Shyam Ponappa: Sensible Subsidies?

Subsidies are controversial and easy to condemn. Yet, subsidies abound in the real world. Despite theoretical arguments to the contrary, we have to live with the manifestations of national or territorial interests. This is where subsidies come in.

There appears to be general acceptance of subsidies for basic food needs, i.e. in subsidising needy buyers. Subsidies for growing food are more problematic. Some argue that market processes provide self-correction, e.g. reduced consumption as prices rise, substitutes, imports to counter shortages. This reasoning ignores the facts. First, people who spend more than half their income on food do not switch staples; such rice-eaters don't switch to wheat, nor do such wheat-eaters switch to rice. Second, traditional exporters like Thailand and Vietnam have restricted exports at this time. Third, India's needs are so large that even a small proportion is massive relative to world rice exports. Fourth, food subsidies are used worldwide including in America and the EU as an instrument of policy, and cannot be wished away.

Another sector where subsidies abound despite being controversial is energy/fuel. Morgan Stanley estimates that half the world enjoys fuel subsidies.* As with food, we would be well advised to structure energy subsidies in a way that is beneficial to the public interest.

Food Subsidies
A possible approach to rice and wheat subsidies in India is as follows:

a) Give farmers access to market prices.
b) Replace the PDS with direct subsidies at retail linked to income for needy buyers.
c) Provide comprehensive, integrated, end-to-end solutions. Read: think through, develop, and put in place every piece of this system (avoid patchy implementation).

The underlying principles are: avoid distorting producer prices, subsidise needy users directly, and plan each step and integrate the processes we need into a coherent system, with prioritisation (don't assume it will just happen).

Production support too is essential, especially (i) timely inputs, (ii) finance, and (iii) insurance. These services are not even designed properly