BY JERRY CHRISTO

SUBSIDY Subsidies are unrecovered costs of public provision of

non-public goods and services financed by the budget.

Subsidies, as converse of an indirect tax, constitute an important fiscal instrument for modifying market-determined outcomes.

While taxes reduce disposable income, subsidies inject money into circulation.

Taxes appear on the revenue side of government budgets, and subsidies, on the expenditure side.

CLASSIFYING SUBSIDIES

Subsidy

Narrow Subsidy Broad subsidy

NARROW SUBSIDY

Narrow subsidies are those monetary transfers that are easily identifiable and have a clear intent.

They are commonly characterized by a monetary transfer between Governments and institutions or businesses and individuals.

Example- Government payment to a farmer.

BROAD SUBSIDY

Broad subsidies include both monetary and non-monetary subsidies and is often difficult to identify.

A broad subsidy is less attributable and less transparent.

Example- Environmental externalities.

TYPES OF SUBSIDIES

Production subsidy Consumer/consumption subsidy Export subsidy Employment subsidy Tax subsidy Environmental externalities

PRODUCTION SUBSIDY

A production subsidy encourages suppliers to increase the output of a particular product by partially offsetting the production costs or losses.

Objective- expand production of a particular product more so that the market would promote but without rising the final price to consumers.

Example- Enterprise Investment Scheme, Industrial Policy and Regional Policy.

CONSUMER/CONSUMPTION SUBSIDY

A consumption subsidy is one that subsidises the behaviour of consumers.

It is most common in developing countries where Governments subsidise such things as food, water, electricity and education on the basis that no matter how impoverished, all should be allowed those most basic requirements.

Example- ‘lifetime’ rates for electricity.

EXPORT SUBSIDY

An export subsidy is a support from the government for products that are exported, as a means of assisting the country’s balance of payments.

Most common in China.

EMPLOYMENT SUBSIDY

An employment subsidy serves as an incentive to businesses to provide more job opportunities to reduce the level of unemployment in the country (income subsidies) or to encourage research and development.

Example- Social Security Benefits

ENVIRONMENTAL EXTERNALITIES

In economics, an externality is a cost or benefit that results from an activity or transaction and that affects an otherwise uninvolved party who did not choose to incur that cost or benefit.

In this, the business is effectively gaining a net benefit but not compensating those affected.

ECONOMIC EFFECTS OF SUBSIDY

Shift in Demand curve

Shift in Supply curve

Protectionism

Spill over effect

PROTECTIONISM

Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition.

Typical methods of protectionism are import tariffs, quotas, subsidies or tax cuts to local businesses and direct state intervention.

SPILLOVER EFFECT

Spillover effects are externalities of economic activity or processes that affect those who are not directly involved. 

Spillover effects are those variables in every economy that cannot be adjusted by a single policy monitored by the government.

SUBSIDIES IN INDIA

RATIONALE ABOUT SUBSIDY

Subsidies are justified in the presence of positive externalities because in these cases consideration of social benefits would require higher level of consumption than what would be obtained on the basis of private benefits only.

Primary education, preventive health care, and research and development are prime examples of positive externalities.

HARMFUL

Subsidies often promote inefficiencies.

Over-subsidisation could adversely affect environment and allocation of resources.

Subsidy given on fuel can make the beneficiary to over use it and thus create environmental pollution.

Similarly farmers over utilization of fertilizers.

Fiscal deficit.

FISCAL DEFICIT

Fiscal deficit is the difference between the government’s expenditures and its revenues excluding the money it’s borrowed.

A country’s fiscal deficit is usually expressed as a percentage of its GDP.

Current fiscal deficit 4.89% GDP.

Causes for fiscal deficit.

How bad can fiscal deficit be.

Difference from CAD.

Current scenario about fiscal deficit.

MAJOR POINTS

* Subsidies bill estimated at 2.48 trillion rupees from 1.82 trillion rupees

* Petroleum subsidy seen at 650 billion rupees in 2013/14

* Revised petroleum subsidy for 2012/13 at 968.8 billion rupees

* Estimated 900 billion rupees spending on food subsidies in 2013/14

* Revised 2012/13 fertiliser subsidy at 659.7 billion rupees

SUBSIDY BILL – BUDGET 2013/14

FOOD SECURITY BILL

Estimated budget is 1.23 lakh crore.

Finance minister P. Chidambaram had allocated Rs77,740 crore as food subsidy in the budget estimates for the current fiscal and kept Rs10,000 crore over and above the normal food subsidy, towards the incremental cost.

This will impact fiscal deficit by 0.5%.

It would add to Rs 25,000 crore annually to the food subsidy.

SUBSIDY ON FUEL

Increase in consumption of diesel.

State owned oil companies incurred a loss of Rs.40,500.

Oil subsidies accounted for 16 % of the fiscal deficit in the last budget.

Current year fuel subsidy accounts to 26% of the total subsidy.

SUBSIDY AMOUNT

Large commercial users like malls have also increased their diesel use.

They are being subsidised by the government to the extent of Rs 13 on every litre used.

Subsidy amount on each LPG cylinder is Rs.565 amounts to approximately around Rs.4000 crore.

SLASHING PRICE SUBSIDY

India desperately needs to woo foreign investors if it is to return to rapid economic growth.

Govt provides domestic and foreign investors with fresh tax and other concessions, while slashing subsidies for working people and the rural poor.

The lowering of the deficit to GDP ratio, especially through cuts to subsidies for fuel, fertilizer, and staple foods.

MEASURES FM Chidambaram led a major cost-cutting drive, ordering

across-the-board cuts in all departments and ministries aimed at reducing expenditure for 2012-13 by almost 6 percent.

The budget calls for the petroleum subsidy to be cut by 33 percent to 650 billion rupees for the 2013-14 fiscal year, from 968.8 billion rupees.

Government will raise 500 billion rupees through tax-free bonds

10 percent surcharge on the approximately 42,000 Indians with taxable incomes above 10 million rupees .

A 5 to 10 percent surcharge will also be levied on

domestic corporates whose income exceeds 100 million rupees a year.

Duties on mobile phones, cigarettes and luxury vehicles have also been raised.

FINAL MOVE

Increase of total government spending by 16.4 percent to 16.65 trillion rupees for the current fiscal year from 14.3 trillion.

The increase in spending is based on the higher tax revenue projected from a highly optimistic growth target of between 6.1 and 6.7 percent

If not the government will slash spending, as it did in the final months of past fiscal year, with social spending the first casualty.