Subsidy Research Paper

Introduction:

Economic interventions by governments are very common in contemporary economies. These occur in form of minimum wage legislations, direct subsidy transfers and tax cuts, to overcome the inequitable allocation of goods and services, and serving as a means of greater income equality and social welfare. Advocates of free market economics, however, view these mechanisms as harmful, believing the government’s inability to effectively understand and manage the market.

The government's stance on the subsidy issue has been against the free market principles, which advocate drastic cuts in such expenditure. The key ingredients in India's subsidy are fuel, fertiliser and food. While the government has already taken steps to reduce fuel

Transfer payments such as subsidies on fuel, welfare distribution of goods to the economically and socially backward etc. are not included in the GDP of the country. If the government increases the transfer payments by an amount TR. Then, the autonomous spending will only increase by an amount of c*TR (c is the Marginal propensity to consume). As a result the output increases by a factor of multiplier*c*TR. On the other hand, an increase in the government spending through NREGS should lead to an increase in the output multiplier*G. Therefore, it appears that it makes more sense for the government to spend on a policy such as MGNREGA rather than providing transfer payments such as subsidies.

There has been very little research on the estimation of the fiscal multipliers in India. Bose and Bhanumurthy (2013) modelled the value of the fiscal multipliers for the Indian economy. The estimated multiplier values are tabulated as below:

Table: Estimated Expenditure Multipliers

Variable Impact Multiplier Cumulative Multiplier

Capital Expenditure 2.45 4.80

Transfer Payments 0.98 0.95

The cumulative multiplier captures the effect of any fiscal stimulus over a longer period. From a policy standpoint, this data is very critical. Over the last few years, the capital expenditure has been around 4% of the GDP. This number should be increased in order to reap the benefits

Regression analysis resulted in an R-squared value of 0.018. Hence, there seems to be no correlation between inflation and expenditure on NREGA. Caution needs to be taken because of the limited data size.

2. Fiscal deficit: NREGA was launched as a major scheme to alleviate rural poverty by creating tangible assets in the rural economy. As a result, over the years, a significant proportion of the government spending was devoted to the scheme. This has had an impact on the government’s fiscal deficit.

3. Migration: There have been reports that as a result of NREGA, there has been a reduction in rural-to-urban migration. This is particularly true for the females than the males.

4. According to the released data, the percentage of rural population reduced from 41.8% in 2004-05 to 25.70% in 2011-12. Considering that this period coincided with the implementation of NREGA. Therefore, we can make a conclusion that NREGA can be considered one of the factors for reducing poverty levels in the rural