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subsidy in India.

SUBSIDY in India

A subsidy is a benefit given by the government to producers in the form of cash payment or a tax reduction and consumers in the form of reduction in prices of commodities.

Reasons for subsidies

A subsidy is generally used as a form of support for particular sections of a nation’s economy. It can assist the poor by reducing prices of food articles for them or encourage new businesses by providing financial support to them.

Direct versus Indirect Subsidies

Direct subsidies involve a direct payment towards a particular group or industry. In a direct subsidy, bank payment can be provided to the specified group.

Indirect subsidies do not hold a predetermined monetary value that is specifically directed towards a particular industry or individual. It is given in form of price reductions for required goods or services. This allows the needed items to be purchased below the current market rate, resulting in a saving that is ultimately determined by the amount of participating activity.

 Types of SUBSIDIES IN INDIA

Subsidies constitute nearly one-eighth of the total central government expenditure. Apart from the central government subsidies, there are separate subsidies given by state governments. The share of subsidies as a proportion of total expenditure has decreased since 2012, when it reached a peak value of 18.23%. In 2016-17, 12.66% of the total central government budget expenditure (₹250,433 crore) was allocated for various subsidies.

Among the central government subsidies, three subsidies—food, fertilizer, and fuel subsidy—constitute a major chunk of all the subsidies in India.

Food Subsidy in India

Minimum support price (MSP) is the price at which the government purchases crops from farmers, whatever may be the price for the crops. MSP helps to incentivize the framers and thus ensures adequate food grains production in the country. Currently, MSP is announced by the Government of India for 25 crops at the beginning of each season, Rabi and Kharif.

The government decides the MSP for various agricultural commodities with the following process: recommendations of the Commission for Agricultural Costs and Prices. The Cabinet Committee on Economic Affairs takes the final decision on MSP on behalf of the government.

Commission for Agricultural Costs and Prices subsidy in India

The Commission for Agricultural Costs and Prices (CACP), formally known as the Agricultural Prices Commission, is a decentralized agency of the Government of India. It was established in 1965 as the Agricultural Prices Commission and was renamed to Commission for Agricultural Costs and Prices in 1985. The commission is attached to the Ministry of Agriculture and Farmers Welfare, Government of India.

CACP recommends on MSP after taking into consideration the cost of agricultural inputs and some profit for farmers.

Government agencies, such as the Food Corporation of India, transfer agricultural commodities from surplus to deficit regions with the help of railways. Finally, agricultural commodities are distributed through fair price shops at reduced rates. The Antyodaya beneficiaries (poorest of the poor) are given agricultural commodities at even lesser rates. The difference between the MSP and the price at which commodities are sold at ration shops is the subsidy burden borne by the government.

Fertilizer Subsidy in India

On the introduction of Green Revolution, the central government established fertilizer units across the country under the National Fertilizers Limited. The government purchases fertilizers from these units. The price at which the government purchases is decided keeping in mind the cost of production of these units. However, the efficiency of these units varies to a large extent. Apart from domestic procurement, the central government is required to import a huge amount of fertilizers from abroad. Though fertilizer subsidy is required to make fertilizers available at cheap rates to the farmers, there are certain issues with fertilizer subsidy.

Issues related to fertilizer subsidy

  • Huge amount of subsidy: Fertilizer subsidy poses a huge burden on central government finances.
  • High imports: To overcome the shortfall in domestic fertilizer production, a large amount of fertilizers are imported from foreign nations.
  • Inefficiencies in usage of fertilizers: Farmers keep on applying urea, which is a common fertilizer and is available at cheap rates, irrespective of the nutrient requirements of the soil.

It is estimated that on an average the outcome derived from the use of fertilizers is 33% for nitrogen, 15% for phosphorous, and 20% for potassium.

The inefficiency in the usage of fertilizers is due to faulty agricultural practices, such as application of fertilizers without knowing nutrient requirements of the soil, inappropriate seed, inappropriate farming methods, overuse or misuse of water, etc.

To improve the efficiency in usage of fertilizers, the government has introduced the Soil Health Card scheme.

Soil Health Cards

The Soil Health Card scheme was launched by the Government of India in February 2015. Under the scheme, the government plans to issue soil cards to farmers, which will carry crop-wise recommendations of nutrients and fertilizers required for the individual farms to help farmers improve productivity through judicious use of inputs. All soil samples are tested in various mobile soil-testing labs across the country.

Thereafter, the experts will analyse the strength and weaknesses (micronutrients deficiency) of the soil and suggest measures to deal with it. The results and suggestions will be displayed on the cards. The government plans to issue the cards to 14 crore farmers.

  • Overuse of water: Fertilizers require water in order to penetrate deep into the soil. As a result, overuse of fertilizers requires overexploitation of water resources, which further leads to problems of water scarcity.
  • Soil poisoning and health hazards: Chemical fertilizers cause soil poisoning, which leads to harmful effects on people who consume the crops grown in that soil. Moreover, the groundwater and nearby canals also get polluted, which further leads to health problems among the local population.

On account of all these factors, there is a need to rationalize fertilizer subsidy in India.

Fuel Subsidy

The various types of fuels widely consumed are petrol, diesel, liquefied petroleum gas (LPG), and kerosene.

  • Petrol subsidy: Among the fuel subsidies, petrol subsidy was the first to be withdrawn. Rise in petrol prices is borne by the owner of automobiles, who are middle and upper classes of the society and have the capacity to bear hike in prices.
  • Diesel subsidy: Diesel is used for transportation of goods. Thus, increase in diesel prices on account of withdrawal of diesel subsidy was expected to result in overall price rise in the economy.

However, diesel subsidy was putting burden on government finances. As a result, the government finally withdrew diesel subsidy in 2014. Low international crude oil prices facilitated the withdrawal of diesel subsidy.

  • LPG subsidy: If LPG subsidy is withdrawn, many poor households would not be able to afford LPG cylinders and as a result would shift to wood, cow dung cakes, or kerosene stoves for cooking.

The government, thus, continues to provide various types of subsidy in India like LPG subsidy. However, certain reforms have been taken. There is a restriction on the number of subsidized cylinders (at present 12 per year). Earlier, the cylinder was available at subsidized rates. Now, a cylinder is purchased at the full rate but subsidy is credited to the bank account of beneficiary. This step has eliminated wrongful claim of LPG subsidy to a large extent.

Moreover, taxpayers with an annual income of more than ₹10 lakh are not eligible for subsidized LPG.

Kerosene subsidy: Kerosene subsidy inIndia is used mainly by the poor for a variety of needs such a lighting, cooking, etc. At present, kerosene is made available to the poor at subsidized rates through fair price shops (public distribution shops).

Analysis of subsidies distributed across various sectors reveals that the share of food subsidies has been the highest since 2013. Presently, half of the total subsidy goes to food.

Various Subsidy in India like petroleum has varied over time on account of fluctuating oil prices. Moreover, it has reduced in the recent times because the government has withdrawn subsidy on petrol and diesel.

The subsidy on LPG has reduced to a large extent because it is now available to households with income below ₹10 lakh. Moreover, the government has eliminated wrongful claim of LPG subsidy through the use of Aadhaar.

SUBSIDIES FOR AGRICULTURE

Introduction of high-yield variety seeds in the 1960s as part of Green Revolution required critical inputs. Moreover, these critical inputs were to be made available at low rates.

The important critical inputs constituting bulk of agriculture subsidies are fertilizers and water. Fertilizer subsidy is borne by the central government. It has already been discussed in this chapter.

 Water subsidy  in India is borne by the state governments. The state government either arranges for canal irrigation or provides power subsidy to draw underground water. The costs of arranging water resources are high, and farmers are poor. Thus, water subsidy is essential. However, certain problems arise on account of water subsidy.

Indian Economy

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