Who’s Gaining Anyway? Why Subsidies Hurt the Poor & Help the Rich

Do the benefits of freebies reach the truly needy? Not really.

Do subsidies reach the truly needy? Let us explain.

(Photo: Aroop Mishra/The Quint)

In the run up to the Budget, there’s going to be a lot of debate on subsidies and welfare schemes. The main question will be – do the benefits of such general freebies, as opposed to targeted subsidies, reach the truly needy?

The simple answer is no – and it can very well be backed with data from Chapter 3 of the 2015 Economic Survey. It says:

“Prima facie, price subsidies do not appear to have had a transformative effect on the living standards of the poor.”

It further states that a closer look at the price subsidy landscape reveals why they may not be the government’s “best weapon of choice in the fight against poverty”.

Here are some stats:

– Poor households avail of only 10 percent of the entire power subsidy amount. Very rich households corner a large share of 27 percent of the subsidy as they consume electricity many times more than the poor households.

– The situation is not very different with regard to kerosene subsidy. The survey points out that “a majority (51 percent) of subsidised kerosene is consumed by the non-poor and almost 15 percent of subsidised kerosene is actually consumed by the relatively well-off (the richest 40 percent)”

– The survey points out that the bottom 80 percent of poor households constitute only 28 percent of total passenger traffic on railways.

...and so on and so forth.

Subsidies Harm the Poor

Other than instances of benefits not reaching the sections they are meant to reach, the survey lists out reasons how the subsidies end up harming the interests of poor.

For example, the Centre offers the minimum support price (MSP) to farmers for selected items procured by government agencies. The scheme is meant to ensure that prices of certain food items don’t fall below a threshold level, saving farmers from sudden price shocks.

There are studies to show that this encourages “under-cultivation of non-MSP supported crops”. As a result, there is a demand-supply mismatch, pushing prices of non-MSP supported crops such as fruits and vegetables higher. This results in higher food inflation, hurting poor households the most.

In view of growing evidence against continuing with the general subsidy regime, can we continue with more of the same?

Now that the general budget is about to be unveiled, can we move towards a targeted welfare scheme regime?