CAN INDIA GROW AT 7 % WITHOUT SUBSIDY?

Dilemma between National Interest and WTO, looking beyond for inclusive growth 

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India’s real GDP or GDP at constant (2011-12) prices for the year 2015-16 is estimated at INR 113.5 lakh crore showing a growth rate of 7.6 % over the first revised estimates of GDP for the year 2014-15 of INR 105.52 lakh crore. This will maintain its position as the fastest growing major economy, according to Central Statistics Office (CSO). For FY 2015-16, World Bank also estimated 7.6 % growth rate. India needs to grow at 8 % and more for several years in order to raise incomes, generate jobs and lift millions out of poverty. Union Budget 2016-17 highlights expected spending of government in subsidy to be nearly INR 2.4 lakh crore which is nearly 4% less than FY 2015-16. However, if spending on subsidy reduces, it will surely spark the growth engine and India may able to grow at 7 % or even more consistently. India has the capability to grow beyond the imagination. Without rhetoric verdict, there is a need to view the subsidy in a different way.

  • Is subsidy hindering the growth?
  • Imagine India without subsidy and its National Interest.

In order to find the above answer for the conclusion whether “India can grow at 7 % without subsidy”, various dynamic factors that contribute in growth and our National interest has to be taken into picture, including global phenomenon like WTO.

Highlights

 Definition: Growth Rate, Subsidy, Inclusive growth

  • Growth Rate indications and its impact
  • Subsidies: Are they solution or themselves a problem?
  • Opportunity cost of subsidy
  • Subsidy effect on efficiency
  • Dynamic effect of subsidy and its distribution
  • Dilemma over subsidy: Nation Interest and WTO
  • Growing India with and without subsidy: answer to introductory questions
  • Conclusion

 The real economic growth rate measures economic growth, in relation to GDP (Gross Domestic Product), from one period to another, adjusted for inflation. The real economic growth rate is expressed as percentage that shows the rate of change for a countries’ GDP from one period to another. GDP is the market value of all goods and services produced in a country within a financial year. Inclusive Growth is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity both in monetary or non-monetary term, fairly across the society. Subsidy is given by government to groups or individuals usually in the form of cash/digital payment or tax reduction in an objective to bolster the welfare of society. It leads to fall in price of subsidised product. But in other way it also acts as expenditure from taxpayers’ money which may have been used as investment for other purpose.

GDP MP =  GDP FC + Indirect Taxes – subsidies

Real GDP = GDP/ (1+ inflation science base year)

Real GDP = (most recent years’ real GDP- previous years’ real GDP)/ previous years’ real GDP

GDP: Gross Domestic Product MP: Market Price FC: Factor Cost

Growth rate indications and its impact

Economic growth rates indicate a positive impact on the economy. It increases the aggregate demand encourage a corresponding increase in overall output that brings new resources of income and employment opportunity. This may result in increase in per capita income and overall development of individual and lifestyle.

Subsidies: Are they solution or themselves a problem

A welfare state without subsidies cannot be imagined. Government has to step forward in terms of subsidies for achieving socio-economic policy.

Category FY14 Actual ( Rs Cr) FY15 Revised Estimates (Rs Cr) FY16 budget Estimates (Rs Cr)
Urea 38,038 50,300 50,500
fertilizers 29,301 20,667 22,469
Food 92,000 122,676 124,419
Petroleum 85,378 60,270 30,000
Interest 8,137 11,147 14,903
Other 1,778 1,632 1,520
Total 254,632 266,692 243,811

(Union Budget  – subsidy distribution)

By this, they aim at

  • Making basic necessities affordable to poor people through extension of consumer services
  • To prepare a foundation of various economic sectors in which private sector can participate later. When economy is at lower stages of development, it is often unviable and unaffordable for private sector to step in production. This is mainly because there are limited resources with private investors and there are informational externalities/uncertainties. In such case government do handholding by supporting private sector by extending subsidies and withdrawing them when private sector becomes competitive

Opportunity cost of subsidy

People who are in favour of subsidies give the argument that due to the subsidies provided, more goods and services are being produced in that particular sector, and more employment opportunities are being created. But the point which is almost never acknowledged is the benefits the society would have reaped if the money would have been spent otherwise or left in the pockets of the taxpayers.

Example: Suppose a person has INR 1000 in his/her pocket and spends INR 800, on a party night, that INR 800 is no longer available to buy his/her necessities like food or clothes.

Example: Suppose the government spends INR 1000 crore in constructing a bridge that a very few number of people will use, that money is not available anymore to be spent on other services like healthcare, education and other policies which are on high priority.

     But when there is a budget constraint, all spending decisions are traded off. In an ideal situation, the aim of the government is to plan its expenditure in such a way that the return to the society is roughly same as the spending. But this balanced is disordered by subsidies. The biggest problem of subsidies is that they decrease the surplus in a disguise.

Example: Consider a hydropower plant. The water used to produce electricity is also utilized by a farmer to irrigate his/her field. Now, when a cubic meter of water goes through the turbine to generate electricity, it has much higher value than irrigating the farmer’s crops. The government then comes up with a subsidy policy which allows him to pump out water from the reservoir at a minimal cost. This results in diverting the water from the water source to a lower value use, which in turn shrinks the surplus and the economy as a whole generates a smaller surplus.

Subsidy effect on efficiency

Granting of subsidies has its first order of static effects. Economic experts often say that subsidies create economic distortions, especially the subsidies which are used to promote any particular sector or industry. In such cases, resources are more often than not, diverted to less productive use, thereby reducing the economic efficiency. Those who are in favour of subsidies counter this view by contending that these subsidies serve other redistributive goals. But again, what they miss out is that providing subsidies may have external effects, which were not anticipated.

 Dynamic effect of subsidy and its distribution

Over time, the benefit reaped from the subsidy policies capitalize into the least elastic form of production. Subsidies are transitional. It helps only that section of the society who can immediately take the benefits of the subsidies. The successor of these people ends up paying a higher price for the subsidized product. The beneficiaries of subsidy programs become socially trapped also. Matters become worse when subsidization is used to support employment. Due to the subsidies being provided, people are more inclined to enter the profession, and mobilization in that form of profession stagnates. The amount of dependence on subsidies becomes an obstacle when it comes to make new policy reforms. It is of no doubt that some subsidies do benefit some disadvantaged groups. But even in such cases, these subsidies benefit companies and richer people more. Ironically, the distribution consequences of subsidies are often the opposite of what had been really intended. The passage between the government and those who are intended recipient of the subsidy benefits is often more like a stream rather that a pipe which provides ample opportunity to other to dip themselves in the stream and reap the benefits of it before the actual intended recipient. But introduction of DBT(Direct Benefit Transfer) is doing better to reap away the middle hassles.

Dilemma over subsidy: National interest and WTO

Subsidies not only hurt the general governance of the society, but it also impacts the overall economic structure. Very recently, The World Trade Organization’s 2015 in its Nairobi Ministerial decided to scrap subsidies provided on cotton exports. Reacting to that, the Indian Government has stated that the eliminations of the subsidy will benefit Indian exports. According to the government, the scrapping of such subsidies creates a level playing field.

  • These statements reinforce the fact that elimination of subsidies helps in a larger way too. Talking about subsidies on fuel, these subsidies also cost Oil Marketing Companies a lot. According to a report, the under-recovery incurred by OMCs in the first quarter of the financial year 2014-15 itself was INR 28, 690.74 crore.
  • Contrary to popular belief, the duty and the excise on fuels is not much. The price of fuels like petrol and diesel keeps on going up due to the subsidies provided on them.

There are many examples like subsidy in agriculture, solar panel, direct benefit transfer etc. have cached eye at WTO, but India’s stand has been consistently on its national interest.

Growing India with and without subsidy: answer to introductory questions

India is an emerging market and many people are below poverty line. Our National Interest is to uplift the people from poverty and organising them into mainstream economy. Our National interest is to facilitate the needy people where subsidy can be a thrust to their development. Our National interest is to give priority to our people over other country. As India is going ahead to achieve the form of welfare state, government need to help the people for their overall socio-economic development keeping inclusive growth in mind.

Conclusion

Country like India, with a population of more than 120 crores, and half of them living in poverty, it is impossible to eliminate subsidies. Providing subsidies have become a part and parcel of the Indian economic structure. The missing link is a proper structure of distribution of subsidies between the government and the actual intended recipients. If the process is made water-tight, subsidies will cease to be a burden on the economy of the nation. On the other hand, the fact that subsidies are a burden also can’t be negated. But by keeping the prices low in a fabricated manner by providing subsidies, the government is not doing any good to the economy of the country. Therefore, the need of hour for introducing new policy reforms and start eliminating subsidy policies in a phased manner. If India can grow at 7.6% with subsidy than definitely with suitable policy India can grow at 7% and more, consistency without subsidy or practically with minimal subsidy. Indeed, soon India shall able to achieve inclusive growth more comprehensively.

Sankar Ray, Faculty

North East Institute of Advanced Studies [NE-IAS]

Assam

References

  1. http://economictimes.indiatimes.com/news/economy/policy/elimination-of-export-subsidies-on-cotton-beneficial-for-indian-exports-says-government/articleshow/52013264.cms
  2. http://pib.nic.in/newsite/PrintRelease.aspx?relid=107321
  3. http://www.financialexpress.com/article/economy/tax-payers-earning-over-rs-10lyr-not-to-get-subsidised-lpg/184675/
  4. http://www.firstpost.com/business/ending-lpg-subsidy-for-the-well-off-a-welcome-move-will-kerosene-urea-follow-soon-2563840.html
  5. https://www.iisd.org/gsi/effects-subsidies
  6. Wikipedia
  7. Investopedia
  8. Indian Economy by Dutta and Sundaram
  9. Indian Economy for Civil Services Exam by Ramesh Singh
  10. Union Budget 2016-17, Economic Survey 2016

 

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northeastias

North East Institute of Advanced Studies (NE-IAS) has been founded with a vision to make high quality professional education and training available at doorstep with the guidance and assistance of nationally acclaimed trainers and mentors who have achieved benchmark in their fields by consistent success records. NE-IAS aims to develop a quality and result-oriented coaching and training institute in NE India. The institute currently offers courses for preparation of UPSC and state level civil services.

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