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Subsidy

Good or bad for the economic development


Overview
• Subsidy
• Need
• How it benefits industry?
• What WTO says
• Types
• Forms of subsidy
• Judging the success of subsidies
• Positive aspects of subsidy
• Negative aspects of subsidy
• Our perspective
• Recommendations
• Conclusion
subsidy

• A subsidy is a benefit given by the government to groups or individuals,


usually in the form of a cash payment or a tax reduction.
• A subsidy is often given to remove some type of burden, and it is often
considered to be in the overall interest of the public.

• Derived from the Latin word subsidium. It means coming to “assistance


from behind”
Need
Poverty

Promote
Unemployment exports

subsidy

Boost
industrialization Illiteracy

Promote
political interest
How it benefits industry?
What WTO says
• The World Trade Organization has a broader definition of subsidies. It says a
subsidy is any financial benefit provided by a government which gives an
unfair advantage to a specific industry, business, or even individual.
The WTO mentions five types of subsidies:

• Cash subsidies, such as the grants mentioned above.


• Tax concessions, such as exemptions, credits, or deferrals.
• Assumption of risk, such as loan guarantees.
• Government procurement policies that pay more than the free-market price.
• Stock purchases that keep a company's stock price higher than market levels.
These are all considered subsidies because they reduce the cost of doing
business.
Types

SUBSIDY

Direct Indirect
Forms of subsidy
• Production subsidy
• Consumer subsidy
• Export subsidy
• Import subsidy
• Employment subsidy
• Tax subsidy
• Housing subsidy
Who bears the cost of these subsidies?
Judging the success of subsidy
• There are different ways to evaluate success of government subsidies. Most
economists consider subsidy a failure if it fails to improve the overall
economy.
• Policy makers might still consider it a success if it achieve a different
objective when it fulfils cultural or political goals.
• Hence most subsidies are long term failure in economic sense but still
achieve cultural or political goals.
Positive aspects of subsidy

Increase Quality public


Promote quality
Reduce cost production and Increase saving transport
products
consumption services

Reduces Promote
Reduces Reduce Reduce market
unemployment positive
housing cost competition failure
rate externalities
Negative aspects of subsidy

Affect
Product Increase product Dead weight Continuous
shortage taxes competiti loss pressure
veness

Difficult to Lack of Divert


Inefficiency Benefits
determine informa
success tion
the rich resources
Our Perspective
• To the best of our knowledge our view point for whether subsidies are good
or bad for the economic growth is
• There is bounties for well off which means that subsidies are often given in
the name of poor but the rich people takes benefit and it rarely benefit the
poor.
• Subsidies are supported through the tax collected from the general public, it
eventually end up putting pressure rather than providing support to the
public.
Cont.
• Subsidies often promote inefficiency in economy because of system leakage.
• It is difficult to measure the success of the implementation of subsidies because it is
difficult to get the quantitative data of how much subsidies are received and actually
came into use by the public.
• But it cannot be said that subsidies does only the harm and no benefit. It no doubt
helps in reducing poverty, low illiteracy, unemployment in a developing country like
India.
• However the benefits can be maximizd only when the subsidies are transparebt well
targeted and subsidies are designed in effective way without any leakages.
Recommendations
The benefits can be maximized when subsidies are transparent, well targeted, designed in an effective way and implemented
without leakages. This can be done by keeping into mind the following points:
• The focus should be on physical achievements and not on financial disbursements.
• The effects of subsidies should be monitor able and measurable in terms of quality or quantity.
• Subsidies should be given as a one-time help or for a short period. Subsidies on continuing basis should be avoided.
• The parameters fixed on subsidy should be transparent.
• Subsidies should be cost- effective. Most of the assistance should reach the intended beneficiary and very small amount
should be spent on administrative arrangements.
• Subsidies should be properly targeted, i.e. benefit should go to the really deserving.
• Timing of subsidies should be made proper. For example, free seed distribution should be just before sowing.
Conclusions
• From the available data it is clear that there is improper implementation of subsidies
in India which is acting as a hindrance in the economic growth. It is also clear that
taking out hands from subsidies by government is no solution. It will eventually
degrade the economy more.
• Better implementation is needed so that the benefits actually reach the needy.
• What can be done is to make effective policies which include proper check on
corruption which leads to leakages. More focus on the welfare of public rather than
political benefits.
Cont.
• Since India is a developing nation and a large part of the population is poor,
literacy rate is quite low and imports far outweigh exports and to overcome
all these subsidies are necessary to an extent.
• Also, promotion of agriculture and safeguarding farmers is needed.