🟠 Topic 61: Subsidies – Types & Rationalisation

📌 Introduction

Subsidies are financial assistance or benefits provided by the government to individuals, groups, or sectors to make essential goods and services affordable, promote specific economic activities, and achieve social welfare objectives. While subsidies play a critical role in poverty alleviation and supporting vulnerable sections, their misuse, leakages, and fiscal burden have raised concerns, leading to calls for rationalisation.

🔹 Constitutional & Legal Provisions Related to Subsidies

🔹 What is a Subsidy?

📖 Definition

A subsidy is a direct or indirect financial support provided by the government to lower the cost of a product, service, or activity, ensuring greater affordability and accessibility for targeted groups.

Objectives of Subsidies

✔️ Ensure affordable essential goods for vulnerable sections.
✔️ Support agriculture, food security, healthcare, and education.
✔️ Encourage green energy adoption and research & development.
✔️ Address market failures (e.g., rural electrification).
✔️ Boost competitiveness of strategic sectors.

🔹 Types of Subsidies

1️⃣ Direct Subsidies

• Cash transfers or direct financial aid to eligible beneficiaries.
• Example: Direct Benefit Transfer (DBT) for LPG subsidy.

2️⃣ Indirect Subsidies

• Price reductions via lower taxes, interest subvention, or input price support.
• Example: Fertiliser subsidy, interest subvention for MSMEs.

3️⃣ Product-Based Subsidies

• Applied to specific goods/services to reduce prices.
• Example: Food grains under Public Distribution System (PDS).

4️⃣ Sectoral Subsidies

• Support to priority sectors like agriculture, renewable energy, etc.
• Example: Renewable Energy Subsidy for Solar Power.

🔹 Major Subsidies in India

1️⃣ Food Subsidy

• Provided under National Food Security Act (NFSA).
• Ensures wheat, rice, coarse grains at subsidised rates via PDS.
• Implemented by Food Corporation of India (FCI).

2️⃣ Fertiliser Subsidy

• Ensures affordable fertilisers for farmers.
• Covers both: ✔️ Urea subsidy (fixed price, open-ended).
  ✔️ Nutrient-Based Subsidy (NBS) for phosphatic & potassic fertilisers.

3️⃣ Fuel Subsidy

• Provided for domestic LPG and, in the past, for kerosene.
• Now transferred directly via DBT in LPG (DBTL) scheme.
• Petrol & diesel largely decontrolled.

4️⃣ Power Subsidy

• Lower tariffs for agriculture and rural households.
• State governments provide power subsidies for irrigation, rural electrification.

5️⃣ Interest Subvention Subsidy

• Reduced interest rates on crop loans, MSME credit, etc.
• Example: Kisan Credit Card loans.

6️⃣ Export Subsidies

• Support for exporters through schemes like RoDTEP (Remission of Duties and Taxes on Exported Products).
• Encourages global competitiveness of Indian goods.

🔹 Benefits of Subsidies

✔️ Promotes inclusive growth by supporting vulnerable sections.
✔️ Ensures food security, healthcare access, and education for all.
✔️ Encourages investment in strategic sectors (renewables, MSMEs).
✔️ Protects farmers from input cost volatility.
✔️ Reduces regional disparities by supporting underdeveloped areas.

🔹 Issues with Subsidies

1️⃣ Fiscal Burden

• Large subsidies strain fiscal health.
• In 2023-24, total subsidy bill ~₹4.03 lakh crore.

2️⃣ Inefficient Targeting

• Leakages and inclusion-exclusion errors.
• Rich households often benefit from fuel and fertiliser subsidies.

3️⃣ Distortion of Market Prices

• Subsidies can lead to overuse of inputs (water, fertilisers).
• Creates inefficient cropping patterns (excessive rice cultivation).

4️⃣ Environmental Damage

• Power and fertiliser subsidies contribute to: ✔️ Groundwater depletion.
  ✔️ Soil degradation.
  ✔️ Air pollution (free power for paddy stubble burning).

5️⃣ Political Populism

• Subsidies often driven by electoral considerations.
• Difficult to rationalise once granted.

🔹 Rationalisation of Subsidies – Key Measures

1️⃣ Direct Benefit Transfer (DBT)

• Shifts from price subsidy to income support.
• Reduces leakages, ensures targeted delivery.
• Example: DBT in LPG subsidy.

2️⃣ Targeted Public Distribution System (TPDS)

• Identifies priority households using SECC data.
• Ensures only the poor get food grains at subsidised rates.

3️⃣ Fertiliser Direct Cash Transfer (Pilot)

• Linking fertiliser subsidy to farmer Aadhaar accounts.
• Ensures fertilisers sold at market price, subsidy credited to farmer.

4️⃣ Phased Removal of Fuel Subsidy

• Petrol and diesel prices deregulated.
• LPG subsidy restricted to poorest households.

5️⃣ Linking Subsidies to Social Indicators

• Conditional cash transfers linked to: ✔️ Child education (DBT for girl child education).
  ✔️ Health outcomes (Janani Suraksha Yojana).

Case Study – Pahal (DBTL)

• World’s largest cash transfer scheme for LPG subsidy.
• Linked LPG connections with Aadhaar and bank accounts.
• Resulted in: ✔️ ₹50,000 crore savings by eliminating fake/duplicate accounts.
  ✔️ Improved subsidy targeting.

📊 Key Statistics (2023-24)

📚 Practice MCQ

1️⃣ Which of the following schemes provides direct cash transfer of LPG subsidy to beneficiaries?

✅ Options:
(a) PMUY
(b) Pahal
(c) PMFBY
(d) KUSUM

2️⃣ Consider the following statements about subsidies:

1. Fertiliser subsidy is provided directly to farmers.
2. Food subsidy is delivered through the Public Distribution System (PDS).
3. Fuel subsidies for petrol and diesel are still provided.

Which of the above statements are correct?

✅ Options:
(a) 1 and 2 only
(b) 2 only
(c) 1, 2, and 3
(d) 2 and 3 only