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Consequences of subsidies

GS Paper 3

Syllabus: Indian Economy and related issues/ Issues related to Direct and Indirect Farm Subsidies

 

Source: DTE

 Context: A new World Bank report highlights the negative consequences of inefficiently subsidising agriculture, fishing and fossil fuel sectors.

 

Highlights of the report:

  • Subsidies in the 3 areas (generally considered to bail out economies in crises) exceeded $7 trillion, equivalent to 8% of the global gross domestic product (GDP).
  • In 2021, countries shelled out $577 billion to actively lower the price of polluting fuels such as oil, gas, and coal.
  • Agricultural subsidies (over $1 trillion globally) are targeted at farmers for buying specific inputs or growing particular crops.
    • However, these subsidies tend to favour wealthier farmers, even when programs are designed to be targeted to reach the poor.
  • The fisheries sector receives 35.4 billion per year in subsidies and about $22.2 billion contributes to overfishing.

 

Negative implications of subsidies:

  • Exacerbate climate change: For example, fossil fuel subsidies incentivise the overuse of fossil fuels → lead to air pollutionhigh health burden.
  • Dwindling fish stocks.
  • Inefficient subsidy usage: It is responsible for ~17% of all nitrogen pollution in water in the past 30 years → Health impacts reducing labour productivity by up to 3.5%.

 

 

Positive implications of reducing subsidies: For example, a US$0.10 per litre increase in the average annual retail price of diesel may be associated with a decrease of 2.2 μg/m3 in the average annual concentration of PM2.5.

 

Challenges:

  • Demand for energy is less responsive to prices.
  • Cleaner alternatives are not easily accessible and are sometimes not affordable.

 

Way ahead:

  • These subsidies could be repurposed to finance just transition activities or to provide a better quality of life, as they have far-reaching impacts on the environment.
  • Diverting these subsidies to the financial allotments made towards commitments made under the 2015 Paris Agreement.
  • Ensuring the availability and affordability of clean technologies, addressing information and capacity constraints, and addressing behavioural biases are ways to increase the effectiveness of subsidy reform.

 

Conclusion: There is an urgent need to redirect these subsidies to unlock significant funds for sustainable purposes.

 

Insta Links:

Understanding Subsidies in India

 

Mains LInks:

In what way could replacement of price subsidy with Direct Benefit Transfer (DBT) change the scenario of subsidies in India? Discuss. (UPSC 2015)