- Subsidies are grants or other financial assistance given by one party for the support or development of another.
Types of subsidies
SUBSIDIES TO AGRICULTURE SECTOR
- Input Subsidies: Subsidies are offered by providing inputs lower prices than the standard market price for them. The magnitude of subsidies will be determined by the difference between the two prices per unit of input distributed. Subsidies fall under this category in many varieties.
a) Fertilizer Subsidy
- Farmers receive inexpensive chemical or non-chemical fertilizers. Fertilizer difference is the difference between the price paid to fertilizer manufacturers (domestic or foreign) and the price received by farmers.
- As a result of this subsidy:
-Farmers have access to cheap inputs,
-Returns to the manufacturer that are reasonable,
-Fertilizer price stability, and
– Farmers have access to fertilizers.
- This type of subsidy is sometimes granted by removing the tariffs on fertilizers that otherwise would be imposed on imports.
b) Irrigation Subsidy
- The government pays subsidies to the farmers in exchange for providing irrigation facilities.
- The irrigation subsidy is the difference between the operating and maintenance costs of the irrigation infrastructure in the state and the amount farmers are charged for irrigation.
- It may be possible to accomplish this through the provision of public goods like canals and dams which are constructed by the government and are utilized by farmers for little or no cost.
- Pump sets can also be used for irrigation, which is a cheap private solution.
c) Power Subsidy
- Consequently, farmers receive low rates for the electricity they use. Farmers mainly use electricity for irrigation purposes. Electricity from producers to farmers is generated at a cost that differs from the price they receive.
d) Seed Subsidies
- Governments can provide seeds that produce high yields at low prices. The government also undertakes the research and development necessary for producing such productive seeds, the expenditure on these acts as a subsidy for farmers.
e) Credit Subsidy
- There is a difference between the interest a farmer will pay and the actual costs incurred in providing credit, plus the costs of writing off bad loans if necessary. Poor farmers face a major problem with credit availability. Due to their cash problems, they cannot approach the credit market because they lack the collateral required. In order to finance production activities, they approach local money lenders.
2) Price Subsidy
- This is the difference between the price at which FCI purchases food grains from farmers, and the price at which PCI sells either to traders or to the PDS.
- There are cases in which farmers will not be able to make profits because the market price is so low. A government may offer a higher price than the market for the crop in such a case.
- There is a per unit government subsidy that separates the two prices. A procurement price is the price at which the government buys crops from farmers.
- Government procurement also has a long-term impact. Farmers are encouraged to grow crops that are regularly procured.
3) Infrastructural Subsidy
- In many areas, private efforts to improve agricultural production are insufficient. For production and sale to take place, it is necessary to have good roads, storage facilities, power, market information, and transportation to the ports.
- Those facilities are public goods, whose costs are enormous and whose benefits accrue to every cultivator in an area.
- Because of the poor farm conditions in India, the government takes the responsibility to provide public goods.
4) Export Subsidies
- Subsidies of this type are not different from others. However, its purpose is unique. Exporting agricultural products to foreign markets earns a farmer or exporter money as well as foreign exchange for the country. As a result, agricultural exports are generally encouraged, provided they don’t damage the domestic economy. Subsidies offered as an incentive for exporting are called export subsidies.
FERTILIZER SUBSIDY
- For Indian farmers, urea is heavily subsidized.
- However, the skewed subsidy system, where urea is paid less compared to phosphorus and potassium, has led to urea overuse.
- Approximately 50 lakh metric tons of excess urea are purchased by India, leading to wasteful expenditures by farmers and the government of Rs. 2,680 crore and Rs. 5,860 crore respectively, further constraining the government’s resources.
- As a result of the distorted policy, private investment has stagnated in the sector, especially in urea, and imports have increased. Fertilizer subsidies hurt farmers, firms, taxpayers, and consumers.
FUEL SUBSIDIES IN INDIA
- Selling fuel at less than market prices results in under-recoveries for Oil Marketing Companies (OMCs) such as Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL).
- In order to compensate these OMCs, the government directs upstream oil companies like Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), and GAIL India Ltd to provide discounts on crude oil purchases by these companies and issue oil bonds. Over the years, the government has ensured OMCs remain profitable and meet their financial obligations.
- Kerosene subsidies have increased from Rs. 12.92/litre to Rs. 34.80/litre and LPG subsidies from Rs. 175/04/cylinder to Rs. 522.10/cylinder during the same period. Under-recoveries for diesel account for 45%, LPG 33%, and kerosene 22%. To curb subsidies, the petrol price was deregulated in June 2012. In spite of this, petrol only accounted for 10% of the total petroleum products consumed in the country.