A subsidy is a form of monetary support given by the government to an industry or business to keep the price of a commodity or service low. Subsidies give support to a vulnerable sector, which is not capable enough of surviving in free market conditions.
While subsidies support vulnerable and poor sections of the society and are a traditional way for governments to pursue their social justice objectives, they have some disadvantages and limitations too.
Subsidies disrupt market and discourage productive investment
Subsidies can be trade distorting and market disrupting, meaning that they can give shocks to the market by disturbing the demand-supply equilibrium. A fertiliser subsidy temporarily lowers the price for farmers, but the price shoots up abruptly as soon as the government withdraws the subsidy. Subsidies thus make a sector dependent on doles by the government. They also hamper productivity enhancing investment as private investors like to stay away from a sector that sees frequent government intervention.
Distortions due to unintended exploitation of subsidies
Fertiliser subsidies were earlier only provided for urea, leading to over-application of urea and an unhealthy soil nutrition balance. Electricity subsidies have resulted in rapidly falling water table in many areas, hurting sustainability of agriculture. Price support for select crops has made our diet cereal-dominated.
Inequitable distribution: Often, subsidies were largely appropriated by large commercial farmers, and the poor and vulnerable ones were left out due to lack of awareness or support.
Revamping subsidies with Direct Benefit Transfer (DBT)
Direct Benefit Transfer is a mode of delivering subsidies wherein the subsidy is directly credited into the beneficiary’s account. This cuts the middle men and greatly reduces the possibility of diversion of government funds through corrupt and inefficient service delivery channels.
The government of India is increasingly shifting towards using DBT (Direct Benefit Transfer) mode for delivering subsidies, and letting the prices of the commodity (fertilisers, farm produce, etc) be decided by full play of demand and supply forces. This is expected to curb diversion and other leakages and may nudge the beneficiaries of subsidies to utilise them more judiciously.