Friday, June 9, 2017

The myth of government-provided subsidies, and its relation to cross-subsidies

  • Till some time ago, petrol and diesel used to be subsidized in India, "by the Indian government". First of all, I don't think it's proper to say that the government was subsidizing it. Government officials were's paying for the subsidy from their pockets. It was the public's own money, collected by the government, which was being used to provide this subsidy.
  • This leads to the question of whether there can ever be a true subsidy. Any subsidy that the "government" provides seems either like a cross-subsidy, or like a compromise. The former, if prices are raised for one class of people [say the wealthy] to provide subsidy to another class [say the poor]. The latter, if the provision of a subsidy results in a reduction in government spending on some other priority/sector [e.g., if the government allocates less amount for building roads because it provided subsidy on diesel].
  • In case of a compromise [the latter situation], does the public "save" anything overall? I don't think so. The public sure got that diesel subsidy, but it didn't get those extra roads. Sure, some people or a class of people reaped the benefits, while some other people or some other class of people continued experiencing suffering, but there likely wasn't any net benefit on an aggregate/overall basis [like vector sum in physics].
  • So when a story on FT reads "India to forgive billions of dollars of farm debt", one must remind oneself that while it might be tempting to give credit to the Indian government for "forgiving" this debt and doing a sort of huge favor to the farmers, it's really the overall Indian public that's paying this bill in the form of reduced government benefits. Any praise showered on the Indian government is undeserved. The politicians and the ministers, however, will of course try to milk the debt waiver for their own benefit ["In a note to clients this week, BofA Merrill Lynch predicted nearly $40bn in farmers’ debts — equivalent to about 2 per cent of GDP — would be waived before India’s next general election in 2019, when Prime Minister Narendra Modi hopes to secure a renewed mandate for the following five years."] ["Mr Modi opened the floodgates for a series of costly farm loan write-offs during the recent Uttar Pradesh election campaign, when he promised that the BJP would forgive nearly $5.6bn owed by more than 21.5m small farmers if it came to power."] ["The farm-debt waiver was one of the key campaign promises that helped prime minister Narendra Modi’s Bharatiya Janata Party win a landslide victory in Uttar Pradesh’s recent state elections, seen as crucial for Mr Modi’s own re-election prospects nationally in 2019."]. The government, it ought to be remembered, is only managing the public's resources.

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