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A Perspective on Subsidies in India

            India in 2015-16 was expected to spend Rs. In a country trying to rein in fiscal deficit and with a problem with revenue collection with innumerable free riders – with around 2% of the population paying taxes. This surely begs the question and forces one to ask if there is some merit in the argument for subsidies. The oil prices in the world have been in freefall. With ISIS forces seizing control of certain Iraqi oilfields and the introduction of shale gas by the US, crude oil prices have fallen to as low as $30 per barrel, and some expect it to fall to even $20 levels. The resulting fall has eased pressure on the Indian government to provide subsidy, and they have been slashed as a result. The question now is whether further slashes are possible.
             A subsidy is an economic measure to make a public good affordable or to encourage the use of a public good. It is the inverse of tax in this regard. The government either sets a price ceiling – as in the case of fuels (petrol and diesel) – or pays a part of the price on behalf of the consumer. In the case of artificial price ceilings, the problem arises because the corporations involved (PSUs – IOCL, BP, HP) undergo very high operational costs and losses in general, and the people unable to afford the product are still unable to use it. In this sense, it is very difficult to justify subsidies – since they fail at their primary goal while exerting great pressure on the economy.
             Another problem that can be seen with subsidies in general is the fact that they negatively affect markets. Considering the example of diesel, a heavily subsidized fuel in the country, it can be seen that the subsidy is not entirely justified in the present context. Diesel was encouraged as Trucks and heavy utility vehicles run on it. As a way of promoting transportation, they were subsidized. However, diesel engines are a lot more polluting than petrol engines, and the recent years have seen the rise of smaller vehicles which run on diesel – a phenomenon attributable to subsidies.


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