rationalization of subsidies

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Rationalization of Subsidies in India SMBA 7 Bala Iyer, Pawan P, Dipesh P, Arti & Rajesh

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Page 1: Rationalization of subsidies

Rationalization of Subsidies in India

SMBA 7

Bala Iyer, Pawan P, Dipesh P, Arti & Rajesh

Page 2: Rationalization of subsidies

Meaning:

Derived from the Latin word 'subsidium', it implies coming to assistance from behind.

Definition:The Oxford English Dictionary defines subsidy as "money granted by State, public body etc to keep up the prices of stationeries etc"

Objectives:

A wedge between consumer prices and producer costs

Achievement of social policy

Government subsidies may be defined as the difference between cost of delivering various publicly provided good & services and the recovering arising from such deliveries.

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Subsidies TG: Income Level, Social Group & Merit etc

Exclusion errors and inclusion errors

Error:

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S = RX + (d + i) K + i ( Z + L ) - ( RR + I + D )Where:RX = revenue expenditure on the serviceL = sum of loans advanced for the service at the beginning of the periodK = sum of capital expenditure on the service excluding equity investment at the beginning of the period.Z = sum of equity and loans advanced to public enterprises classified within the service category at the beginning of the period.RR = revenue receipts from the serviceI + D = interest, dividend and other revenue receipts from public enterprises falling within the service category.d = depreciation ratei = interest rate

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EFFECTS OF SUBSIDIESAllocative effects:

Redistributive effects:

Fiscal effects:

Trade effects:

Unintended economic effects:

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Economic Subsidies

Agriculture &Cooperation

Irrigation&

Flood Control

Power &

Energy

IndustryTransport

Communication & others

Social Subsidies

Education Health

Water Supply&

SanitationRural

Housing and others

In India subsidies can be classified in two categories

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Types of Subsidies

Fertilizer Subsidies (60000 Cr)

Food Subsidy

Irrigation Subsidies

Power Subsidies

Subsidization of Agriculture

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The proportion of subsidies that go to the poorest quintile is only 0.07 per cent as compared to 52.6 per cent(8.2%) for the richest quintile.

ALLOCATION OF SUBSIDIES

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2012-13

2012-2013 Rs. In Cr

Oil Subsidy 43580

Food Subsidy 75000

Fertilizer Subsidy 60974

Total Subsidy 179554

Oil SubsidiyFood SubsidyFertilizer Subsidy

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The following steps would need to be taken as part of the operational strategy to reform the subsidy regime:

(i) Each Department/Ministry/Enterprise should prepare a comparative picture of per unit costsand per unit receipts for all chargeable services;

(ii) Each unit should prepare a plan for reducing staff strength, by putting limit on freshrecruitment and developing a scheme for redeployment of staff, and introduction of voluntary andsometimes compulsory, retirement schemes.

(iii)Strategies of private provision of publicly provided private goods by sub-contracting, unbundling of public sector activities, and privatisation should be continually explored;

(iv)A mechanism for automatic (or linked to an index of cost) upward revision of fees and user charges should be introduced as guided by User Charges Commission or similar bodies;

(v)New public enterprises should not normally be set up any more; and

(vi)There should be a periodic review as to the utility of continuing a subsidy and a decision should be taken even at the initial stage of its introduction as to the life of the subsidy

Page 13: Rationalization of subsidies

Laying the foundation stone for Rs 20,000-crore integrated refinery expansion project of the BPCL in Kochi, the Prime Minister said "To meet our target of rapid, inclusive and sustainable development, we must undertake a phased rationalization of energy prices to bring them in line with global prices."

To ensure supply of energy at affordable prices, Singh said the country would need large investments in oil and gas exploration, buying assets abroad and distribution infrastructure.

Current Affairs

Page 14: Rationalization of subsidies

Thank You