1. SUBSIDIES IN INDIA 1
Subsidies in India
Sehaj Duggala
, Ankit Agarwalb
and Subhash Agarwalc
a
SCEE, Indian Institute of Technology Mandi
b
SE, Indian Institute of Technology Mandi
c
SCEE, Indian Institute of Technology Mandi
Himachal Pradesh, India
*Email: agarwal1994@live.in, Phone: +91-9816479040
2. SUBSIDIES IN INDIA 2
Abstract:
Subsidies contribute to about 12% of Indian budget. In the present scenario, the
subsidies play a major role in defining the economic condition of states. In this work,
the major points of subsidy in India, its advantages, its disadvantages, effects etc.
This work also contains 2 case studies: “Fuel Subsidies” and “Food Security Bill”. It
also contains a comparison of subsidies on “Food Security Bill” and “Fuel Subsidies”.
This document can be used by Technocrats, Bureaucrats, and common people to
observe the effect of subsidies on Indian Economy.
Keywords: economy, subsidy, India, fuel, food
3. SUBSIDIES IN INDIA 3
INDEX:
1. What is subsidy...........................................................................4
Advantage of subsidy............................................................4
Disadvantage of subsidy.......................................................5
Other effect.............................................................................5
2. Fuel subsidy................................................................................6
Advantages & Disadvantages of FSB..................................11
3. Food security Bill.......................................................................12
Salient Features………………………………………………….12
Advantages & Disadvantages...............................................13
4. Comparison between food and fuel subsidy............................14
5. Conclusion...................................................................................15
6. References...................................................................................15
4. SUBSIDIES IN INDIA 4
What is Subsidy?
A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy. It
is derived from the Latin word 'subsidium‘, means a subsidy literally implies coming
to assistance from behind.
The objective is subsidy is often creating a wedge between consumer prices and
producer costs, lead to changes in demand/ supply decisions.
• inducing higher consumption/ production.
• offsetting market imperfections including internalisation of externalities.
• Achievement of social policy objectives including redistribution of income,
population control, etc.
Advantages of Subsidy
• Reduces cost of production
• To increase consumption and production, the government can offer a subsidy to reduce the
price and increase quantity.
• Enables greater social efficiency. Consumers end up paying the socially efficient price which
includes the external benefit.
5. SUBSIDIES IN INDIA 5
• Subsidy = P0 -P2
• The supply curve shifts to S2 and Price falls from P1 to P2
• People will now consume more at Q1
• Q1 = Social Efficiency: because SMC = SMB
Disadvantages of Subsidy
• According to the UNESCO, India has the lowest public expenditure on higher
education per student in the world.
• As much as 39% of subsidised kerosene is stolen.
• Subsidies may also lead to perverse or unintended economic effects.. They
would result in inefficient resource allocation if imposed on a competitive
market.
• By diverting economic resources away from areas where their marginal
productivity would be higher. Generalised subsidies waste resources.
• A price control may lead to lower production and shortages and thus
generate black markets resulting in profits to operators in such markets
and economic rents to privileged people who have access to the distribution
of the good concerned at the controlled price.
Other Effects
• Subsidies have some fiscal effects since a large part of subsidies emanate
from the budget. They directly increase fiscal deficits. Subsidies may also
indirectly affect the budget adversely by drawing resources away from tax-
yielding sectors towards sectors that may have a low tax-revenue potential.
6. SUBSIDIES IN INDIA 6
• A regulated price, which is substantially lower than the market clearing price,
may reduce domestic supply and lead to an increase in imports. On the other
hand, subsidies to domestic producers may enable them to offer
internationally competitive prices, reducing imports or raising exports.
• Subsidies have a tendency to self-perpetuate. They create vested interests
and acquire political hues.
• It is difficult to control over subsidy in india as it transmitted through market
which has much more imperfections.
2. India’s Fuel Subsidies
• Fuel is one of the important commodity of a common man.
• The demand of crude in India is tremendous and it is one of the costly
commodity.
• Merits of fuel subsidies:
• To protect poor consumers so that they may afford kerosene for
lighting and heat
• To provide merit goods to consumers such as clean cooking
fuels like natural gas, LPG and kerosene to replace use of
biomass-based fuels such as firewood and dung.
India crude oil consumption by year:
7. SUBSIDIES IN INDIA 7
Following is quick summary of net contribution government of
India received from petroleum sector:
Table 1: Net contribution to Government exchequer
Year Crude Price Crude Consumption
2004-05 39.21 120171
2005-06 55.72 122353
2006-07 62.46 131668
2007-08 79.25 140699
2008-09 83.57 145511
2009-10 69.76 148415
2010-11 85.09 156913
2011-12 111.89 163494
Table 2: Under recovery by marketing company
Year PDS SKO LPG Petrol Diesel Total
2004-05 9480 8362 150 2154 20146
2005-06 14384 10246 2723 12647 40000
9. SUBSIDIES IN INDIA 9
Evolution of Fuel Product Prices and Subsidies, 2004–2012
Evolution of Fuel Product Prices and Subsidies, 2004–2012
10. SUBSIDIES IN INDIA 10
Evolution of Fuel Product Prices and Subsidies, 2004–2012
Evolution of Fuel Product Prices and Subsidies, 2004–2012
11. SUBSIDIES IN INDIA 11
Advantages of Fuel Subsidies
1. Public transport is cheaper.
2. Agricultural activities are cheaper.
3. To protect poor consumers so that they may afford kerosene for lighting
4. To provide merit goods to consumers such as clean cooking fuels like natural
gas, LPG and kerosene to replace use of biomass-based fuels such as
firewood and dung.
Disadvantages of Fuel Subsidies
1. When government provides fuel subsidy then it asks the oil companies to bear
the losses by issuing oil bonds. These oil bonds are then later on redeemed
by government to the oil companies at a higher price as they cannot bear the
losses continuously or else they'll have to be shut down.
2. The reason why fuel subsidy has to be removed is because of the rising fiscal
deficit. This deficit will further rise in the future if more subsidy is provided by
the government. To ease the burden it will print more money and hence fiscal
deficit will rise. Once this deficit will rise higher, country's credit rating will fall
down, FIIs will run away and IMF will next impose evil conditions to grant us
any further loan.
3. We have spent Rs 1,53,275 Cr since 2004-05 on subsidizing kerosene, which
apparently is used not for cooking but for lightning purpose. Many power
plants could have started with this money.
12. SUBSIDIES IN INDIA 12
3.Food Security Bill
The Indian National Food Security Act, 2013 (also Right to Food Act), was signed
into law September 12, 2013. This law aims to provide subsidized food grains to
approximately two thirds of India's 1.2 billion people. Under the provisions of the bill,
beneficiaries are to be able to purchase 5 kilograms per eligible person per month of
cereals at the following prices: rice at INR3 (4.6¢ US) per kg wheat at INR2 (3.1¢
US) per kg coarse grains (millet) at INR1 (1.5¢ US) per kg.
Salient Features
1. 75% of rural and 50% of the urban population are entitled for three years from
enactment to five kg food grains per month
at 3 (4.6¢ US), 2 (3.1¢ US), 1 (1.5¢ US) per kg for rice, wheat and coarse
grains (millet), respectively;[5]
2. The states are responsible for determining eligibility;
3. Pregnant women and lactating mothers are entitled to a nutritious "take home
ration" of 600 Calories and a maternity benefit of at least Rs 6,000 for six
months;
4. Children 6 months to 14 years of age are to receive free hot meals or "take
home rations";
5. The central government will provide funds to states in case of short supplies
of food grains;
6. The current food grain allocation of the states will be protected by the central
government for at least six months;
7. The state governments will provide a food security allowance to the
beneficiaries in case of non-supply of food grains;
8. The Public Distribution System is to be reformed;
13. SUBSIDIES IN INDIA 13
9. The eldest woman in the household, 18 years or above, is the head of the
household for the issuance of the ration card;
10.There will be state- and district-level redress mechanisms; and
11.State Food Commissions will be formed for implementation and monitoring of
the provisions of the Act.
Advantages of food security bill
1. Food subsidies to the poor families would be beneficiary in some
cases.
2. Benefits provided to the pregnant women encourages healthier growth
of the child, if used wisely.
3. Malnutrition in the children could be reduced through this bill.
4. Death due to starvation could be reduced.
Economic And Social Disadvantages of this bill
1. Increase in the annual food budget which in turn cause an increase in fiscal
deficit.
2. Will to work of a person decreases because his daily needs are satisfied by
this bill, reducing manual labour and employment in India.
3. For a person, if food prices decreases, he/she may spend his/her wage in
illicit activities such as alcohol consumption, drug addiction or gambling which
in turn will ruin the social atmosphere of the country.
4. Child exploitation could be increased. They could be forced to bring “take
home rations” instead of having mid-day meal.
5. As every person is allowed 5 kg of grains, so he can sell the excess grains at
a higher price, thus exploiting the government.
14. SUBSIDIES IN INDIA 14
4.Study Comparing Diesel Subsidy Vs Food
Subsidy
There has been a debate ever since that will reducing diesel subsidy could ever
compensate the cost that has been added to the budget due to Food Security bill.
So, we have taken the following data to do this small study:
Average consumption of diesel per day = 408,517.854 ltrs
Estimated cost of food security bill (Govt.) = ₹25,000 cr
Estimated cost of food security bill (Economist) = ₹1-3 lakh cr
Assumed cost of food security bill (this study) = ₹50,000 cr
Now, our main aim is to calculate the cost (of food security bill) per 1 ltr of diesel
Therefore,
Money spent on food security bill in one day = ₹1,369,863,013.7.
408517.854 ltrs diesel consumed against ₹1,369,863,013.7 (FSB) per day.
So 1 ltr diesel consumed against ₹3,353.25 (FSB) per day.
This leads to the result that: For each 1 ltr of diesel sold ₹3,353.25 should be
reduced as subsidy from diesel to compensate the cost of food security bill.
Therefore, the debate that decrease in subsidy on fuel cannot neutralise money
spent on food security bill. Therefore, even by reducing the subsidy of diesel to 0 we
cannot compensate the money spent on food security bill as the subsidy on diesel is
obviously less than ₹3353.25.
15. SUBSIDIES IN INDIA 15
5.Conclusion
Subsidy has many advantages and disadvantages in different areas. Many
upcoming industries have machines subsidised by government which further
contribute to the upliftment of Indian economy. Seeds subsidised to the farmer helps
him to tackle the loans he take. Food is the basic requirement of a person which is
fulfilled by subsidy in food through Food Security Bill providing food to all.
Government can have subsidy by providing money or ease on tax. Government
should select the best way of providing subsidy, that will reduce the burden on Indian
economy and also help the people.
6.References
1. http://www.quora.com/India/Is-removing-the-subsidy-on-petrol-and-diesel-
justified-over-a-period-of-time-why-dont-they-remove-taxes-also-like-this
2. http://centreright.in/2013/04/fuel-pricing-policy-notional-subsidy/
3. http://www.telegraphindia.com/1130829/jsp/business/story_17285278.jsp#.Uo
j88_mmgzA
4. http://www.indexmundi.com/energy.aspx?country=in&product=oil&graph=con
sumption
5. http://www.imf.org/external/pubs/ft/wp/2013/wp13128.pdf
6. http://www.finmin.nic.in/workingpaper/FossilFueSubsdies.pdf
7. "The National Food Security Bill, 2013 Receives the Assent of the President,
Published in the Gazette of India as Act No. 20 of 2013" (Press release).
Press Information Bureau. Jump up
8. "Govt defers promulgation of ordinance on Food Security Bill". Times of India.
June 13, 2013.
9. http://en.wikipedia.org/wiki/National_Food_Security_Bill,_2013
10.http://en.wikipedia.com
