Since 1970s, subsidies have always remained the main plank for poverty eradication in India. Government provides number of subsidies in the form of Food, Fertiliser, Electricity, Water, MSP, railway Passenger fare etc. In 2020-21, Government has spent almost Rs 6.5 lakh crores on subsidies in comparison to defence expenditure of Rs 4.8 lakh crores.
So, the question is "Are subsidies best weapon for fighting poverty in India?".
PROBLEMS WITH SUBSIDY REGIME
- Price subsidies are often regressive: Some of the subsidies such as Electricity, Fertilisers, MSP etc. are universal in nature and are given to all the households irrespective of their socio-economic status. Being universal in nature, such subsidies benefit the richer households more than the poor households and hence considered to be regressive in nature.
- Leakages & Corruption: Inclusion and Exclusion Errors; Duplicate and Ghost Beneficiaries; Presence of Middlemen, Poor administrative efficiency etc. Example: 46% leakage in PDS
- Subsidies create distortions and ultimately affect poor people:
AGRICULTURE
Announcement of higher MSP on Rice and Wheat has encouraged cultivation of water-intensive crops and prevented diversification of Indian Agriculture towards Pulses, Oilseeds, Fruits and Vegetables etc. It has impacted the poor people in the following ways:
- Low Income for Farmers
- Inflation in Agri-Commodities: Lower production of Pulses, Oilseeds, Eggs etc. lead to demand-supply mismatch.
- Nutritional Insecurity: Demand-supply mismatch has led to nutritional insecurity leading to micronutrient deficiencies, vitamin, iron deficiencies etc.
RAILWAYS: Cross subsidization of Passenger fares by increasing freight charges-> Higher Operating Ratio (98%) -> Lower profits-> Poor service delivery to poor people.
SUBSIDY ON ELECTRICITY: Subsidy on Electricity-->Poor Financial position of DISCOMs--> High AT&C losses--> Inability to provide 24X7 Electricity to poor households
Adverse Impact on different sectors of Economy
Banking: Farm loan waivers can have an adverse impact on the credit culture in the country as even those farmers who have the capacity to repay back the loans would default on the anticipation that the loans would be waived off by the government. Similarly, poor financial position of DISCOMs and Power generation companies has led to increase in NPAs.
Power Sector: Poor financial position of DISCOMs; Higher AT&C losses; Inability to pay money to power generating companies; Higher NPAs of Banks
Railways: Higher Operating Ratio; Lower profits; Decrease in capacity addition and Modernization; Higher Logistics Cost
Public Finance: Higher expenditure on subsidies reduces the ability of the government to spend money on creation of assets such as Roads, Railways, ports etc. leading to decline in overall productivity of economy
WAY FORWARD
Eliminating or phasing down subsidies is neither feasible nor desirable unless accompanied by other forms of support to cushion the poor and vulnerable. In this regard, the JAM Number Trinity – Jan Dhan Yojana, Aadhaar and Mobile numbers would be able offer this support in a targeted and less distortive way.