Subsidies: Types and Effects - 2 | Economics Optional Notes for UPSC PDF Download

What are the Positive Impacts of Subsidies?

Agriculture:

• Income Support: Subsidies can provide income support to farmers, helping them cope with price fluctuations, market uncertainties, and production risks.
  • For instance, the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme launched in 2019 provides direct income support to small and marginal farmers.
• Increased Production: Subsidies on inputs like fertilizers, seeds, and irrigation can promote increased agricultural production.
  • The Indian government's support for fertilizers through the Nutrient-Based Subsidy (NBS) scheme ensures the availability of fertilizers at affordable prices to farmers.

Fishery:

• Modernization and Infrastructure Development: Subsidies in the fishery sector can aid in the modernization of fishing practices and the development of infrastructure.
  • This can lead to increased productivity, improved safety measures, and better storage facilities.
  • The Pradhan Mantri Matsya Sampada Yojana (PMMSY) aims to enhance fish production and fishermen's welfare through various interventions, including infrastructure development..
• Livelihood Support: Subsidies can provide livelihood support to fishermen, especially during lean seasons and adverse climatic conditions.
  • Schemes like the National Scheme of Welfare of Fishermen provide assistance to fishermen for the construction and repair of boats, supply of safety equipment, and training programs.

Fossil Fuel:

• Energy Access and Affordability: Subsidies on fossil fuels, such as LPG (liquefied petroleum gas) and kerosene, can ensure energy access and affordability for vulnerable sections of society.
  • The Indian government launched the Pradhan Mantri Ujjwala Yojana (PMUY) to increase LPG usage and reduce air pollution, deforestation, and health disorders

What are the Challenges Related to Subsidies?

• Fiscal Burden: Subsidies often impose a significant fiscal burden on the government.
  • The cost of subsidies can strain the government's finances and impact its ability to allocate resources to other critical sectors such as healthcare, education, and infrastructure development.
  • Balancing the need for subsidies with fiscal sustainability is a constant challenge.
• Inefficient Targeting: One of the major challenges is ensuring that subsidies reach the intended beneficiaries effectively.
  • There is a risk of subsidies being misdirected or captured by ineligible individuals or entities.
  • Proper identification and targeting mechanisms are essential to avoid leakages and ensure that subsidies benefit the intended recipients.
• Market Distortions: Subsidies can distort market dynamics and create inefficiencies. They may lead to overproduction or overconsumption of certain commodities, leading to market imbalances and price distortions.
  • These distortions can affect the competitiveness of the sector and hinder the development of a sustainable and market-oriented agricultural, fishery, or energy sector.
• Environmental Implications: Subsidies on fossil fuels can discourage the transition to cleaner and more sustainable energy sources.
  • They can perpetuate the reliance on fossil fuels, contributing to environmental degradation, air pollution, and climate change.

Way Forward

• Targeted Subsidy Reforms: Implement targeted subsidy reforms to ensure that subsidies reach the intended beneficiaries effectively.
  • This can be achieved through the use of technology, such as Aadhaar-linked identification systems, to improve targeting accuracy and reduce leakages.
• Gradual Reduction and Rationalization: Gradually reduce and rationalize subsidies to ensure fiscal sustainability and minimize market distortions.
  • Instead of across-the-board subsidy cuts, a phased approach can be adopted, focusing on reducing subsidies for the affluent and gradually redirecting funds towards investments in infrastructure, research and development, and capacity building in the respective sectors.
• Promote Sustainable Practices: Encourage the adoption of sustainable practices in agriculture, fishery, and energy sectors through subsidies.
  • This can include providing incentives for the use of organic farming techniques, efficient irrigation systems, eco-friendly fishing practices, and renewable energy technologies.
  • Subsidies should be designed to incentivize innovation, productivity improvements, and environmental conservation.