Are subsidies needed in India?

India is a welfare-based society.Subsidy is an instrument of fiscal policy which the government has been adopting for social justice almost since independence.The developed countries too provide subsidies to its citizens so as to improve their lives.

More than half of the population in India are chronically poor and live below poverty line.Therefore,subsidies are essential to improve the condition of the poor.Since the tenth five-year plan,the government is serious about ‘inclusive growth’.The government thus provides a range of subsidies including food and fuel subsidies.However,the objective of ‘social justice’ still remains an elusive goal despite subsidies contributing about two percent of country’s GDP.That said,there are methodological flaws in the way the subsidies are doled out to the citizens.

Subsidies should be meant for the merit goods only.Political parties make hefty promises to the people like free electricity and free power in order to garner votes. The promises of subsidies are generally made irrespective of the income groups.One of the telling demerits of subsidies is that it increases the fiscal burden of the economy by widening the fiscal deficit.Thus the government is left with little fiscal space for infrastructure development and capacity building.

Many critics recommend abolition of subsidies. Their argument is that subsidies distort prices by not letting the market allocate resources efficiently.This is partly true as subsidies crowd out the private investment in the economy.The private sector is reluctant to produce goods and services which doesn’t give returns and otherwise subsidized by the government.

Moreover,subsidies impact the natural resources adversely.For instance.in agriculture sector,the provision of free power in certain areas had led to the farmers exploiting the ground water recklessly due to the rampant use of diesel pumps.Subsidies also make people lazy as free handouts by the government do not hold citizens accountable.

Therefore,the remedy is not to do away with subsidies but to target them appropriately to the underprivileged sections of the society.The government is therefore seriously considering the rolling out of Direct Benefit Transfer(DBT) scheme in social security schemes,flagship programmes and disbursal of essential goods.Subsidies should also be better targeted to consumers and therefore should be income-specific in priority sectors.It is to be remembered that  it is better to get the citizens to learn how to fish rather than handing out a fish each day for them to consume.