2. Definition
O A benefit given by the government to
groups or individuals usually in the form of a
cash payment or tax reduction.
O Subsidy is an assistance to a business or
economic sector or producers
3. Subsidies…
O Subsidies inject money into circulation.
O Subsidies affect the commodity market by
lowering the price of the subsidized
commodity, thereby generating an increase in
its demand.
4. O With an indirect tax, the price of the taxed
commodity increases, and the quantity
demanded for the product at the market for
that commodity falls.
O Taxes appear on the revenue side of
government budgets, whereas subsidies, on the
expenditure side.
5. Subsidies are classified as
O Subsidies for public good-defense, Police &
General administration
O E.g.parks, street-lighting.
O Subsidies for merit good- Protection against
disease, environmental protection, education
O E.g. health services, education
6. Advantages and disadvantages
O Advantages
O Reduces cost of production
O Help less privileged people to have access to
production
O Releases resources for other purposes
O Increases the firms competitive edge in terms
of prices
O Enables greater social efficiency.
7. O Disadvantages
O Is expensive and will require higher taxes.
O Difficult to decide on who may receive a
subsidy
O Giving subsidies to firms may encourage
inefficiency
O Increases dependence of firms and hence,
might not provide motivation necessary for
increasing efficiency and supply.
8. Direct Cash Subsidy
O The government has started direct cash transfer of
subsidy to bank accounts of beneficiaries in 20
districts from January 1st 2013.
O The Direct Benefit Transfer system has been
implemented in seven schemes such as
scholarships and old age pensions from Jan 1. A
total of 26 schemes will be covered under it.
O The scheme will be rolled out in 11 more districts
on Feb 1 and 12 more districts will join on March
1st 2013.
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9. O There is no intention to transfer the subsidy on
food, fertilizer, diesel and kerosene.
O In Kerala ,the system is active in
Pathanamthitta & Wayanad districts.
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11. Direct Cash Subsidy,
in the Indian Context
• Huge financial liability to the government.
India spends about Rs. 160,000 crore every
year or roughly 2% of the country’s GDP on
subsidies, all indirectly. And most of these
subsidies do not reach the poor. In the Union
Budget 2012-13, target is to keep 2012-13
subsidies under 2 percent of GDP and under 1.75
percent of GDP in the next 3 years.
12. Direct Cash Subsidy,
in the Indian Context
• Financed through taxation.
Subsidies must be financed through
taxation, the continual use of subsidies widens
the government's budget deficit, and bigger
budget deficits imply higher interest rates which
dampen economic performance. On the other
hand, India spends relatively little on education,
health, or infrastructure.
13. Direct Cash Subsidy,
in the Indian Context
• India to cut `unproductive` subsidy.
In India with the indirect system the
benefits of subsidy are not received by those who
need them. In the policy prescriptions by the
World Bank to developing countries it prescribe
that to enhance economic performance in the
developing countries like India they should
remove subsidies on agriculture, health,
education, petroleum products, etc
14. Direct Cash Subsidy,
in the Indian Context
• Redirecting subsidies to those who need them
India should redirect subsidies to those who need
them. We can not remove subsidy completely because
• Subsidy encourages the production and consumption
of goods and services,
• subsidy could be used to boost expenditure or
aggregate demand.
• It might dampen economic activity.
• Government uses the subsidy system for supply of
fund to the poor ones.
• It can have adverse effects on the poor in these
countries and lead to political agitation
15. Direct Cash Subsidy,
in the Indian Context
• No reliable system to identify and target
the people in need of subsidy
So far there has been no reliable system in
place to identify and target the people who are
most in need of subsidy. But with systems like
the Unique Identity Number in place, it might be
possible to get the benefit directly to the
deserving and leave out unintended beneficiaries.
16. Direct Cash Subsidy,
in the Indian Context
Other shortcomings in the current system.
• Dual-pricing
• Unresponsiveness to customer needs
• Poor targeting of BPL population
• Diversion and leakages
• Distribution system
• Inefficient allocation of resources
17. Direct Cash Subsidy,
in the Indian Context
Impact on government
• The new system is expected to reduce this cost
and subsidy bill through better targeting.
• In the Union Budget 2012-13, target is to keep
2012-13 subsidies under 2 percent of GDP and
under 1.75 percent of GDP in the next 3 years.
• Could be a potential game changer for the
UPA−II, in the next elections, which has been
besieged by charges of corruption.
18. International best practices
O Jamaica, Philippines, Turkey, Chile, Mexico,
Indonesia, South Africa, Morocco and United
States have adopted this system in the form of
Conditional Cash Transfer (CCT) programs
O Direct cash is provided to the poor families on
condition
O Investments in human capital
O Regular school attendance.
O Attaining basic nutrition and health care.
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19. O The largest and the most successful conditional
cash transfer program is the Bolsa Família
Program (BFP) in Brazil.
O Covered close to 100 % of Brazil's poor - 2007
O The government transfers cash straight to a family
subject to conditions:
O school attendance,
O nutritional monitoring,
O pre-natal and post-natal tests
O The entire system is managed through efficient
targeting, disbursement and regular monitoring of
the disbursed funds.
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20. The new subsidy system would be
implemented in 2 phases
O Phase I
O Direct transfer of subsidy through state governments/UT
Administration
O States purchase commodity from manufacturers at market price
O Central government transfers the differential subsidy directly to the state
Governments/UT
O Subsidy amount is proportional to commodity uplifted from the retail
points in a state/UT
O States reform their distribution system based on the CSMS system
proposed by the Task Force.
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21. O Phase II
O Subsidy transfer to beneficiaries
OThe cash equivalent of subsidy is
transferred directly to beneficiaries
through their bank accounts by linking
transactions to Aadhaar
OThe commodity purchase and then
transfer of cash subsidy to their account
will be based on successful authentication
of the beneficiary through Aadhaar at the
point of sale.
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22. Critical success factors
O The government’s efficiency in dealing with the
fundamental issues like the basis of targeting,
definition of poverty line & identification of
intended beneficiaries
O Effectively subsidizing the poor for fertilizer or
kerosene once the prices are market determined
and are liable to fluctuate
O Devising a methodology to transfer the cash
subsidy to the poor
O State Government’s endeavour in taking up
fundamental reforms required in Public
Distribution System (PDS)
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