Criticism of Subsidies

Agriculture subsidies, on the other hand, must be considered not only in terms of fiscal imbalances, but also in terms of ensuring food and nutritional security for billions of people, as well as ensuring that poor and marginal farmers are not pushed out of the market.

Subsidies may also have unintended economic consequences. If imposed on a competitive market or where market imperfections do not justify a subsidy, they would result in inefficient resource allocation by diverting economic resources away from areas where their marginal productivity would be higher.

Subsidies waste resources

Generalized subsidies waste resources and they may have perverse distributional effects, favoring some people more than others. A price control, for example, may result in lower production and shortages, resulting in profits for market operators and economic rents for privileged people who have access to the distribution of the goods concerned at the controlled price.

Subsidies have a tendency to perpetuate themselves. They generate squandered interests and political hues. Furthermore, it is difficult to control the incidence of a subsidy because its effects are transmitted through market mechanisms, which frequently contain flaws other than those addressed by the subsidy.

In light of the then-difficult economic situation, C Rangarajan, Chairman of the Prime Minister’s Advisory Council (Under Tenure of UPA Government), advocated cutting fuel and fertilizer subsidies to keep the fiscal deficit within the budgeted level of 5.1 percent on June 29, 2012.

Subsidy Issues in India


Subsidies have become increasingly common in India for a variety of reasons. This proliferation can be traced to the breadth of government activities, governments’ relatively weak determination to recover costs from the respective users of subsidies, even when this is desirable on economic grounds, and governments’ generally low-efficiency levels.

The biggest issue with agricultural subsidies is that they can’t tell who is in need and who isn’t. In the United States, 90% of the subsidies go to the top 25% of farms. This figure is 70% in the European Union, Japan, and Canada. The debate over the true benefits of subsidies is a global phenomenon. Farm subsidies, according to Joseph Stieglitz, a Nobel Laureate in economics, have a long-term effect of rising global food prices, which harms the poor, increases malnutrition, and so on, and the economic explanation for this is that it alters free market conditions.

Subsidies prevent comparative advantage

Subsidies also impede terms of trade, preventing you from reaping the benefits of comparative advantage

Subsidies, once again, are a major source of inefficiencies. Subsidies in areas such as education, health, and the environment may be justified on the grounds that their benefits extend far beyond the immediate recipients and are shared by the entire population, present, and future. However, the case for many other subsidies is less clear. Many subsidies exist as a result of the government’s extensive involvement in a wide range of economic activities. These subsidies hide inefficiencies or have dubious distributional credentials. And this is especially true in India, where administrative management does not fully control corruption.

The straining effects of agricultural subsidies on the sub-optimal use of scarce inputs like water and power induced by subsidies, as well as whether subsidies lead to systemic inefficiencies, are all issues to consider. Inadequate subsidy targeting is also a hot topic.

Policy Implications and Suggestions

The majority of studies show that some subsidies should be provided while others can be eliminated without harming farmers. The withdrawal of subsidies should be done in stages. The following are some recommendations based on the findings of this study. The federal government should establish criteria for distributing subsidies to states, such as gross cropped area or productivity.

According to the study, subsidies for seeds and fertilizers that have a direct relationship with productivity and income should be given to farmers; however, subsidies for electricity can be withdrawn because the electricity supply in Punjab is irregular, and farmers prefer regular power supply even if they have to pay for it. If implemented, it will reduce the burden on the state electricity board, and this money can be used to increase electricity production, reducing the need to buy electricity at exorbitant prices, which adds to the state budget deficit.

The government should develop a farmer-friendly agriculture price policy, in which the price of farm produce is set in light of rising farm input costs, allowing farmers to become financially self-sufficient. The central government decided to implement a diesel subsidy during Kharif in 2010 to have standing crops in the field due to drought/deficit rainfall in certain regions (Bihar, Jharkhand, Orissa, and West Bengal), and the same pattern should be followed in states where this problem occurs.

Government must not please their voter through subsidies

The government should set aside its desire to please voters or increase its vote bank, and instead frame a rational policy in which small-scale farmers who are not actual beneficiaries of subsidies receive more, and subsidies that they do not want are removed. Subsidies should be given to those who need them the most, such as small and medium-sized farmers. Subsidies that they do not require should be phased out over time.

Instead of subsidies, the government should concentrate its efforts on three areas: electricity generation, infrastructure development, and water supply. The rest will be taken care of by the accompanying development. Subsidies should be replaced with constructive programs that empower people and provide them with the final push they require to escape poverty.

JAM Trinity – Jan Dhan Yojna, Aadhaar and Mobile base

Subsidies will be transferred directly to beneficiaries’ accounts through direct benefits transfers. There are two separate but related issues that must be resolved as prerequisites for this to happen efficiently. The first is the mode of transfer, and the second is beneficiary identification.

For starters, the government is relying on the Pradhan Mantri Jan Dhan Yojna, which has resulted in the creation of over 20 crore accounts. The unbanked population has been halved to 233 million people, which is perhaps the most significant step toward financial inclusion to date. People’s Jan Dhan accounts are being credited with subsidies under the PAHAL scheme, pensions under the National Social Assistance Plan, and wages under the MGNREGS.

It also includes a Rs. 5000 overdraft after 6 months of use and Rs. 100000 in accidental insurance. These incentives have resulted in a massive demand for account opening. One advantage is that the account holder’s overdraft will be repaid on a regular basis by an automatic transfer of various subsidies from the account. As a result, the risk of default is reduced to nil.

Thousands of villages lack physical bank branches

Thousands of villages, on the other hand, lack physical bank branches. Mobile penetration is steadily increasing in these villages. More than 900 million people in India have access to the internet, with about 370 million of them living in rural areas. The number of rural subscribers is increasing at a rate of 2.8 million per year. India’s internet penetration is currently around 40%, and once the national optic fiber network is in place, it is expected to skyrocket. All of this will be turned into digital mobile or internet-based money transfer systems.

In addition, the RBI has chosen differentiated banking by issuing licenses to Payment and Small banks. A bank with a payments bank license can only accept deposits and send remittances. Last year, the RBI granted 11 payment bank licenses to various corporate giants, telecommunications companies, and, most importantly, India Post. India Post has approximately 155000 branches, the majority of which are located in rural areas.

Aside from that, ten entities have been granted in-principle Small Finance Bank licenses. In India, small finance banks are a type of niche bank. Small finance banks are permitted to provide basic banking services such as deposit acceptance and lending. The goal is to bring financial inclusion to parts of the economy that aren’t served by other banks, such as small businesses, small and marginal farmers, micro and small businesses, and unorganized sector entities. As a result, it is likely that subsidies will reach all beneficiaries’ bank accounts within a few years.

Aadhaar card is blessing in disguise

An Aadhaar card base is now a blessing in disguise for ensuring the beneficiary’s identity. At least 93 crore Aadhaar cards have already been issued, but universal coverage will take some time. The biometrics on this card ensure that no claims are duplicated or made incorrectly. Previously, the Supreme Court had prohibited the use of Aadhaar cards due to privacy concerns, but on the government’s appeal, it permitted their use as long as they were not made mandatory.

Aside from these initiatives, behavioral and technical remedies could be extremely useful in better controlling and targeting subsidies. Around 50 lakh LPG users have voluntarily given up their subsidy entitlements as part of the ‘Give it up’ campaign. On the technological front, urea is being coated with neem, which improves agricultural productivity but renders it unfit for industrial use.

Subsidies are meant to help the poor and ensure that resources are distributed fairly. Subsidies to the wealthy are regressive. They contribute to the perpetuation of poverty by creating inefficiencies in the economy, which result in inflation and corruption. As we have seen in the case of India, the economy suffers as a result. When India grew at an average rate of 7.5 percent in the first decade of the millennium, it was discovered that this growth was jobless and unsustainable. India’s economy was hampered by supply-side constraints, which meant that productivity did not rise in tandem with GDP.

The Reserve Bank of India (RBI) then had to use steep interest rate hikes to control spiraling inflation. The rationalization of the subsidy regime will improve India’s markets, attracting more investment. In other words, this can help turn the wheel of a virtuous economy that creates more jobs and attacks poverty at its source.