In order to understand whether government subsidies are good or bad for India we have to see things in larger perspective.
Instead of looking only at immediate effects, one shall see long term repercussions of subsidies.
What is subsidy? And why government decides to have them in first place?
When price of goods or services are controlled below its real market price by government the price is said to be subsidized.
An Industry is asked by Government to sell its product at certain price levels below its market price.
The loss incurred by company is compensated by the Government. Government subsidizes an item to make it affordable for poor/common men.
The concept of subsidy looks to be morally very sound.
But it is a economic disaster if not implemented properly.
Take example of petrol and diesel. Whenever price of petrol and diesel goes up we all think badly about the government.
But is this anger justified? I personally think that subsidies are not a good solution.
It may give us short term relief, but in long term its burden tolls. When petrol/diesel price was subsidized who got benefit from it?
People who consume more fuel were the beneficiaries. A rich person who runs on multiple cars got maximum benefits. A poor man in India hardly has a two wheeler.
In most cases poor people in India has no vehicle.
Majority use public transport for commutation. So benefit of subsidy went only to rich and middle class.
While poor stood waiting for hours on bus stops, rich enjoyed their plush cars.
If fuel prices would not have been subsidized, the same money could have used by government to build wide serving public transport system.
Some may argue that subsidies help in lowering cost of living. To an extent this reasoning is correct but it does not support long term good.
Normally, when price of any item goes up what we do? We try to buy less of that item. We switch to other alternatives.
This results in lower demand of the costly item. Lower demand forces prices to come down.
But in case of subsidized items, people do not feel the heat of prices going up. The demand of those items continues to grow without control.
When demand grows price will also grow. Subsidies defeat the concept of demand-supply balance.
Who bears the cost of subsidies?
Does government pays those subsidies from their pockets? Of course not.
The subsidies are paid from tax payer’s money. The money that could have been utilized for development is used for subsidies.
The money that can build metro rails, bridges, roads, better trains, better buses, electricity etc goes waste as subsidy.
Increased spending on subsidies is compensated by increased taxes and lower government spending. Sometimes government also prints more currency to pay for subsidies.
The entire alternative to nurture subsides are only detrimental to economy. When taxes goes-up, people purchasing power go down.
They spend less and thus overall demand in country falls. This lowers GDP growth rate. Lower government spending means less developmental projects in country.
It means lower efficiency of the country.
This further lowers the country GDP. When government prints more notes, it leads to increasing inflation. Sustained high-inflation-rate is neither good for people not for the country’s economy.
Then why voters accept a government which favors subsidies? The negative effect of subsidies does not create direct damage.
It is like a child of disturbed parents who fights on the streets. Question should be why the child fights? Subsidy is like a disturbed parent whose negative effect is seen on a child when he grows up.
Immediate damage of subsidy is not visible.
Final Words…government subsidies are good or bad for India?….
As a concept subsidies are not bad. But it should benefit the needy. If we subsidize Diesel, Kerosene, LPG then the benefit should be felt by the poor.
People who can afford shall pay the market price. People who cannot afford shall get subsidies.
I do not know how to implement subsidies the way I have said. May be AadharCard is one step forward.
If the needy are not able to utilize the benefit of subsidy then it is useless. Better will be to get away of it.
Investors must welcome all efforts by government to remove subsidies.
Less fiscal deficit means more development for the country. With population of India crossing 125 Crore, I feel we cannot afford badly executed subsidies.
Better will be that we pay more to the government and then they help us.
A good example can be, we pay more for the LPG cylinders today. And in next 3 years government give us a stove which works of Solar Energy.
We pay more for Diesel and Petrol today, and in next 3 years Government gives us better rods, buses and rail transport.