This document discusses subsidies and cash transfers. It notes that subsidies distort markets by transferring cash from one group to another. While subsidies can help industries and lower prices, they incentivize inefficient production and consumption choices. The document advocates for replacing many subsidies with direct cash transfers, which are more efficient and have lower leakage, though they lack use monitoring. Conditional cash transfers may help incentivize behaviors like education and healthcare usage. Overall, the document argues for targeting subsidies only to essential needs and giving them directly to beneficiaries to minimize distortions.

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Subsidies and Cash
Transfers
Rahul Reddy
VistaMind

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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

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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

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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

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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

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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

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Subsidies in India
 Food (PDS)
 Fertilizer
 Petroleum products
 Diesel, Kerosene, LPG etc
 Electricity
 Education
 Public healthcare

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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

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Public Distribution System
 Food Grains procured by Union Govt (FCI)
 Procurement, Storage and Transport
 Distribution by State Government
 Identifying Beneficiaries, Mange FP Shops

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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

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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%.

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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

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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

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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

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Conditional Cash Transfers
 Use of CTs as incentives
 Schooling
 Basic Healthcare
 Examples
 Brazil and most of SA
 Indonesia and Philippines

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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

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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