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| Source -- Sify News | ||
Tuesday, March 1, 2011
Brief description and current status of the Upcoming financial legislative initiatives!!
Editorial on Budget (Indian Express)
Union Budget 2011 has many positive elements, is low on bad ideas and pushes the reform agenda ahead. Finance Minister Pranab Mukherjee focused on implementing the many promises made by the UPA in previous years. This bodes well as the pending reforms on the government’s wish list will take plenty of time and effort if they are to be seriously implemented. There is an attempt at fiscal consolidation and controlling expenditure, though there remains the risk that oil prices may make these calculations go haywire. The changes to direct taxes are welcome. The exemption limit needed to be raised to take account of inflation, and the corporate surcharge had to come down.
On indirect taxes, the minister did not propose a GST but has taken steps toward the implementation of a GST in 2012. The government will also remain on track on the disinvestment agenda.
What characterised the budget speech, on this 20th anniversary of reform, was the announcement that the unfinished reform agenda would, on many fronts, be completed.
To enable the GST, the finance minister said he proposed to introduce a Constitution Amendment Bill in this session of Parliament. He also announced a pilot project with 11 states, using the IT system that is being set up, during this year. Similarly, a large number of financial sector bills are pending.
The minister announced that he would move bills such as the Insurance Amendment Bill, the LIC Bill, the revised PFRDA Bill, the Banking Laws Amendment Bill (to allow the Reserve Bank to grant banking licences to private-sector players), the SARFAESI Bill, etc. He proposed to introduce the Public Debt Management Agency of India Bill this year, which would enable the setting up of a Debt Management Office. This has been on the agenda for nearly two years but not much progress has been made beyond setting up a middle office. The subsidy bill of the government was a budgeted Rs. 1 lakh crore for 2010-11. However, the revised estimate shows that the subsidy bill crossed Rs. 1.5 lakh crore. The largest element of the subsidy bill that went beyond the budget was the petroleum subsidy. It rose from a budget estimate of Rs. 3,108 crore to a revised estimate of Rs. 38,386 crore. The food subsidy bill rose from an estimate of Rs. 55,578 crore to a revised estimate of Rs. 60,599 crore. The fertiliser subsidy bill was estimated to be Rs. 49,980 crore, but turned out to be Rs. 54,976 crore. The three put together accounted for an increase of nearly Rs. 50,000 crore beyond estimates. The risk for the coming year, 2011-12, when oil prices could rise, is large. This could push government expenses beyond budget estimates.
One of the most important announcements that could have significant long-run impact is the announcement of the direct transfer of cash subsidies for kerosene and fertilisers to those below the poverty line. As has become apparent, the kerosene subsidy is used to adulterate diesel, and fails to reach its intended beneficiaries. Instead of selling kerosene cheap, if it is sold at market price and the subsidy is given as cash to the targeted group, the poor will benefit, the subsidy bill will come down and the oil mafia could be sidelined. The budget proposes the first step towards a direct transfer of cash subsidy. Once the mechanisms for such cash transfers are put in place, the template can be used for food subsidy.
The budget for 2011-12 has moved ahead on opening up India’s capital account. While no announcement has been made on foreign direct investment, the FM announced that discussions are under way to further liberalise the FDI policy. However, on foreign portfolio investment, important announcements have been made. The recommendations of the finance ministry’s working group on foreign investment, headed by U.K. Sinha, have been implemented. These include opening up the rupee-denominated corporate debt market to FIIs. The limit on purchase of bonds of infrastructure companies has been increased from $5 billion to $25 billion. This means that the limit for FII investment in corporate bonds has suddenly jumped from $20 billion to $40 billion. A doubling of FII investment in corporate bonds will help both the development of the corporate bond market, and India’s infrastructure funding needs. Foreign investors have also been permitted to invest in Indian mutual funds. While currently FIIs and sub-accounts are allowed to invest, the FM announced that other foreign investors who meet Know Your Client norms will also be allowed to invest. These are significant steps towards greater capital-account openness, and will attract long-term capital into the country. And given the legislative support needed for the FM to keep his promises, the budget can be as ambitious as the budget session of Parliament allows itself to be. The UPA’s floor managers have their work cut out.
Source-- Indian Express
Monday, February 28, 2011
Budget - 2011-12 (Highlights)
- Critical institutional reforms set pace for double-digit growth
- Scaled up flow of resources infuses dynamism in rural economy
- GDP estimated to have grown at 8.6% in 2010-11
- Exports grown by 9.6%, imports by 17.6% in April-January 2010-11 over corresponding period last year
- Indian economy expected to grow at 9% in 2011-12.
- Five-fold strategy to deal with black money. Group of Ministers to suggest ways for tackling corruption
- Public Debt Management Agency of India Bill to come up next financial year
- Direct Tax Code (DTC) to be effective from April 01, 2012
- Phased move towards direct transfer cash subsidy to BPL people for better delivery of kerosene, LPG and fertilizer mooted
- Rs. 40,000 crore to be raised through disinvestment in 2011-12
- FDI policy to be liberalized further
- SEBI registered mutual funds permitted to accept subscription from foreign investors who meet KYC requirement
- FII limit for investment in corporate bonds in infrastructure sector raised
- Additional banking license to private sector players proposed
- Rs. 6000 crore to be provided in 2011-12 for maintaining minimum Tier I Capital to Risk Weighted Asset Ratio (CRAR) of 8% in public sector banks
- Rs. 500 crore to be provided to regional rural banks to maintain 9% CRAR
- India Microfinance Equity Fund of Rs. 100 crore to be created by SIDBI
- Rs. 500 crore Women SHG Development Fund to be created
- Micro Small and Medium Enterprises MSME gets boost as Rs. 5000 crore provided to SIDBI and Rs. 3000 crore to NABARD
- Existing housing loan limit enhanced to Rs. 25 lakh for dwelling units
- Provision under Rural housing Fund enhanced to Rs. 3000 crore
- Allocation under Rashtirya Krishi Vikas yojna (RKVY) increased to Rs. 7860 crore
- Allocation of Rs. 300 crore to promote 60000 pulses villages in rainfed areas
- Rs. 300 crore vegetable initiative to achieve competitive prices
- Rs. 300 crore to promote higher production of nutri-cereals
- Rs. 300 crore to promote animal based protein
- Rs. 300 crore Accelerated Fodder Development Programme to benefit farmers in 25000 villages
- Credit flow to farmers raised from Rs. 3,75,000 crore to Rs. 4,75,000 crore
- Rs. 10,000 crore for NABARD’s Short Term Rural Credit Fund for 2011-12
- 15 more mega food parks during 2011-12
- National food security bill to be introduced this year
- Capital investment in storage capacity to be eligible for viability gap funding
- 23.3% increase in allocation for infrastructure
- Tax-free bonds of Rs. 30,000 crore proposed by government undertakings
- Environmental concerns relating to infrastructure projects to be considered by Group of Ministers
- National Mission for Hybrid and Electric Vehicles to be launched
- 7 Mega clusters for leather products to be set up
- Allocation for social sector increased by 17% amounting to 36.4% of total plan allocation
- Bharat Nirman allocation increased by Rs. 10,000 crore
- Rural broadband connectivity to all 2.5 lakh panchayats in three years.
- Bill to amend Indian Stamp Act to introduce. Rs. 300 crore scheme for modernization stamp and registration administration
- Significant increase in remuneration of Angawadi workers and helpers
- Allocation for education increased by24%. Rs. 21,000 crore allocated for Sarv Shikshya Abhiyan registering an increase of 40%
- 1500 institute of higher learning to be connected by March 2012 with Knowledge Knowledge Network.
- National Innovation Council set up. Additional Rs. 500 crore for National Skill Development Fund
- Plan allocation for health stepped up by20%
- Indira Gandhi National Old Age Pension Scheme liberalized further
- Rs. 200 crore for Green India Mission
- Rs. 200 crore for cleaning of rivers
- Rs. 8000 crore provided for development needs of J&K
- 10 lakhs Aadhaar(UID) numbers to be generated everyday from 1st October
- Fiscal deficit kept at 4.6% of GDP for 2011-12
- Income Tax exemption limit for general category in individual tax payers enhanced from Rs. 1,60,000 to Rs. 1,80,000
- Qualifying age for senior citizens lowered to 60; senior citizen above 80 year to get Rs. 5,00,000 IT exemption
- Surcharge on corporate lowered to 5%
Sunday, February 27, 2011
Basic Budget Structure
The Union Budget presented to the Parliament consists of the General Budget and the Railway Budget, the Demands for Grant, the Vote on Account, the Supplementary Demands for Grant, the Appropriation Bill and the Finance Bill.
The Annual Financial Statement is the main Budget document. It details the receipts and payments under which Government accounts are kept, namely - Consolidated Fund, Contingency Fund, and Public Account.All revenues received by the Government, loans raised, and receipts from recoveries, form the Consolidated Fund. All Government expenditures are acquired from the Consolidated Fund, and no amount can be withdrawn from the Fund without authorisation from the Parliament.
The Contingency Fund on the other hand is placed at the disposal of the President of India , for occasions that may arise when the Government may have to incur imperative and unexpected expenditure. Parliamentary approval for such expenditure and its reimbursement from the Consolidated Fund is subsequently obtained, and the amount spent is recouped to the Contingency Fund.
Besides the normal Government expenditures that relate to the Consolidated Fund, certain other transactions enter the Government accounts in respect of which, the Government acts more like a banker, overlooking transactions relating to provident funds, small savings collections, other deposits, etc. The money thus received is deposited in the Public Account, and the related distribution is also made there from. Thus, funds in the Public Account do not belong to the Government, and have to be paid back to the persons and authorities depositing them.
After passing of the Appropriation Bill, the Finance Bill is considered and passed by the Parliament as a Money Bill.
Thursday, February 24, 2011
Goods and Services Tax (Fully Explained)
What is GST? How does it work ? | ||||||||||||||||||||||||||||||||
 GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer's point and service provider's point upto the retailer's level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well. Table
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 Advantages of introduction of GST in India would be: |
(1)speeds up economic union of India; (2)better compliance and revenue buoyancy; (3)replacing the cascading effect [tax on tax] created by existing indirect taxes; (4)tax incidence for consumers may fall; (5)lower transaction cost for final consumers; (6)by merging all levies on goods and services into one, GST acquires a very simple and transparent character; (7)uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present; (8)efficiency in tax administration; (9)may widen tax base; (10)increased tax collections due to wide coverage of goods and services; and (11)improvement in cost competitiveness of goods and services in the international market. |
What is the justification of GST ? |
There was a burden of "tax on tax" in the pre-existing Central excise duty of the Government of India and sales tax system of the State Governments. The introduction of Central VAT (CENVAT) has removed the cascading burden of "tax on tax" to a good extent by providing a mechanism of "set off" for tax paid on inputs and services upto the stage of production, and has been an improvement over the pre-existing Central excise duty. Similarly, the introduction of VAT in the States has removed the cascading effect by giving set-off for tax paid on inputs as well as tax paid on previous purchases and has again been an improvement over the previous sales tax regime. But both the CENVAT and the State VAT have certain incompleteness. The incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive trade below the stage of production. It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/ dealers. The introduction of GST will not only include comprehensively more indirect Central taxes and integrate goods and services taxes for set-off relief, but also capture certain value addition in the distributive trade. Similarly, in the present State-level VAT scheme, CENVAT load on the goods has not yet been removed and the cascading effect of that part of tax burden has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. Further, there has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. In addition, although the burden of Central Sales Tax (CST) on inter-State movement of goods has been lessened with reduction of CST rate from 4% to 2%, this burden has also not been fully phased out. With the introduction of GST at the State level, the additional burden of CENVAT and services tax would be comprehensively removed, and a continuous chain of set-off from the original producer's point and service provider's point upto the retailer's level would be established which would eliminate the burden of all cascading effects, including the burden of CENVAT and service tax. This is the essence of GST. Also, major Central and State taxes will get subsumed into GST which will reduce the multiplicity of taxes, and thus bring down the compliance cost. With GST, the burden of CST will also be phased out. Thus GST is not simply VAT plus service tax, but a major improvement over the previous system of VAT and disjointed services tax - a justified step forward. |
Will GST be levied in addition to the existing taxes? No, the introduction of GST will replace the various taxes presently being levied by Central & State Government(s). The CGST will subsume following taxes levied by Central government: - • Central excise duty (Cenvat), • Service tax, • Additional duties of customs; • Central sales tax And SGST will subsume following taxes levied by State Government: - • Value-added tax (VAT), • Entertainment tax, • Luxury tax, • Octroi, • Lottery taxes, • Electricity duty, • State surcharges related to supply of goods and services & • Purchase tax. |
Will prices go up after the implementation of GST? In fact, the prices of commodities are expected to come down in the long run as dealers will be allowed to avail the CENVAT credit of Excise duty paid by Manufacturers and more over he will be allowed to avail the CENVAT credit of tax paid on services also. This passing of the benefits of reduced tax incidence to consumers by slashing the prices of goods will definitely reduce the prices. |
What are the implications of GST on imports and exports? Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded as similar to the present scenario. |
History of GST around the Globe: - France was the first country which introduced a comprehensive goods and service tax Regime in 1954. The Goods and Service Tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. The GST rate in various countries ranges from 5 per cent in Taiwan to 25 per cent in Denmark. In the late 1980s, the federal government of Canada replaced its MST (Manufacturer’s Sale Tax) with a new value-added sales tax called the Goods and Services Tax (GST). The basic motive behind this reform was to introduce a new nationally harmonized sales tax which would replace individual provincial sales taxes (PST), and both the levels of government would share the revenues generated there from. Subsequent negotiations to harmonize the provincial and national sales taxes proved unsuccessful for the Canadian Government. Various provinces challenged the introduction of national sales tax on the ground that the federal government was exceeding its constitutional powers by operating in a taxation field historically reserved for the provinces. But as a result of constructive efforts by the Canadian Government National Sales Tax was implemented in 1989-90. In Australia It was introduced by the Howard Government on 1 July 2000, replacing the previous Federal wholesale sales tax system and designed to phase out a number of various State and Territory Government taxes, duties and levies such as banking taxes and stamp duty. This proved a milestone in the taxonomy of Australia. Today, it has spread to about 150 countries. |
Before parting and to bring an end to this article we summarize that GST is a harmonized consumption tax system, whose introduction will bring an end to a varied number of Indirect taxes presently being levied by Central Government and State Government. The proposed date of Introduction of GST has been announced by the Government to be 1st April, 2010. Till now Government has not yet issued any Draft of GST model or various provisions to be applied, all we can do is to wait for the Draft to release. Till then we can only predict the outlook of the GST model in India and nothing can be said with utmost certainty. Further we would bring in light that the Finance Ministers categorical statement in Parliament regarding GST implementation on April 1, 2010 clearly indicates the Governments clear and incessant intention towards bringing this tax regime by its due date. Accordingly, based on indications, as also on the basis of our subsequent interactions with senior Government Officials, we believe that the April 1, 2010 timeline for introduction of the dual GST will be duly met and we must welcome this new levy as this is the future of forthcoming India. |
Sunday, January 30, 2011
"The fiscal deficit" is a guaranteed conversation killer. What is fiscal deficit?
What is fiscal deficit?
Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.
Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources.
Components of fiscal deficit
The primary component of fiscal deficit includes revenue deficit and capital expenditure.
Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received.
Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.
In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks).
Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received.
Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.
In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks).
Arguments: Fiscal deficit lead to inflation
According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy.
In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.
In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.
Expert recommendation
Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure.
Impact
Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced.
Source-
Economy Watch
Rediff Business
Critical Economic Data
| 2008 | 2009 April | 2010 | |
| 1. GDP growth | 9% | 6.7% (CMIE estimation) | (Estimation): 7.2% |
| 2.Inflation | 7.61% | - 1.61 | Jan 2010: 8.56% |
| 3. Fiscal deficit | 3.1% | 6.1% | 6.8% |
| 4. Dec IIP growth | -0.2% | 16.8% | Nil |
| 5.Direct Tax Collection (in Rs) | 3.09 lakh crore | 3,38,212 crore | 4 lakh crore(target) |
| 6.Indirect Taxes(in Rs.) | : 2.79 trillion | 2.81 lakh | 2.71 lakh crore |
NABARD--National Bank for Agriculture and Rural Development
 | |
| NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with | |
| 1. | Providing refinance to lending institutions in rural areas |
| 2. | Bringing about or promoting institutional development and |
| 3. | Evaluating, monitoring and inspecting the client banks |
| Besides this pivotal role, NABARD also: | |
| • | Acts as a coordinator in the operations of rural credit institutions |
| • | Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development |
| • | Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development |
| • | Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development |
| Acts as regulator for cooperative banks and RRBs | |
| • | Refinance disbursement under ST-Agri & Others and MT-Conversion/ Liquidity support aggregated Rs.16952.83 crore during 2007-08. |
| • | Refinance disbursement under Investment Credit to commercial banks, state cooperative banks, state cooperative agriculture and rural development banks, RRBs and other eligible financial institutions during 2007-08 aggregated Rs.9046.27 crore. |
| • | Through the Rural Infrastructure Development Fund (RIDF) Rs.8034.93 crores were disbursed during 2007-08. With this, a cumulative amount of Rs.74073.41 crore has been sanctioned for 280227 projects as on 31 March 2008 covering irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, flood protection, forest management etc. |
| • | Under Watershed Development Fund with a corpus of Rs.613.71 crore as on 31 March 2008, 416 projects in 94 districts of 14 states have benefited. |
| • | Farmers now enjoy hassle free access to credit and security through 714.68 lakh Kisan Credit Cards that have been issued through a vast rural banking network. |
| • | Under the Farmers' Club Programme, a total of 28226 clubs covering 61789 villages in 555 districts have been formed, helping farmers get access to credit, technology and extension services. |
Subsidies are inverse of taxes.How it goes about in India.Do we require them ?
Do we want the government to reduce tax rates? Yes, sure. Do we also want the government to pay higher taxes to us? Well, what is that? Yes that is a subsidy. Subsidies are inverse of taxes. Just as a tax increases the price of the product taxed, subsidies reduce the price of the product subsidised. And just as taxes increase a government’s income, subsidies reduce it. Hence, subsidies are sometimes called negative taxation.
Subsidies play a vital role in the economy of a country. A country has various resources which are to be gainfully deployed for the benefit of the population of the whole country. Subsidies are provided to ensure equitable utilization of the resources for the people. The developed, developing and underdeveloped countries have different kinds of subsidies. Developed countries like India provide subsidies to their population for improving standard of living; the underdeveloped countries provide subsidies for meeting bare minimum needs of the vast majority of population.
Subsidies represent a sizeable item of the center’s non- plan revenue expenditure.
In India, Food and fertilizers are the two main items subsidized by the government through budgetary support.
Having said that what is a subsidy, studying their role and importance, one needs to understand that why India needs subsidies or why it does not. No doubt a developing country like India needs subsidies due to various reasons. Providing minimum consumption entitlement to the poor by subsidizing the items consumed by them is extremely important for the welfare of the economy.
However, the benefits can be maximized only when the subsidies are transparent, well targeted, and subsidies designed for effective implementation without any leakages. These days, one can hardly see the benefits of the subsidies and often the government is criticized for granting subsidies which do not reach their target or are manipulated by the rich. The whole issue of granting subsidies or not has given rise to many questions which needs to be answered by our government, economists and politicians as well.
The few questions that frequently come up and needs as answer are-
* Do we really need subsidies and if yes then how can they be effectively used for the welfare of the people?
* Are many wrong goods/services being subsidised?
* Does over subsidisation lead to harmful effects?
* Is it that that only the rich enjoy subsidies?
* Are subsidies a burden on the Indian economy?
* Do we need to re- target the subsidies?
* Is a pure economic issue of subsidies directly linked up with the political gamble?
* If subsidies are a burden on the economy, then how India can reduce its burden?
The major question in front of the policy- makers and economists these days is that that do we really need subsidies? For this, one needs to look into the negative effects of subsidies which are far more than the positive effects. Once received, people become dependent on the subsidies. Subsidies make the beneficiaries lethargic. Hence, subsidies are sometimes termed as sweet poison. Misuse of subsidies for political purpose is known worldwide. Subsidies support one industry at the expense of the other. When a person is given subsidy benefit, it imposes burden on some other person in the country. Malpractices have often been noticed in the administration of subsidies.
The whole issue of subsidies is an economic as well as a political issue. The subsidy policies in India are being advocated by those same policy makers who appear in public as pro-poor, but are driven by the political implications of their actions. In India, the politicians lack the courage to privatize the huge, loss-making public sector because they are afraid to lose the organized labour vote. They resist dismantling subsidies for power, fertilizers and water because they fear the crucial farm vote. They don’t even think of touching food subsidies because of the massive poor vote. The politicians create their elections agenda out of the subsidies and corner the real meaning and use of subsidies. Increases in subsidies will only result in keeping the political constituents happy and lead to a bulging fiscal deficit – without benefiting the intended beneficiaries.
One who advocates subsidies should also keep in mind one thing that the subsidies in India never reach their intended target i.e. the poor. The fact is, in India, most subsidies are not for the poor but for the rich. Despite of the continuously rising food subsidies, hunger and malnutrition prevails in the entire county.
Even the fertilizer subsidy in India reveals the same dismal picture. Fertilizer subsidy places another heavy burden on the central government. It is a very well known fact that the subsidy benefits majorly goes to the fertilizer industry and not the farmers. Only 60 per cent of fertiliser subsidy goes to farmers. If we take a look at the fertilizer subsidy and its origin, then we will come to know that the original purpose of the fertilizer subsidy was to encourage spread of green revolution technology to new areas and farmers but this reason and motive has lost its credibility in the recent years.
Here regarding the fertilizer subsidy, one should also keep in mind that the availability of subsidised fertiliser should be restricted to farmers who grow staple food and cereals as they need it the most and those farmers, who produce cash crops, do extensive horticulture or produce farm goods for direct exports should be kept outside the purview of subsidy regime.
The most alarming aspect of the surging subsidies is not the size, but the manner and purpose of spending on them. Subsidies provided in India suffer from both inclusion error (wrong kind of people benefiting) and exclusion error (deserving people left out of subsidies). Efficient subsidies must be transparent, targeted and-in many cases-temporary. These three Ts are missing from most subsidies in India.
The issue is not about removing subsidies but about how to make them effective so that they reach the target consumers and people are benefited from it. The policy- makers should try out new- mechanisms to reach the target consumers more effectively. Sometimes government subsidises some things but those things might not be affordable by the target audience, so there is need for restructuring of subsidies.
It is not the first time problems besetting subsidies have been talked of. It is also not the first time solutions have been offered. In 1997 too Chidambaram had brought out a paper on subsidies, hoping to make the system leaner and cleaner. Nothing happened.
Now the time has come when the Planning Commission, the Central Government, and the National Development Council will have to work on building a political and national consensus on the subsidy issue. It is important that we restructure subsidies so that only the really needy and the poor benefit from them and all leakages are plugged. All subsidies should be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor.
Reforms can only be made in the subsidy system when the policy- makers, politicians and economists will understand that the question is not whether to subsidise or not, but who to subsidise and how.
Thus some measures for effective utilization of subsidies can be:
1. The focus should be on physical achievements and not on financial disbursements.
2. The effects of subsidies should be monitorable and measurable in terms of quality or quantity.
3. Subsidies should be given as a one- time help or for a short period. Subsidies on continuing basis should be avoided.
4. The parameters fixed on subsidy should be transparent.
5. Subsidies should be cost- effective. Most of the assistance should reach the intended beneficiary and very small amount should be spent on administrative arrangements.
6. Subsidies should be properly targeted, i.e. benefit should go to the really deserving.
7. Timing of subsidies should be made proper. For example, free seed distribution should be just before sowing.
Source-The Viewspaper
Some Idea of what is given more priority in the Indian Budget
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