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Political Play
CA Dr Sunil Gupta
Yet another bottleneck for the new government - Ambiguous subsidy regime 13 May, 2014
The UPA 2 government might have concealed the failures of many years by coming up with a Bill that assures food to all. The actual picture, however, is quite distinct. In case this had been such an easy and advantageous scheme, the administrators would not have delayed this for decades. Plus, what else could a human expect? Food is now almost guaranteed.
However, producing, procuring, distributing, and managing foodgrains call in for labors and outlays. Thus, the scheme might look too lucrative; execution of this would demand sweats. Remember, procuring food for two third population of India at excessively cheap rates, and that too when the upcoming monsoon does not promise proper yields would be one of the most threatening tasks for the new government at the center. Though, the implementation of the scheme would call in for elevated pains, the new government now cannot even back out.

This isn't all. Ever since the democracy witnessed government elected by the people, products and industries have been subsidized. Ranging from fuel to food and education to health, subsidies are a part of every other domain. The motive is to ensure that the general public can procure basic necessities at manageable rates. On the contrary, the World Bank criticized the subsidy culture of India and commented that this has enhanced the incompetence of the Indian economy.

The union government of India funds almost USD 60 billion from the revenue generated to the subsidy programmes. Realizing the adverse impact of subsidies, the chairman of PM’s Advisory Council advocated trimming down of fuel and fertilizers subsidies so as to maintain fiscal deficit within the budgeted level. The new government post the 16th will have to consider all the pros and cons of the ever-high and vague subsidy system.

Considerable to note, subsidies on non-merit goods are five times more than subsidies on merit goods, which depicts the wrong measures and directions of the subsidy regime. Amongst the merit goods are the construction of bridges and roads, followed by scientific research and education. Agriculture is the main constituent of the non-merit subsidy rule. The element to note is that in case of electricity, the per capita subsidy in richer states is substantially higher as compared to poorer states.

Let us now notice what is eating up the state's money. The most vital explicit subsidies that form a part of union government’s budget are the food and fertilizers subsidies. During 1974-75 subsidies on food accounted for almost 70 percent of the total expenditure on subsidies, which fell to 20 percent during 1990-91; however elevated to 40 percent during 1995-96. Export subsidies too are another key component.

Next, let us also take a sneak peak at the much highlighted programme, MGNREGA, with more than USD 25 billion spent as wage payments until now. Promising earning prospects for the residents of the rural areas, the scheme was devised with a view to promoting labor work. While the world is talking about technological advancements, this scheme is a reverse model. Above all, the projects are charged with severe misappropriation of funds. Plus, the outlays on this scheme have contributed towards the hike in the labor cost for private and agricultural projects.

Inflation, too has mounted owing to the fact that the spending capacity has multiplied. Rather than improving the productivity, the scheme feeds people with ready food. The new government will have to rethink this project and come up with some control measures to curb deviations from the anticipated outcomes. Comprehensive streamlining of MGNREGA is much-needed for the real betterment of economy.

Are the state welfare schemes and subsidy programmes beneficial in real terms? A clear distinction is necessary between subsidies that are unsoundly eating up the government’s money (for instance excessive food subsidy) and those which are assisting the economy (for instance export subsidy). Plus, it must to be comprehended that state welfare programmes move money into the hands of those who are unproductive, rather than encouraging the entrepreneurs.

This creates a gap between production that lessens due to unavailability of funds and consumption that upsurges due to grants. The gap becomes wider when the unemployed are assured of supply of necessities, which in turn demotivates them to work. Also, what can be expected out of direct money transfer?

Rather than utilizing, the beneficiaries are vulnerable to spend the cash received on immoral activities. Restructuring of the subsidy regime is therefore the urgent need of the hour. Surely, the anticipated disaster of the UPA is backed by extensive mismanagement that resulted in unjustifiable rise of prices and wages.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
About The Author
A Chartered Accountant by profession and Director on the board of Punjab National Bank (PNB), General Insurance Corporation of India (GIC) and Rural Electrification Corporation Limited (REC). Dr. Sunil Gupta is working flawlessly for the economic and social prosperity of India. His Linkedin and twitter handles are @cadrsunilgupta. Facebook page is CADrSunil.
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