Earlier this month, the government set up a task force under the former chief of Infosys, Nilekani, who at present is Unique Identification Authority of India ( ) chairman. The panel also included secretaries from the ministries of finance, chemicals and fertilisers, agriculture, food, petroleum and rural development.
The need to set up the task force arose in view of "overwhelming evidence that this (current) policy is resulting in waste, leakage, adulteration and inefficiency. Therefore, it is imperative that the system of delivering the subsidised kerosene be reformed urgently," the government had said.
Besides designing an IT framework, the task force will align the systems with the issuance of the UID numbers and suggest changes in the administration and supply chain management.
The recommendations of the task force will be implemented on a pilot basis by the concerned ministries and the final report would include the results of such projects. We can define a subsidy as an amount of money that would be paid by the government to a firm per unit of output.
The article above taken from Times of India talks about the plans of the current government to provide subsidized kerosene and fertilizers mainly to people below the poverty line of farmers.
There might be many reasons which have been taken into consideration before such a decision is made as providing subsidies arises many opportunity of costs for the government as the same money could be used in many other areas. A few of such reasons can be seen in the article above like, to improve the supply and incur a reduction in the cost of production of such goods that are highly essential fro the poor and the agricultural workers. If a government feels a need to lower the price of essential goods in order to increase consumption or increase the living standards then a subsidy is given or if the govt. wants to guarantee the supply of essential goods, it shall provide subsidies to the manufacturers of such goods and similar is the cas in our situation relating to kerosene and fertilizers.
Subsidies lead to a shift in the supply curve as can be seen above reducing the price and increasing the supply.
Taking a normal supply and demand curve we can easily understand the situation in the above two diagrams. A subsidy to a producer is a fixed amount of money he receives from the government using which he can increase the supply of the certain good for which he got the subsidy and hence this would lead to lower prices for the consumers and an increased supply of that commodity in the markets. This would be highly beneficial in our case as the government is providing subsidies taking into consideration the population that is BPL. BPL can be defined as below poverty line, i.e. people whose incomes are much less than that is required for them to sustain their lives and have a decent living standards for them and their families.
To these people, prices have an incredible value as they themselves have very low incomes and the government is trying to help them to raise the living standard of the country by subsidizing the products of the daily needs and businesses.
From the above article we understand that the existing market is a market where the price elasticity of demand of products like kerosene and fertilizer is relatively elastic however the rice elasticity of supply remains inelastic.
This can be represented using the above diagram. Consider the market is at an equilibrium at price level P*. After the subsidy is provided per unit, the supply curve can be seen to have shifted vertically downwards from S to S+Subsidy. This will have an effect as here the producer of the goods would lower their prices however increase the supply till we the market is balanced again at a new equilibrium which would occur at PS. This would be a win-win situation for both the consumer, producer and also the government in our case as the consumers buy more goods, producers have an increased revenue and finally the government has achieved it’s objective of helping the poor people BPL.
Knowing the market conditions, the state of consumers and also that of producers, a government has certain criteria’s/points to consider while providing a subsidy that have been mentioned below:
1.When PED=PES, the price of the commodity would decrease by 50% of the subsidy.
2. If PED>PES, the prices of the commodity would decrease by >50% of the subsidy provided.
3. If PED<PES, then the price of that commodity would decrease y <50% of the subsidy provided.
Hence, we get to know from above how the plans of the Indian govt. of providing a subsidy shall help the poorer citizens however there exist many costs that the govt. needs to consider before such a major decision which are mentioned below:
- Opportunity Costs= Govt. can either spend on subsidies or other major schemes like education etc.
- Provision of subsidies can make the producer inefficient as they would no more have to realistically compete with other producers in the market for revenues.
- To provide subsidies, the govt. may have to increase their taxes in order to increase their revenue to fund their scheme which might attract opposition for the government by the tax-payer citizens.
- Subsidies might effect the imports in the country making them un-popular that might be seen as a protectionist measure by the domestic government attracting foreign hatred for the country’s exports.
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