subsidy pres

8/8/2019 Subsidy Pres

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MENCKENS LAW

Whenever A annoys or injures B onthe pretense of saving or improving

X, A is a scoundrel

Newspaper Days , 19411


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SUBSIDY

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SUBSIDY

Derived from the Latin word subsidium, -

coming to assistance from behind

Form of financial assistance paid by thegovernment to business or economic sector

Creates a wedge between consumer prices andproducer costs -- leading to changes in demand/

supply decisions

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OBJECTIVES

Subsidies are often aimed at :

- Preventing the decline of that industry

- Stabilising prices of its products

- Inducing higher consumption/ production

- Achievement of social policy objectives including

redistribution of income,.. etc4


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TYPES OF SUBSIDIES

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EFFECT OF SUBSIDY

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SUBSIDIES

IN DIFFERENT COUNTRIES

USA, INDIA, BANGLADESH, NEWZEALAND

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US - FARM SUBSIDIES

Direct Payments

Marketing Loans

Countercyclical PaymentsConservation Subsidies

Insurance

Disaster AidExport Subsidies

Agricultural Research and Statistics 9


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The U.S. Department of Agriculture distributes

between $10 billion and $30 billion in cash subsidies to

farmers and owners of farmland each year

> 90 % of agriculture subsidies go to farmers of five

cropswheat, corn, soybeans, rice, and cotton

More than 800,000 farmers and landowners receivesubsidies, but the payments are heavily tilted toward

the largest producers

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US FOOD SUBSIDIES

Largest portion of the U.S. Department of Agricultures

budget consists of food subsidies, not farm subsidies

Food subsidies cost taxpayers $79 billion in fiscal 2009and account for about two-thirds of USDAs budget

The largest food subsidy programs are food stamps; the

school breakfast and lunch programs; and the women,infants, and children (WIC) program

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US - HIGHER EDUCATION SUBSIDY

The Department of Education spends about $30 billion ayear on subsidies for higher education.

The bulk of that funding goes toward student aidprograms, with the balance going toward grants toeducational institutions

In 2008, grants to institutions cost $2.3 billion and aid

programs cost $27.6 billion, which included- student grants,

- student loans, and

- administration 12


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INDIAN SUBSIDIES

The Indian government subsidizes many industries andproducts, from gasoline to food

Farmers are given water, electricity for free & paid by the

state.

International Herald Tribune (2005) : stated that subsidiesamounted to 14% of GDP.

India spends relatively little on education, health, orinfrastructure

Farm & fertilizer subsidies rice , wheat etc 13


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SUBSIDY ISSUES

Burden on government finances being unbearable

Agricultural subsidies distort the cropping pattern and lead tointer-regional disparities in development

General subsidies on scarce inputs like water and power havedistorted their optimal allocation

Subsidies- mistargeted

Subsidies have a harmful effect on general economic growth ofsectors not covered by the subsidies

Impact of subsidies on the quality of health,environment andecology Eg :Tobacco Vs Beedi 14


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TRENDS

Rs. 9,581crore(1990-91)

Rs.40, 416crore (2002-03)

Rs.48, 636 crore(2003-04)

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Economic Survey, 2004-05


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INDIA - LPG SUBSIDIES

LPG in 2007 was priced at about 60 per cent of the supplycost resulting in large distortions in the Indian energymarket

The total cost of LPG subsidies to the state oil companiesand the government amounted to almost 70 billion Rupees($1.7 billion) in the first half of the 2007/08 financial year

76 % - allocated in urban areas

In spite of the ineffectiveness of the LPG subsidy inmeeting the goal of alleviating poverty, the governmentrecently extended the programme until 2010

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INDIA- PUBLIC DISTRIBUTION SYSTEM

(PDS)

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PDS provides rationed amounts of basicfood items (rice, wheat, sugar, edible oils)and other non food products (kerosene,coal, standard cloth)

At below market prices to consumersthrough a network of fair price shopsdisseminated over the country

BPL households - entitled with rationcard that allows them to buy more

quantity at subsidized prices

As much as 39 % of subsidized keroseneis stolen


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BANGLADESH & JUTE SUBSIDIES

Jute , the golden fiber as it was called, was

the key to Bangaldeshs Success & largest

hard currency earner

Jute and Jute products constitute one-third

of Bangladeshs export

82 percent of the population depends upon

agriculture for livelihood19


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In the 1980s, Jute prices collapsed , when plasticswere invented and was available at very cheap rates

The price of jute fell below the cost of growing jute

which led to the subsidization of jute and juteproducts

In 1990-91 fiscal year , around 3.25 billion taka wasgiven as subsidy to government owned companies and

even then they could not make profit

Productivity Reduced, Affected other industries likeCotton, Textile etc

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NEW ZEALAND - FARM SUBSIDIES

What would the world look like without agriculturalsubsidies?

New Zealand

One of the first and still one of the few modern countries tohave completely dismantled its system of agricultural pricesupports and other forms of economic protection forfarmers

Second decade of subsidy-free farming, New Zealand enjoysa worldwide reputation for its high-quality, efficient andinnovative agricultural systems

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MINI-HISTORYOF NEW ZEALAND

AGRICULTURE

Major realignment of global trading relationships in 1972

- Britains decision to join the European Economic

Community

Triggered a period of escalating inflation, making it

increasingly difficult for farmers to secure good prices on

the international market

Governmental policy - farmers were offered subsidies to

purchase more fertilizers, and tax breaks for increasing

herd sizesfurther depressing commodity prices through

oversupply22


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In 1982, Federated Farmers of New Zealandrecommended - controlling inflation, rather thancompensating farmers for the consequences ofinflation, should be the national priority

Recommendations rejected by then-Prime MinisterRob Muldoon but later accepted in 1984 when the

Labour Party won a landslide election

Transition Period lasted about six years, with landvalues, commodity prices, and farm profitabilityindices stabilizing or rising steadily by 1990

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THE RESULTS

Today New Zealand has around 80,000 farmholdings on 15.5 million hectares (38.3 millionacres)

Agricultures contribution to the New ZealandGDP has risen from 14.2% in 1986-87 to 16.6% in1999-2000. Agriculture accounts for 11.4% of thetotal workforce

Agricultural productivity has gone up 5.9% ayear on average since 1986. Prior to 1986agricultural productivity gains were about 1% ayear. 24


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In 2001 governmental assistance to agriculture was

equal to just 1% of the value of agricultural output,

compared to an average value for developed countries

of 31%. Remaining assistance in New Zealand is

primarily in the form of funding for agricultural

research

Around 90% of New Zealands total farm output is

exported. These exports account for over 55% of totalmerchandise exports. Most food consumed in the

country is domestically produced.25


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IS SUBSIDY GOOD/BAD??26


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INDIAN SCENARIO

Food subsidy: PDS - leakage, low coverage ofpoor , small magnitude of benefit derived by thepoor

Electricity: unit cost increasing

Public irrigation: mainly for richer farmers

Health & Education: bias towards the better-offpeople

Vote bank Politics 27


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GENERAL PROBLEMS WITH SUBSIDIES

Redistribute Wealth

Damage the Economy

Prone to Scandal & Corruption

Uneven Playing FieldWeakening of Private Sector

Taxpayer Cost

Damage the Environment

Damage Trade Relations

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USAGRICULTURE SUBSIDIES HIT POOR IN

AFRICA

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CONCLUSION

Subsidies in areas such as education, health andenvironment at times merit justification

Subsidies that are ineffective or distortionary need to beweaned out

Subsidies lead to increased levels of consumption andwaste

Place a heavy burden on government finances, weakeningthe potential for economies to grow

They do not always end up helping the people who needthem most.

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AGENDA FOR REFORM

The agenda for reform should focus on:

Reducing the overall scale of subsidies

Making subsidies as transparent as possible

Using subsidies for well defined economic objectives

Instituting systems for periodic review of subsidies

Setting clear limits on duration of any new subsidyschemes

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Whenever thegovernment annoys or

injures a productive market on the

pretense of saving or improving an

unproductive market, thegovernment

is a ______________!!!

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Thank you

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REFERENCES

All the trouble in the world P. J.

ORourke(1994)Agriculture Subsidies, Food Subsidies

Chris Edwards(2009)

Business Subsidies Tad Dehaven & ChrisEdwards (2009)

Higher Education Subsidies - NealMcCluskey and Chris Edwards(2009)

Ten Reasons to Cut Farm Subsidies ChrisEdwards(2007)

Environmentally and EconomicallyDamaging subsidies Concepts andIllustrations - Carolyn Fischer and MichaelToman

www.wikipedia.com34

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