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What's the article about?
- It talks about the negative effects of India’s high subsidies on the 3Fs — food, fertiliser and fuel — in the current fiscal year.
Relevance:
- GS3: Indian Economy and issues; Government Budgeting; Effects of Liberalization on the Economy.
Context:
- The Union government received the Lok Sabha’s nod to spend an additional Rs 2,14,580.88 crore towards subsidies on the 3Fs — food, fertiliser and fuel — in the current fiscal.
- Assuming no further batches of supplementary demands for grants, it will take the total expenditure in 2022-23 to Rs 5,32,446.79 crore:
- Food (Rs 2,87,179.34 crore),
- fertiliser (Rs 2,14,511.27 crore) and
- petroleum (Rs 30,756.18 crore).
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What Is a Subsidy?
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Reasons for spikes in subsidies:
- Government’s decision to cushion consumers and farmers from the ravages of Covid-19 and the Russia-Ukraine war.
- Three external shocks in the last three years—the pandemic (2020-21 and 2021-22), weather (2021-22) and war (2022-23) — with each seamlessly transitioning to the other.
Rationale behind the government’s decision to raise subsidies:
- The spike in subsidy spending as response to crises that come only once in a decade or more.
- The government ensured that the poor and vulnerable got access to free/near-free grain through the pandemic — not a small thing for a country that saw millions die during the 1943 Bengal Famine or the great drought of 1899-1900.
- There was also no significant shortage of urea and di-ammonium phosphate (DAP) for Indian farmers, despite the disruptions to the global fertiliser trade following the war.
- Even on petrol and diesel, the government softened the blow by not allowing retail prices to go up since early-April this year.
Negative effects of the spike in subsidies:
- The magnitude of subsidy amount:
- The subsidy bill on the 3Fs will consume nearly a quarter of the Centre’s budgeted revenue receipts for this fiscal.
- Market Distortions:
- Market distortions are events, decisions, or interventions taken by governments, companies, or other agents, often in order to influence the market.
- In this instance, government subsidies are controlling pricing. But over time, this is a bad practice because the abrupt removal of subsidies could force poor consumers to pay exorbitant costs. In order to prevent market distortion, there should be a balance between government subsidies and forces of markets.
- The government has addressed this substantially in fossil fuels, which are today, rightly, net taxed than subsidised. But this does not apply to fertiliser and food.
Way Forward:
- It is encouraging to see the government responding to external shocks by increasing subsidies to maintain the socialist goal that is established in the constitution. However, we must also acknowledge that everything has a price, thus corrective actions must also be planned.
