MechEngg anyone. 2nd Law of Thermodynamics – One cannot transfer energy from Low temp body to a high temp body without doing some work.Subsidies are by nature inefficient – There will be losses. Politically we have to determine whether the losses are ‘worth it’
54 cents per every bushel of wheat is given to US farmers.Underdeveloped countries depend heavily on agriculture and natural commodities (minerals) for exports. If this is prevented, they have no other way of earning Forex – and hence paying for the imports they need.
How does a farmer decide what to produce? Based on price. A good price is a signal that there is demand for the product and it needs to be produced. However, subsidies can create a false signal to farmer, making him produce what is already in over supplyIn the USA, most subsidies are based on production, the more you produce the more subsidies you get, hence efficient farms which need less or no subsidy get more of it. Largest farms get most subsidy – Leading to a consolidation of farms. Also non farmers like food processing companies get the benefits.Scientist recommend a 4:1 ratio between Nitrogen based to Phosphate, Potassium based fertilizer. In Punjab ratio is 24, In Haryana it is 32
Vouchers (or cash) allow Farmers (or any target segment) buy products of their choice at a subsidized price. For example, a famer with a Govt given voucher can buy fertilizer from any company – promoting competition in terms of price and quality.Similarly, Education vouchers permit parents to decide which school to enroll.
Subsidies and cash transfers
+ Subsidies and Cash Transfers Rahul Reddy VistaMind
+ Subsidies A form of Financial Assistance To prevent decline of an Industry To reduce price of certain products To increase production, hiring etc etc A subsidy distorts markets A price must be paid A form or cash transfer from 1 group to another Subsidy is a political decision
+ Types of Subsidies Universal Vs Targeted Merit Vs Non Merit Explicit Vs Disguised Subsidy Given to Consumers Producers Producers of Input Direct Production by Govt/PSU’s
+ Farm Subsidies – Developed world US & Europe etc heavily subsidize farmers Making Direct payments to farmers Paying them extra money per unit produced The effect Cheaper Imports from 3rd world are prevented US produce is dumped to other countries It is a cash transfer From general public (tax payer) to Farmers Would be cheaper to import food and compensate farmers
+ Farm Subsidies – Developed world Reasons cited Food security due to supply and price fluctuation Protection of farming as an industry The negatives Distorts price signals – wrong production choices Unfair trade practice – 3rd world farmers Benefits the wrong people
+ Issues with Subsidies Public Investment Vs Subsidy debate Market distortions due to subsidy Governmental Inefficiency in subsidy targeting and delivery Wrong targeting of subsidy Lack of will to recover cost of public services Effect on organizations delivering subsidized services Flat rate Vs Pay per use
+ Subsidies in India Food (PDS) Fertilizer Petroleum products Diesel, Kerosene, LPG etc Electricity Education Public healthcare
+ How Big is the problem? FY 12 Revised Estimates (BE 1.34 Lakh Cr) Explicit Central Subsidies 2.08 Lakh Crore Food 72,800 Fuel 68,500 Fertilizer 67,200 FY 13 Budgets for 1.8 Lakh Crore
+ Public Distribution System Food Grains procured by Union Govt (FCI) Procurement, Storage and Transport Distribution by State Government Identifying Beneficiaries, Mange FP Shops
+ Issues with PDS Huge losses in procurement, storage and transportation High cost of subsidy due to losses and operational costs MSP and Procurement quantities hiked for political reasons Huge difference between Central Allocation and off takes of states. Barely 20-25% of the allocated quantities are taken by the state governments
+ Issues with PDS Leakage/Diversion of food grains Bogus BPL cards, Race to be poorest of the poor Poor coverage of rural, tribal areas, denial of supplies to poorest of the poor %age of food grains under PDS reaching poorest 40% is 25%.
+ The Shocking economics The FCI cost of procurement, storage and Transport of Wheat and Rice is Rs 952 and Rs 1254 per quintal (100kg) as against an actual subsidy of Rs 357 and Rs 482 for Wheat and Rice respectively Cost of transferring Rs 1 to the poor is Rs 6.68 Administrative Costs are 85% of the subsidy
+ Cash Tranfers Direct Transfer of Cash to beneficiary Can be made conditional CCT Advantages Least Cost, Most efficient method Relatively low leakages Beneficiary decides optimal usage of cash
+ Cash Transfers Disadvantages End use of cash cannot be monitored Creates a dependency, disincentive to employment Use as electoral bribe Financial infra and Knowledge lacking
+ Conditional Cash Transfers Use of CTs as incentives Schooling Basic Healthcare Examples Brazil and most of SA Indonesia and Philippines
+ Principles Subsidize only essential commodities, Services Give the subsidy as directly as possibly Direct Cash Transfer, Conditional Cash Transfer Have a Clearly defined target Never make it free Don’t distort incentives Misallocation of resources & Wastage Distortion of production & Consumption choices
+ The way forward… Infrastructure Vs Subsidies Merit Vs Non Merit Subsidies Targeting of subsidies Diesel, LPG etc Quantity restrictions Metered Water, Electricity etc Retain ‘Free Market completion’ Education and Healthcare vouchers