Phasing out Subsidies

PHASING OUT SUBSIDIES

What Does Subsidy Mean?

A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. A subsidy is money given by a government to help support a business or person the market does not support. Subsidies generally result in a transfer of wealth from one group to another.

Rationale for subsidies

Governments provide subsidies for the following reasons:

1. Correcting market failure

2. Protecting national production from competition

3. Reducing import dependence

4. Encouraging national employment

5. Ensuring balanced regional development

6. Enabling access to and affordability of basic services or goods by all

7. Stimulation of economic growth.

Cash subsidy- Cash subsidy is cash reimbursement on expenses incurred by consumers on cooking gas, kerosene and fertilisers.It leads to direct transfer of cash to the bank account of the beneficiaries.

"As announced in the budget, the government will move towards the direct transfer of cash subsidy to people living below poverty line (BPL) in phased manner and the system for the same will be in place by March 2012."

Capital subsidy- Capital subsidy meets part of cost of assets will go to reduce cost of assets as per S. 43 of IT Act, as it stands now. However, in some circumstances it may not go to reduce the cost of assets and can be considered as 'capital receipt', neither taxable nor can be reduced from cost of assets.

* In India, subsidies are provided primarily for the following inputs: fertiliser, power, irrigation and credit. In addition, food subsidies are also provided by the state.

* The share of input subsidies (on fertilisers, power and irrigation) in the GDP rose sharply in the 1980s, and generally declined from the early-1990s. In the early 1990s, roughly 1.6 to 1.9 per cent of the GDP was spent on input subsidies, which fell to roughly 1.3 to 1.4 per cent between 2003 and 2006. The share of input subsidies in the agricultural GDP shows a general rise from the mid-1990s. In 1993-94,the share of input subsidies in the agricultural GDP was 6.7 per cent, while the corresponding figure for 2005-06 was 9.4 per cent. The shares of fertiliser subsidy and irrigation subsidy in agricultural GDP fell after the late-1990s, and particularly in the 2000s.

* As regards fertilisers, the government provides subsidy to companies so that farm inputs, which include urea and imported fertilisers, can be provided to farmers at cheaper rates.

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