The removal of
subsidies has profound effects on all the stakeholders of the market. The
effect on the consumers would be a negative impact, affecting especially the
low income earners who are mainly dependant on the public distribution system (ration
shops) for the sugar. They will be highly affected as the price will increase
and the demand will decrease for the product. This is shown in figure 1 where
the quantity demanded (Q) is less than the quantity supplied in the market.
This is due to the increase in price due to scraping of the subsidy. The
producers will also be affected by the removal of subsidy for sugar. The price
will increase and hence the supply will increase for the producers. However the
quantity supplied is more than the quantity demanded due to the increase in
price. So the producers will have excess of the product sugar being produced.
It will hence be a cost of storage for the producers.
The scraping of the
sugar subsidy will be a positive effect on the government. The government will
be positively affected as the opportunity cost is now diminished. The money
used to provide the subsidy is now used by the government for development and
other purposes such as development in other sectors etc… The workers will also
be negatively affected as it could lead to unemployment. The society will be
worse off because there will be an under allocation of resources.
The removal of subsidy
could result in shrinking of output, reduction in urban and rural welfare.
Subsidies will always be important in order to feed the poor. If the process of proper delivery system for the
subsidies to reach properly is streamlined, the subsidies would no longer be a
burden for the economy of India.
It is true that a significant number of people
in the country are poor and therefore need help. But what is not true is that by keeping prices artificially depressed through
subsidies the government is trying to help the poor man. All it is doing through this populist
measure is to ensure that it gets enough votes to remain in power for another
term. What the government needs to do is to do things in tandem. This means
that it needs to get on with the policy reforms and at the same time start
cutting back on the subsidies. Doing
just one without the other would not help achieve the desired result. And the
desired result is one we all want – India to shine in the long term. Over time, this would help the
government in maintaining healthier fiscal balances and using its money to
promote growth in key areas in the country.
The combined effect would be long term growth for the country.
The removal of subsidy can also have acute effect on income distribution
and poverty. The intention for providing subsidy for sugar in the Public
Distribution System was to make Sugar, accessible to families living below the
poverty line, or as the article mentions, the poorest of the poor. This
could have severe impact on their health as they cannot have access to
affordable sugar. The removal of subsidy also has visible negative impact on
the income distribution of households, firms and the government.
The government of India must consider the impacts of subsidy removal before taking any further
action on this issue.