In a country with nearly 22% of its population below the poverty line, and nearly 70% of the rural population dependent on agriculture and allied activities, subsidies will always be a critical instrument of fiscal policy. Recent events like the food security bill of 2013 have brought subsidies into the public eye and spurred an animated debate between its proponents and opposers.
The basic economics of subsidies is straightforward, and in most parts largely negative. They create substantial deadweight losses while the economic incidence of each subsidy depends largely on the elasticity of the demand and supply curves. They also entail a corresponding increased pressure on the tax base of the country and are largely deemed as fiscally irresponsible. That being said, the need for subsidies in India is undeniable. While fuel subsidies help keep the retail inflation in check, food subsidies are critical for a large mass of the Indian poor who grapple with malnutrition and starvation. Education subsidies and mid-day meal programs which get a sizeable portion of the Indian children into schools and help mobilize the nation’s demographic dividend are necessary expenditures to the fiscal purse. But as research has shown time and again, aid and subsidies do very little for the long-term growth of the country. At best they keep the situation unchanged, at worst they slow the economy down. Replacing the extremely inefficient form of Indian agriculture which includes small farmers and lesser technology with the American model to cater to our fast growing needs is critical. While this will lead to a lot more prosperous farming population, it will also lead to a large exodus of the displaced farmers to urban centers. We need to have a substantial amount of jobs and the requisite infrastructure in place before this can happen.
In conclusion, while the need of subsidies in current day India is undeniable, the aim of fiscal tightening and enabling a more self-sustaining system shouldn’t be forgotten. Let us help our poor out of their misery into a productive world, not keep them there forever.