When price of goods or services are controlled below its real market price by government the price is said to be subsidized. An Industry is asked by the Government to sell its product at certain price levels below its market price. The loss incurred by company is compensated by the Government. Government subsidizes an item to make it affordable for poor/common men.
Is subsidy a good thing for India, or is it bad? Does it help the poor, or only the rich? Does the so-called “culture of subsidy” promote idleness?
If a person can buy rice, wheat for 2 or 3 rupees per kg, why does that person work hard and earn more for his/her family? This so-called subsidy is breaking the backbone of poor and killing their desire to work hard and improve their standard of living.
Some may argue that subsidies help in lowering cost of living. To an extent this reasoning is correct but it does not support long-term good. Normally, when price of any item goes up what we do? We try to buy less of that item. We switch to other alternatives. This results in lower demand of the costly item. Lower demand forces prices to come down. But in case of subsidized items, people do not feel the heat of prices going up. The demand of those items continues to grow without control. When demand grows price will also grow.
Do you ever think who bears the cost of these subsidies?
Does government pays those subsidies from their pockets? Of course not. The subsidies are paid from tax payer’s money. The money that could have been utilized for development is used for subsidies. The money that can build bridges, roads, better trains, better buses, electricity etc goes waste as subsidy. Increased spending on subsidies is compensated by increased taxes and lower government spending.
The entire alternative to nurture subsides are only detrimental to economy. When tax goes up, people purchasing power goes down. They spend less and thus overall demand in country falls. This lowers GDP growth rate. Lower government spending means less developmental projects in country. It means lower efficiency of the country. This further lowers the country GDP.
Then why we voters accept a government which favors subsidies? The negative effect of subsidies does not create direct damage. Immediate damage of subsidy is not visible.
The entire subsidy culture is caused by India’s political system. A lot of subsidies are targeted towards creating political constituencies and vote banks.
The Economic Survey 2015-16 questioned their impact in transforming the lives of the poor. The center and state governments offer a host of price subsidies, including on rice, wheat, pulses, sugar, kerosene, cooking gas, water, electricity, and fertilizer. The survey pegged the fiscal cost of these subsidies at Rs 3.78 trillion, which translates into 4.24% of gross domestic product.
For the last three to four years, India has focused on reining in fiscal deficit over propping growth. A trim subsidy will help government to reduce its fiscal deficit and divert it to public infrastructure or other productive assets in the economy, which, in turn will generate employment and growth across all sectors in the economy.
Does this mean all subsidies are being given at the wrong places, and that there is no good being served? Subsidies on public transport have made traveling affordable for millions of people, apart from reducing pollution and congestion on roads, as well as cutting down on petrol consumption.
“Desirable subsidies” would include the rural employment generation scheme NGERA, midday meal programs, healthcare, female empowerment, funds allotted for the right to education among the poor and agricultural loans.
In short, any subsidy that benefits women, the poor is good; their growth increase national growth.
Subsidies on medical equipment or medicines ensure healthcare for the poor, especially in a country like India where medical infrastructure is poor at rural places.
Similarly, subsidies for agriculture loans given for secondary agriculture initiatives reduce the burden on primary agriculture activities, and also help increasing employment in agriculture sector.
The MSME sector is the backbone for any economy and in India, it accounts for 37% of the GDP. Subsidy here will not only strengthen this sector but also ensure jobs for millions as well.
Subsidies for renewable energy usage at public places and in residential areas, is much desired; solar subsidy, duty exemptions on imports of expensive equipment, and incentives for green fuels like bio-fuels will propel investment in R&D and drive towards a more Eco-friendly energy regime.
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