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Why subsidies hurt government?
Why Subsidies Hurt Government? If we consider the subsidies of all kinds into account, an estimated Rs 2,46,000cr was estimated by the then UPA government while presenting the interim budget in February 2014.
Hyderabad: If we consider the subsidies of all kinds into account, an estimated Rs 2,46,000cr was estimated by the then UPA government while presenting the interim budget in February 2014. The analysts also opined that the subsidies may even go higher but there was no scope for them coming down from the stated figure by the UPA government. Subsidies are largely the amount the government pays for keeping prices of fuel, food and fertilizer low for people.
Now, it is the time for the presentation of the union budget. In view of this, most analysts expect the new government to trim down subsidies. However, poor monsoons and high oil prices would make it difficult from turning a reality.
Appended below are main points in this background:
• The major component of the government spending is the unplanned expenditure. This includes interest on borrowings, defense and subsidies. With high interest rates, it is not possible to cut interest payments on government borrowing. The defence spending could actually go up. The only area where the government has a scope to cut expenditure is subsidies.
• If one has to include the impact of the Foods Security Act passed during the UPA government, this burden could surge to Rs 1,50,000cr in 2014-15. Similarly, if the government decides to account for all fertilizer subsidies spent in 2014-15 this year without deferring it to 2015-16, then the fertilizer subsidy bill alone could surge to Rs 1,00,000cr. This is Rs 68,400cr higher than the estimate in the interim budget, according to Kotak Securities.
• As a consumer, you may want essential goods cheap. However, if the government has to borrow to keep prices low, it hurts you much more. This is exactly the problem. The Indian government cannot afford to keep prices artificially low. When international oil prices rise, the pressure on the government to keep prices low increases. This is because of fear of inflation. It ends up borrowing more from the market causing interest rates to stay high. This slows down the economy and reduces the government’s ability to enhance tax revenue.
To keep prices of essential goods low is sound politics. However, it is poor economics if it does create productive assets or leads to higher government borrowing. Subsidies can only add to the inflationary pressure in such a situation and hurt the very consumers they intend to protect.
