What are subsidies? Subsidies are the money the government gives to the public or corporates for selling essential goods and services at cheaper rates. Simply put, it is the opposite of taxation. There are two different kinds of subsidies – growth oriented and welfare oriented. Reduction in fuel and food costs is an example of welfare-oriented subsidies. The government also sometimes gives money to companies or farmers for operating in certain industries. These are examples of growth-oriented subsidies. These subsidies encourage companies to operate in industries that may have high business costs, but are still important for the public and the economy. The oil marketing industry is the best example of this. These companies sell fuel at cheaper rates, incurring a loss. Yet, fuel plays a very important role in the economy. So, to encourage companies to operate in this environment, the government pays them subsidies to make up for the loss.

1. Subsidies, Indian Scenario and road ahead
What are subsidies?
Subsidies are the money the government gives to the public or
corporates for selling essential goods and services at cheaper rates.
Simply put, it is the opposite of taxation.
There are two different kinds of subsidies – growth oriented and
welfare oriented. Reduction in fuel and food costs is an example of
welfare-oriented subsidies. The government also sometimes gives
money to companies or farmers for operating in certain industries.
These are examples of growth-oriented subsidies. These subsidies
encourage companies to operate in industries that may have high
business costs, but are still important for the public and the economy.
The oil marketing industry is the best example of this. These companies
sell fuel at cheaper rates, incurring a loss. Yet, fuel plays a very
important role in the economy. So, to encourage companies to operate
in this environment, the government pays them subsidies to make up
for the loss.

2. Impact of subsidies?
Subsidies play a vital role in the economy of a country. A country has
various resources which are to be gainfully deployed for the benefit of
the population of the whole country. Subsidies are provided to ensure
equitable utilization of the resources for the people. The developed,
developing and underdeveloped countries have different kinds of
subsidies. Developed countries like India provide subsidies to their
population for improving standard of living; the underdeveloped

3. countries provide subsidies for meeting bare minimum needs of the
vast majority of population.
The Indian government has consistently spent more than it earns from
tax and non-tax sources. This led to a high fiscal deficit. To fund this
extra expenditure, the government borrows from the public. However,
high fiscal deficit and constant borrowing is not good for the economy.
It is potentially inflationary. Moreover, it forces the RBI to keep interest
rates on the higher side.
However, India’s subsidies have been subject to scrutiny and criticism
from the World Bank and UNESCO. The World Bank has said that India’s
subsidy schemes are unproductive and leading to economic instability,
while the UNESCO’s study has detailed that India has the lowest public
expenditure on education.
The government currently had spend a whopping Rs 2.51 lakh crore on
subsidies in 2014-15 or 2.1 per cent of gross domestic product (GDP).
Subsidies pre-empted 23.7 per cent of the entire revenue receipts of
the central government. In terms of opportunity cost, subsidies were
2.64 times the entire Capital Plan Expenditure for 2014-15. Food,
fertilisers and oil-based subsidies account for 95 per cent of all
subsidies ideally, government expenditure has to balance between
growth and social welfare. However, in the past few years, welfare-
related expenditure – which barely contributes to economic growth –
was higher than productive expenditure like infrastructure
development. At a time when the economy has slowed down,
productive expenditure is the need of the hour.

4. At the same time, the government targets a cut in fiscal deficit. To do
so, it has to cut its expenditure and increase revenue. A high subsidy bill
makes this target hard to achieve without compromising on economic
growth.
What is going wrong?
The main problem is the structure and the rules and regulations
regarding the allocation of subsidy and Who are really benefiting from
the subsidiary? And whether the people who are supposed to benefit
from subsidy are getting it or not?

5. In the common case scenario the agricultural and food subsidies
benefits are going the big players in the particular area or products are
being sold the local black market or being sold to the general public at
the higher price at a different name. And in the case of LPG or other
fuel like diesel the major benefit goes to the bigger organized players.
What can be done?
Subsidy need not be stopped but to be regulated. Regulation means the
cyclical process of allocation and supervision. For areas like agriculture
and because of the huge demographic dividend of our nation, the
sensitiveness of the sector is important and thus considered as priority
sector which are not allowed to be neglected for the national interest.
We were having a 50% GDP contribution of agriculture during the birth
of the nation and gradually reduced to 14% these days, this is due to
the shift in the nation's priority from agriculture to Service industry.
Stopping of subsidies will further top up the issue. Here as I said in the
beginning, regulation needs to play an important role to curb the issues
associated with subsidy schemes like poor targeting of the subsidy,
misuse of subsidy, lack of proper planning in case of devising the
subsidy instruments like as in case of urea subsidy etc.