The Politics of Subsidies: Challenges to Government

The Politics of Subsidies: Challenges to Government

By; Amit Bhushan Date: 14th Jul 14

One of the biggest challenges faced by any government either at a state or center which is keen to push growth oriented economics especially when they begin to clash with the Subsidy Bill. Challenge is if you tweak subsidy bill, populist politics begins to hound while on the other side, the demand for growth continues to haunts with specter of a sure shot defeat unless a significant thrust is imparted to a jammed engine. The government is caught in a tussle between legacy and new thinking, and where the new thinking is normally pushed to a back seat due to huge dependencies on existing system that been developed over the years; these dependencies seems almost irreplaceable without significant political costs being paid. Any party in government has to consider both the aspects as upsetting any will cause trouble to brew for the party.

What generally is not discussed are macro measure that can be taken to improve efficiency of the distribution of subsidies and its likely impact on either savings or on public satisfaction achieved through subsidy distribution. To be fair to the previous government it did initiate AADHAR, in an event to improve subsidy distribution but what it could only achieve is a huge bill for distribution of I-Cards with very little real gains. While the current government had initially indicated that it may not back AADHAR with the same gusto, however what its current stand and its likely impact, is now an area of focus.

There can be several possible macro measures on how major subsidies are administered and if the model is changed, there can be potential savings or improvement in satisfaction or outcomes. This is not rocket science however the challenge is to overcome bureaucratic inertia around the system since the bureaucrats are rarely interested in changing status quo unless it results in an increase in their span of influence & control. Also, targeting an improvement in satisfaction of the end consumer requires tightening the belt of the entire chain of command, something that has potential to ruffle feathers of fellow bureaucrats as well as of politicians & service providers/vendors. This is a potential minefield for the bureaucrat to step into and has potential to result into several problems over the long term even if the current government may be supportive of the move. Also, there has been layers of center and state bureaucracy that has been developed for admin and distribution of the subsidies and therefore a push from center or any state initiative alone cannot work on standalone basis; unless of course where center agrees to back the subsidy tweaking initiatives by state governments.

Current subsidy distribution model for major subsidy items at center level are on Fertilizers, Cooking/Transportation fuels (Kerosene & LPG) and Food. There are other areas like central Water resources including irrigation projects management, Central Education Institutions & public services like hospitals managements which are also subsidized for beneficiaries but are not recorded and presented as subsidies. Quite a burden remains on central books as salaries to employees and non-capital expenditure. One of the exercises that need to be undertaken is to measure the exact quantum and form of subsidy distribution by government; so that efforts can be made to improve efficiency of the subsidy distribution system.

With regards to declared subsidies of Fertilizer, Food and Cooking/Transportation Fuels; the subsidy is administered as a negative tax while being distributed. This is so because, one can buy fertilizers at notified price inclusive of subsidy while the fertilizer company is supposed to collect subsidy from government. The same stands for food which one buys from Ration shop, the Ration shop agent receives subsidized food from state which in turns buys subsidized products from center. Cooking and Transportation fuels are administered in the same way. In other words, there is no incentive to save Fertilizer, reduce Food consumption by curbing wastage or saving Cooking/Transportation fuels because your investment on this count results in reduction of subsidies so gains goes to government while investment in say a high efficiency generator or energy saving illumination is to be paid from pocket. Similarly, there is little incentive for setting up a bio-fertilizer plant or researching on low fertilizer consuming plant varieties because customers may not be willing to pay any extra amount or will require convincing to try new seed varieties.

Similarly for state government, we have distribution of education and healthcare where subsidy bill goes though much of it in name of salary and perks. We have huge declared and often undeclared subsidy for electricity where undeclared subsidy is Theft or under recovery. State subsidy for drinking and irrigation water, sanitation etc. remain as not so clearly recorded subsidy programs.

While on one hand we are still developing infra for Direct Benefit transfer so as we tweak the subsidy structure. It may be wise to allow states to run their own experiments as well. The center should perhaps work with some states to distribute subsidies through coupons or credit cards. A preset credit card or coupon can be handed over to targeted beneficiary say head of a family and on purchase of ration, the card swipe should result in some government account be debited for subsidy amount with balance to be paid by the beneficiary in cash. The beneficiary becomes free to buy from any shop which gets him good quality food at affordable price therefore more empowered/better satisfied. The system is forced to become more efficient to meet the demand. The DBT also intends to aim for the same except that it transfers money to the beneficiary with several nutritionists crying that it results in diversion rather than improvement of health outcome.

It would be wiser for the state governments & their leaderships to choose working out their own growth as well as subsidy distribution models in the face of challenges which are forcing governments to innovate and reach out to masses. Remodeling of services is an arena which allows leadership to build reformist image and improve social outreach as well offer support to society to improve productivity and efficiencies that result in economic growth.

 

[Swaswati Borpuzari]

The politics of subsidies present a complex and multifaceted challenge to government, intertwining economic, social, and political dimensions that often require careful navigation. Subsidies, which are financial aids provided by the government to specific industries or groups, are designed to support economic sectors, protect jobs, or promote social welfare. However, they can also lead to significant political debates and controversies. One of the primary challenges is the equitable distribution of resources. Governments must decide which industries or groups receive subsidies, a decision that can be heavily influenced by lobbying and special interest groups. This can lead to accusations of favoritism or corruption, undermining public trust in the government's ability to manage public funds effectively.

Moreover, subsidies can distort market mechanisms, leading to inefficiencies and potentially stifling innovation. When businesses become reliant on government support, they may be less motivated to improve their operations or adapt to changing market conditions. This can result in a lack of competitiveness and a drag on economic growth. Critics argue that subsidies should be temporary and targeted, but in practice, they can often become long-term fixtures, creating vested interests that resist reform.

Another challenge is the fiscal burden that subsidies impose on the government. In many cases, the costs of maintaining subsidies can be substantial, particularly in times of economic downturn when government revenues are reduced. This can lead to difficult budgetary decisions, where governments must balance the need to support key industries with the imperative to maintain fiscal stability. Additionally, the effectiveness of subsidies in achieving their intended outcomes is often questioned. For instance, agricultural subsidies may be intended to support farmers, but they can also lead to overproduction, environmental degradation, and higher food prices for consumers.

Finally, the international dimension of subsidies cannot be overlooked. Subsidies can lead to trade disputes, as other countries may view them as unfair trade practices. This can result in retaliatory measures, such as tariffs, which can escalate into full-blown trade wars. Therefore, governments must also consider the global implications of their subsidy policies, striving to strike a balance between domestic support and international obligations. In navigating these challenges, governments need to adopt transparent and accountable processes, ensure that subsidies are aligned with broader economic and social goals, and regularly review and adjust subsidy programs to maximize their effectiveness and minimize their drawbacks.

 

[Dhruv Bindhani]

The Politics of Subsidies: Challenges to Government

By; Amit Bhushan Date: 14th Jul 14

One of the biggest challenges faced by any government either at a state or center which is keen to push growth oriented economics especially when they begin to clash with the Subsidy Bill. Challenge is if you tweak subsidy bill, populist politics begins to hound while on the other side, the demand for growth continues to haunts with specter of a sure shot defeat unless a significant thrust is imparted to a jammed engine. The government is caught in a tussle between legacy and new thinking, and where the new thinking is normally pushed to a back seat due to huge dependencies on existing system that been developed over the years; these dependencies seems almost irreplaceable without significant political costs being paid. Any party in government has to consider both the aspects as upsetting any will cause trouble to brew for the party.

What generally is not discussed are macro measure that can be taken to improve efficiency of the distribution of subsidies and its likely impact on either savings or on public satisfaction achieved through subsidy distribution. To be fair to the previous government it did initiate AADHAR, in an event to improve subsidy distribution but what it could only achieve is a huge bill for distribution of I-Cards with very little real gains. While the current government had initially indicated that it may not back AADHAR with the same gusto, however what its current stand and its likely impact, is now an area of focus.

There can be several possible macro measures on how major subsidies are administered and if the model is changed, there can be potential savings or improvement in satisfaction or outcomes. This is not rocket science however the challenge is to overcome bureaucratic inertia around the system since the bureaucrats are rarely interested in changing status quo unless it results in an increase in their span of influence & control. Also, targeting an improvement in satisfaction of the end consumer requires tightening the belt of the entire chain of command, something that has potential to ruffle feathers of fellow bureaucrats as well as of politicians & service providers/vendors. This is a potential minefield for the bureaucrat to step into and has potential to result into several problems over the long term even if the current government may be supportive of the move. Also, there has been layers of center and state bureaucracy that has been developed for admin and distribution of the subsidies and therefore a push from center or any state initiative alone cannot work on standalone basis; unless of course where center agrees to back the subsidy tweaking initiatives by state governments.

Current subsidy distribution model for major subsidy items at center level are on Fertilizers, Cooking/Transportation fuels (Kerosene & LPG) and Food. There are other areas like central Water resources including irrigation projects management, Central Education Institutions & public services like hospitals managements which are also subsidized for beneficiaries but are not recorded and presented as subsidies. Quite a burden remains on central books as salaries to employees and non-capital expenditure. One of the exercises that need to be undertaken is to measure the exact quantum and form of subsidy distribution by government; so that efforts can be made to improve efficiency of the subsidy distribution system.

With regards to declared subsidies of Fertilizer, Food and Cooking/Transportation Fuels; the subsidy is administered as a negative tax while being distributed. This is so because, one can buy fertilizers at notified price inclusive of subsidy while the fertilizer company is supposed to collect subsidy from government. The same stands for food which one buys from Ration shop, the Ration shop agent receives subsidized food from state which in turns buys subsidized products from center. Cooking and Transportation fuels are administered in the same way. In other words, there is no incentive to save Fertilizer, reduce Food consumption by curbing wastage or saving Cooking/Transportation fuels because your investment on this count results in reduction of subsidies so gains goes to government while investment in say a high efficiency generator or energy saving illumination is to be paid from pocket. Similarly, there is little incentive for setting up a bio-fertilizer plant or researching on low fertilizer consuming plant varieties because customers may not be willing to pay any extra amount or will require convincing to try new seed varieties.

Similarly for state government, we have distribution of education and healthcare where subsidy bill goes though much of it in name of salary and perks. We have huge declared and often undeclared subsidy for electricity where undeclared subsidy is Theft or under recovery. State subsidy for drinking and irrigation water, sanitation etc. remain as not so clearly recorded subsidy programs.

While on one hand we are still developing infra for Direct Benefit transfer so as we tweak the subsidy structure. It may be wise to allow states to run their own experiments as well. The center should perhaps work with some states to distribute subsidies through coupons or credit cards. A preset credit card or coupon can be handed over to targeted beneficiary say head of a family and on purchase of ration, the card swipe should result in some government account be debited for subsidy amount with balance to be paid by the beneficiary in cash. The beneficiary becomes free to buy from any shop which gets him good quality food at affordable price therefore more empowered/better satisfied. The system is forced to become more efficient to meet the demand. The DBT also intends to aim for the same except that it transfers money to the beneficiary with several nutritionists crying that it results in diversion rather than improvement of health outcome.

It would be wiser for the state governments & their leaderships to choose working out their own growth as well as subsidy distribution models in the face of challenges which are forcing governments to innovate and reach out to masses. Remodeling of services is an arena which allows leadership to build reformist image and improve social outreach as well offer support to society to improve productivity and efficiencies that result in economic growth.

This political article is a masterclass in persuasive communication. The writer's writing style is remarkably incisive and authoritative, cutting through complex issues with clarity and conviction. There's a palpable sense of purpose in every sentence, driving the argument forward with intellectual rigor. The structure of the piece is strategically designed to build a compelling case, carefully introducing evidence and counterpoints in a way that maximizes their impact. Each section contributes meaningfully to the overall narrative, leading the reader towards a well-reasoned conclusion. Critically, the clarity with which the political landscape and proposed solutions are articulated is exemplary, leaving no ambiguity about the writer's stance or the implications of their analysis. This is not just reporting; it's a powerful and accessible contribution to public discourse.