What are subsidies and why countries need it?

Ruling in favour of Brazil, Australia and Guatemala which were locked in a dispute with India over its sugar subsidies, the WTO last month said that New Delhi’s domestic support measures for sugar and sugarcane wre inconsistent with global trade norms.

India has now appealed at the WTO’s Appellate Body, claiming that the ruling has made “erroneous” findings about domestic schemes to support sugarcane producers and exports.

Similarly, 28 members of the US Congress have urged the Joe Biden administration to take India to WTO over its subsidies to wheat and rice farmers. Clearly, these countries want “level-playing field” here. But the US and other western countries are also funnelling subsidies to their farmers.

WTO allows subsidies up to 5% of the value of production for developed nations and 10% for developing nations. But critics say that the western countries have long been circumventing rules to fund their farmers.

Now, reports suggest that in the upcoming Union Budget, the Indian government will likely earmark Rs 1.4 lakh crore or $18.8 Bn as fertilizer subsidy. This is a slight increase from Rs 1.3 lakh crore as fertilizer subsidy in the fiscal year 2022, ending March this year.

The subsidy is to compensate fertilizer companies for selling their products to farmers at lower than market rates. The increase in fertilizer subsidy is of course being done with an eye on the upcoming state assembly elections in Uttar Pradesh and Punjab.

But what do we understand by subsidies? And how exactly do they work?

In the context of the Union Budget, a subsidy is a benefit given to an individual, business, institution or to a particular sector. Subsidies are given to alleviate some kind of a monetary burden and are claimed to be in the overall interest of the public.

Subsidies can either be direct, such as cash payments, or indirect, such as tax breaks. The aim is to reduce the price of a particular product in the market, or as in the case of the fertilizer subsidy, to compensate a particular class of producers for selling their products at a price lower than market prices.

Another kind of subsidy is the one extended to producers to incentivise manufacturing in a particular sector. A recent example is the Production Linked Incentive or PLI scheme for semiconductor goods.

Amid the global semiconductor chip shortage that impacted the supply of everything from automobiles to smartphones, the Centre sanctioned Rs 76,000 crore for the PLI scheme for semiconductor goods.

Under the scheme, the Centre will offer financial support or subsidy that will bring down the production costs of companies manufacturing semiconductor chips, and thus encourage them to set up new factories and other facilities.

As with everything else, there are arguments for and against subsidies. Proponents believe that the government can make use of subsidies to incentivise global companies to ‘Make in India’ and transform India into a manufacturing hub that would ultimately create more jobs.

However, critics say that the burden of subsidies falls on taxpayers, who may complain against rising taxes at a time when the economy isn’t doing too well.

Another set of economists believe that while subsidies may help in attracting some companies to set up a manufacturing base in India, the long-term sustainability of such operations would depend more on the ‘ease of doing business’ here. If a country can provide a conducive business environment for corporations, then perhaps, the need for extending subsidies wouldn’t be felt.

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