The Horticulture Department will not procure and supply subsidised pesticides to farmers from the next financial year. Instead, it will start a direct benefit transfer (DBT) scheme, under which farmers will be reimbursed a part of the money they will spend on pesticides. “For temperate fruits like apple, pear and stone fruits, the reimbursed amount will be Rs 4,000 per hectare. And for subtropical fruits etc, Rs 2,000 per hectare will be reimbursed.

• The department sells pesticides at subsidised rates in over 355 outlets across the state. “Every year, the department procures and supplies pesticides worth Rs 18-19 crore to farmers though its outlets. The subsidy on these comes out to be roughly Rs 5-6 crore.
• ?From the next financial year, farmers will have to buy it from the open market and then submit the bills to an authorised official for reimbursement.
• Counting the benefits of the move for the department, the closure of 355 outlets will free up the staff posted there and they could be used in the field for better implementation of department schemes.
• Besides, the department also pays rent for these outlets, which would be saved.
• The illegal selling of pesticides available in these outlets is also seen one of the reasons.

About Subsidy

Subsidies are one of the quintessential attributes of any welfare state. India, at the eve of independence was left with uphill task of socio-economic development. Markets were almost nonexistence, masses lived in abject poverty and illiteracy, we were not producing enough food to satiate hunger of masses, life expectancy was just 32 years; in short, there was crisis in every sphere; be it agriculture, industry, health or education; partly due to colonial legacy. Given such circumstances, founding fathers of democratic India rightly envisaged Indian state to be a welfare state. However, 70 years down the line only few problems have abated, while new ones cropped up and poverty still stubbornly remains a pressing problem.

In this context, latest economic survey rightly points out that despite spending as high as 3.77 lakh crore rupees annually on subsidies there is no ‘transformational impact’ on standard of living of masses. While subsidies have helped some poor people to do firefighting in life, main allegation on a subsidy economy is that, through subsidies, money meant for poorest is appropriated by richer sections of the society due to mistargeting and leakages.

Subsidies: are they solution to a problem or are they themselves a problem?

As already said, 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.

However, in a democracy, subsidy once extended becomes a politically sensitive issue and governments suffer huge political risk if they phase out such subsidies. Overtime, new subsidies are extended which pile up on older ones and they soon consume scarce revenue resources of government. This takes a heavy toll on other expenditure of the government. They are forced to cut allocation to developmental and infrastructure avenues. Further, higher subsidy expenditure pushes up fiscal and revenue deficits as government starts spending more than it earns. This fiscal deficit can be closed preferably by raising more revenue through new taxes (proactively) or by borrowing money.

Most significant consequence of either of this alternative is that money is squeezed out of economy and which results in lower consumption/demand. This, in turn hits the growth in economy. Less growth results in lower collection of taxes. On other hand subsidy burden remains same or even increases. Further, higher borrowing results in higher amount of interest to be paid. So in short, careless or politically motivated subsidy results in lower revenues for government and higher unproductive expenditure.  

Further, if government is unable to borrow money or to raise taxes, it will have to print new currency to finance deficits, which increases money supply in the economy. This creates inflationary trends in economy. Incoherent subsidy regime unintendedly does more harm than good for the cause it stands – socio- economic development.     

Direct Benefit Transfers as solution

Given above are only few examples of subsidy support gone wrong. In such scenario, direct benefit transfers comes to rescue government from this problem. It is likely to have multiple benefits –

1. Fiscal savings – Assuming explicit subsidies being extended by state in current form to remain between 3 to 4 lakh crores, DBT will curb this expenditure by around 15%, which is a conservative estimate of current leakages. This can save government around 50,000 crore, which can be used more efficiently for developmental purposes. Given that government is capable of sailing through implementation of DBT in comparative smooth manner, as there is huge support from beneficiaries and opposition is weak (unlike other issues such as disinvestment, land acquisition), this will prove to be a low hanging fruit.

2. It hits at roots of corruption – It is common knowledge that subsidized fertilizer is diverted to industrial use from agricultural sector, kerosene is mixed in diesel and PDS food is leaked in black markets. In short, subsidy regime has nurtured a mammoth corrupt ecosystem and black economy in India. When DBT is implemented everything will be sold on market prices by the government. For E.g. Fair Price Shop owner will get PDS food in full central issue price plus margin kept by state government. Then question of giving away PDS commodities illegitimately doesn’t arise.

• Further, Direct transfers will eliminate intermediaries which will end system of rent seeking from beneficiaries. Otherwise there is rampant system of illegitimate commission which is collected by government officials where they have power to stop, deny or delay the benefit to be passed.

3. It is likely to control inflation – Distortions created by subsidy regimes discourage investment in relevant sectors. This creates supply side constraints in economy. It is expected that recent deregulation of diesel will increase production and private firms will reopen their retail outlets. This will create competition which often results in cheaper prices.
Further, trading and purchase at market prices keeps demand in check. For e.g. subsidy on urea encourages farmers to use it more even when there is no due benefit. This created huge demand of urea and in turn high prices of unsubsidized urea. This scenario has increased government’s subsidy on urea manifold, which is not only waste but a disaster in itself. Similar case is with the food grains. DBT will leave more food grain in market and hence lower prices.

4. Better nutrition – When there is cash transfer poor will be able to diversify their diet by including more items like pulses, eggs etc. This will increase their protein intake.

• However, there is risk that some households will misuse this cash in social evils like alcohol, tobacco or gambling. For this government has made eldest women in a household target beneficiary for cash transfers. This step is likely to empower women.
• Government launched PAHAL scheme – pan India initiative for transfer of direct benefits for Liquefied Petroleum gas. Its huge success and about 3 crore fake beneficiaries have been eliminated, which will contribute to annual saving of Rs. 15000 crore.
• Direct Cash Transfer is also being implemented for transfer of wages in MGNREGS scheme. It has resulted in reduction in delayed and fake payments in relevant areas.
• Further, Direct Benefit Transfer for fertilizers and kerosene is on the cards. In case of fertilizers government is facing problems in determination of beneficiaries because there is lack of clear land titles.