Impact of Subsidies on the Indian Economy

By-

Manas Ranjan Tripathy (L)

Garima Rajput

Mohit Khanna

Navneet Malik

Nilanjan Ghosh

Group 2, MBA IB

What is Subsidy??

• Subsidy is a benefit given by the government in the form of a cash payment, tax reduction, etc. to bring out desired changes by effecting optimal allocation of resources, stabilizing the price of essential good & services and redistributing income in favor of poor people

• Types:

Direct

Indirect

India

• Developing Nation

• Population- 1,210,193,422 (2011 Census)

• Literacy Rate- 74.04% (2011 Census)

• Unemployment Rate- 4.9%

• Per Capita Income-US $ 1499 (2013)

• Below Poverty Line- 21.9% (2011)

• Exports- US $ 314,405.30 Million (2013-14)

• Imports- US $ 450,199.79 Million (2013-14)

Objectives of Subsidy in India

• Achievement of social policy objectives including redistribution of income, population control, etc.

• Increase Employment by Wage Subsidies to labour intensive industries

• To Promote Exports

• To Educate People

• Promote Agriculture through subsidy to farmers

• Feed poor people through food subsidies

• Promote Political Interests

IS SUBSIDY REALLY BENEFICIAL ??

Positive Impact

• Lower Cost of Living

• Increase in Employment

• Farmers Welfare

• Export Promotions

• Affordable food to the poor

Negative Impact

• Subsidies often promote inefficiencies

• Over- subsidization could adversely affect environment and allocation of resources

E.g. Over-utilization of subsidized fossil fuels; over-utilization of fertilizers

• Fiscal deficit as expenditure increases

• Higher Prices (supply remaining constant, demand of subsidized products increases)

• Regional Discrepancies

• Hampered growth of producers producing subsidized products due to lack of timely payments by govt. and also low prices

Subsidy has many negatives, but…..

Subsidy is necessary to an extent…..

• India is a developing nation

• Large part of our population is poor

• Literacy rate is also quite low

• Imports far outweigh Exports

• Promotion of Agriculture and safeguarding farmers is needed

Subsidy Bill (2014-15)

The New Govt has cut down the Subsidy on Fuel and a target of 60% reduction has been set for FY 2015

Conclusions

• Better implementation is needed so that the benefits actually reach the needy

• Subsidy on Fuel must be cut down

• Expenditure on Education must be higher

• A better economic environment and infrastructure must be created to promote trade

• Money must also be diverted to improve agricultural techniques

• Slow Cutbacks on subsidy necessary as they hinder growth and impact the economy adversely in the long run