SUBSIDY

Subsidy - Money Matters.

Subsidy is a grant which is devised to moderate the cost of something which affects the life of people. Subsidy is administered by the government. Subsidy is given indirectly to the beneficiaries. Here, the beneficiaries are the citizens of the country or the state. Subsidy has many functions; the main one being to reduce or maintain the price of a product or service which is crucial for survival. There are many things which are crucial for survival, but not all could be subsidised. Only those things are considered for subsidy which affects the life and livelihood of the common man.

The Necessity of Subsidy.

Subsidy is a necessity for people; more so, for the poor people. People's ability to purchase essential goods largely depend on their income. Income is always variable among people who pursue different occupations. It may also be different among people with the same occupation. A variable income has two possibilities: either it can go up or come down. The problem is always with that income which has a risk to slide down. Low income is more likely to push a person and his family towards poverty. Although, this analogy is not comprehensive, it is a fact that poverty induced by dwindling income could affect and destabilise the susceptible population unless, some external help in the form of financial assistance is provided to compensate this shortfall. The most simple form of help which the government can provide is through subsidy. Many people need financial support to survive, which makes subsidy a necessity for them.

The Importance of Subsidy.

Subsidy is meant to manage the problem of high cost of essential items in an economy. Essential items are food, medicines, shelter, clothing, education and transportation. There could be many more which can be added to the list of essentials, but the above mentioned are the most important. In countries where resources are sparse, the economy could be dependent on import of goods. If essential items like food-grains, edible oil, sugar, medicines etc are imported from somewhere, the price may be more than what it could be, if these items were produced within the country. Even if these products were indigenous, the poor may still need help to buy them.

Every government has a social obligation towards its citizens. Subsidy helps to honour the obligations which a government have for its people. Subsidy helps the government to run the economy. Even though, subsidy is a costly affair for the government, it helps to induce movement in a slow economy and bring gradual growth.

A poor economy never runs on its own. It has to be assisted frequently for growth. Government cannot induce growth by giving money directly to people. This assistance has to be administered indirectly. Subsidy just does that. It helps citizens in an indirect way by reducing some part of their burden. A poor country reeling under high cost of food grains, cooking gas and medicines won't be able to achieve any significant growth, because its citizens may not have the money to spend for other things. A country where people spend less on domestic products, because they don't have money, cannot expect to improve their economy.

The Drawbacks of Subsidy.

Subsidy has some drawbacks.

It is costly: Subsidy is costly for the government. To pay for a part of an expensive item is not easy when users of that product are the entire population of a country. The government has to bear the burden of the expenditure which subsidy brings. The government has to find additional resources to fund subsidy. This is not easy, particularly if the country has many liabilities and is short in resources.

It may lead to over exploitation of resources: Over exploitation of resources is yet another problem of a long drawn subsidy. When essential items are available at a cheap price, it may be taken for granted by people who are not aware of the difficulties involved in making it available for them at that price. Goods and services are often valued by people by the price at which they are available for consumption. People become careful in using products which have a high price and if the same products are available cheap, they become careless in its use. This is a human nature, but it affects the economy in a negative way.

It could make citizens habitual of assistance: The ill effects of subsidy is that people will depend more on assistance and grants which if not stopped in time, could form a habit with them. Subsidy is habit forming and it does influence people to demand more than what is actually needed.

Too many subsidies could harm the government: Though subsidy can boost the economy and thereby help the government, too many of them could become counterproductive. A running subsidy may encourage people from other sectors to seek similar subsidy for themselves, which may not be easy for the government to handle. In a developing economy, many sectors may require subsidy, but the government may not help them all, because resources are limited. This problem is grave in a poor economy. Subsidy evokes a lot of emotions, because it is comforting for the people. However, no government can satisfy the demands of every sector because of limited resources.

............................

Previous post: What is a Debt Trap?

Next post: High Net-worth Individuals.

............................

[<<]IIIII[>>]