more employment and attacks poverty at its roots.